Many technology ventures are focused on securing funds from venture capitalists (VCs). This lecture focuses on understanding the motivation of private venture capital firms and how it affects the structure of their term sheets and legal agreements. We explore common pitfalls in dealing with VCs, as well as success stories regarding VC investment.

5.  VC
motivations
 Driven
by
their
model
 Impacts
their
terms
and
expectations
 Most
companies
aren’t
VC’able
 Just
don’t
fit
the
“Big
Money”
model
 May
be
good
companies
and
businesses
 But
if
you
are
then
you’ll
be
better
equipped
than
most
because
of
tonight

7.  1,000
companies
 10
investments
 2
may
be
widely
successful
(usually
1)
 6
“land
of
the
living
dead”
 2
fail
horribly
 Winners
to
offset
my
losers
 Start
ups
10-­‐12x
return
in
5-­‐7
years
 Existing
companies
5-­‐7x
in
4-­‐5
years

8.  A
company
that
doubles
isn’t
enough…
 Every
opportunity
has
to
have
the
potential
to
be
a
home
run

10.  You
Tube
sold
to
Google
for
$1.65
Billion
 Sequoia
invested
$11.5M
received
$495M
 30%
of
the
company
 43x
return
 Great
deal!

11.  6-­‐9
months
to
raise
capital
 Several
meetings
 Want
to
get
to
know
you
 Assess
your
“Say/Do”
factor
 Close
to
truth
▪ Builds
confidence

12.  Personal
Recommendation:
 Get
to
know
the
VC
▪ Process
(who
makes
the
decision,
when
&
how
often)
▪ Where
are
they
in
their
fund
life
cycle
▪ What
was
their
last
deal
▪ Talk
to
their
existing
CEO
▪ Cash
available
to
invest/reserves

13.  Personal
Recommendation:
 Rise
above
the
noise
 Remember
the
frogs
▪ 1,000’s
of
deals

14. Have
to
be
able
to
live
with
them
…
“til
exit
do
you
part”

15.  The
term
sheet…

16.  Non-­‐binding
offer
to
invest
 Outlines
the
general
terms
and
conditions
of
investment
 Which
may
change
 Not
the
definitive
agreement
simply
a
place
to
start
 Everyone
uses
it
 When
they
issue
one
in
their
process

17.  Non-­‐heart
ache
 Company
name
 Investors
 How
much
 Date

20. On
average
it
takes
about
6
years
for
a
software
company
to
get
to
$10
million
revenue.
Far
more
realistic
to
get
to
$50M
in
10
years
(50%
growth
rate
from
years
6
to
10).

24.  Accrue
 Price
+
dividend
convert

26.  Protects
an
investor
from
down
round
 As
if
their
investment
had
been
done
at
the
current
lower
price
 Keeps
the
investor
whole
in
bad
times
 Full-­‐ratchet
 Weighted
average

27.  VC
can
ask
to
have
the
company
buy
back
shares
 Life
of
the
fund
 Investors
in
funds
want
their
money
back
 Outcome:
 Forces
a
sale
 Get
minimum
investment
back
(P+dividends)

28.  60-­‐66
2/3%
 Change
nature
of
the
business
(acquire/divest)
 Change
capital
structure/articles
▪ Default
approval
over
future
financing
 Approve
business
plan/operating
plan
 Change
in
key
employees
(defined
term)
 Creation
of
ESOP
 Unbudgeted
expenditure
in
excess
of
$5,000
 Non-­‐arms
length
transactions
 ….

29.  Monthly
prepared
financial
provided
 20-­‐30
days
from
month
end
 Quarterly
financials
 Analysis
vs.
budgets
 Board
material
 Yearly
operating
plan
 (30
days
prior
to
beginning
of
fiscal
year)

30.  Founder
restrictions
 Drag
Along
 VCs
need
exit
 Tag
Along
 I
can
sell
a
portion
if
you
can

31.  Friends
and
family
 Move
to
5
 2
investor
 2
founder
 1
independent
 Expect
material
in
advance
of
meeting
 Only
a
meeting
if
the
VC
is
there
▪ Defer
once

32.  Founders
 Employees
 Consultants
 Students/universities/research
organizations
etc
 Avoid
convoluted
IP
structures
 Only
going
to
be
unwound

33.  Non-­‐competition
 Non-­‐solicitation
 Customers
 Employees
 IP
Assignment

34.  Ensure
one
common
motivator
 Need
to
attract
talent
 15%-­‐20%
(low
as
10%)
 New
CEO
 New
executives
 Board
members
 Non-­‐VC
 Pre-­‐$
 Dilutive
to
you

35.  Power
of
“OPM”
 Get
to
know
your
VC
 Won’t
matter
in
good
times
 Can’t
tell
you
what
to
do
but
prevent
you
from
doing
things

36.  Acceptance
&
Exclusivity
 Deadline
for
acceptance
 Use
the
time
to
negotiate
with
other
parties
 No
“shop”

37.
Be
careful
what
you
ask
for
…don’t
send
the
wrong
message