Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist (Brad Feld; Jason Mendelson, 2011)

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Review: very thorough explanation on how term sheet and letter of intent suppose to structure when come to fundraising, contains plenty of tips for entrepreneur not to be eaten alive too. Rated: 9/10

Business plan or private placement memorandum (PPM)

  • Stage of the company
  • Competition with other funding sources
  • Experience of the entrepreneurs and leadership team
  • The VC’s natural entry point
    • Which stage investor should enter
  • Numbers, numbers, numbers
    • Past performance
    • Predictions
    • Revenue
    • Earnings before interest, taxes, depreciation and amortisation (EBITA)
    • Cash burn
    • Head count
  • Current economic climate
    • Price adjusted according to macroeconomy

Term sheet

  • General
    • Issuer
    • Investor(s)
    • Amount of financing
    • Price: per share, premoney and postmoney valuation
    • Type of security
    • Closing
  • Terms of series A preferred stock
    • Dividends: a payment made by a corporation to its shareholders, usually as a distribution of profits 
    • Liquidation preference: dictates the payout order in case of a corporate liquidation
    • Conversion: to convert the preferred shares into common shares when the result is more advantageous to the shareholders
    • Automatic conversion
    • Anti-dilution: the right to maintain percentage ownership of a company by buying a proportionate number of shares
  • Redemption rights: to require a company to repurchase their shares after a specified period of time
    • Voting rights: different shareholders voting power
    • Board of directions: electing the right board
    • Protective provision: rights to preferred stockholders to approve certain decisions made by, or with respect to the company
    • Pay-to-play: a strong incentive for investors to participate in future financings
    • Information rights: demand to receive regular updates from the private company about its financials and operations
    • Registration rights: entitles an investor who owns restricted stock the ability to require a company to list the shares publicly so that the investor can sell them
    • Right of first refusal: before third parties have access to the deal
    • Purchase agreement
  • Employee matters
    • Employee pool: option pool
    • Vesting: the right for employees to exercise a set number of shares at a fixed price later on
    • Restriction on sales: right of first refusal on all transfers of common stock
    • Proprietary information and inventions agreement: no-compete, no conflict of interest and intellectual property (IP)
  • Drag-along right: if the majority shareholder of an entity sells their stake, the prospective owner have the right to force the remaining minority shareholders to join the deal
    • Co-sale agreement: allow minority shareholders to sell their stakes in a company if a majority shareholder wishes to sell its stake
  • Founders' activities: each of the founders shall devote 100% of his professional time to the company
    • Key man insurance
  • Other matters
    • Initial public offering share purchase: the right to purchase at least (5%) of any shares issued under a “friends and family” or “directed shares”
    • No-shop agreement: prevents the seller from soliciting purchase proposals from other parties for a given duration of time
    • Capitalisation/fact sheet
    • Indemnification: company will indemnify investors and board members to the maximum extent
    • Insurance
    • Rights to conduct activities
    • Assignment: investors shall be entitled to transfer all or part of its shares
    • Legal fees and expenses
    • Governing law
    • Conditions precedent to financing: detail events that have to occur before the term sheet will become binding
    • Finders
    • Counsel

Capitalisation tables

  • Class
    • Founders
    • Employee pool
    • Venture investors
    • Total
  • Shares
  • Preferred price
  • Valuation
  • Percentage

Convertible bond/debt

  • Discount: converting the loan to shares at a discount to the creditor
  • Valuation caps: sets the maximum price that your convertible security will convert into equity
  • Interest rate: as low as possible for formality
  • Conversion mechanics: tenure term or amount reached
  • Conversion in a sale of the company: creditor gets money back, plus interest plus a multiple of the original principal amount
  • Warrants: almost an alternative to discount

VC structure:

  • Limited partnership
  • General partner
  • Management company

Negotiating style

  • Bully: yelling, screaming, forcing issues and threatening
  • Nice guy: always feel like this guy is trying to sell you something
  • Technocrat: endless detail hell
  • Wimp: indecisive but easy on his wallet
  • Curmudgeon: angry but not bully, nice but never happy

Tips to successful fundraising:

  • Never ask for NDA
  • Don’t email carpet bomb VCs
  • No often means no
  • Don’t ask for a referral if you get a no
  • Don’t be a solo founder
  • Don’t overemphasise patents

Asset deal vs. stock deal: buying certain things in the company vs buying the company’s share
More terms:

  • Adverse change redemption: shareholder gets the right to redeem his shares if something adverse happens to the company
  • At-will employee: no employment agreement and can be terminated anytime
  • Broad-based anti dilution: weighted average anti dilution calculation, opposite of narrow-based anti dilution
  • Entrepreneur in residence (EIR): former entrepreneur helping out the venture firm
  • Pari passu: all classes of preferred stock have equivalent payment rights in liquidation
  • Right of rescission: shareholders to force company buy back their stock


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