Robert Maynard was the co-founder of LifeLock along with multiple other successful companies. He has extensive experience in raising venture capital, so here is a presentation with his essential venture capital terms that any young entrepreneur should be aware of.

1. Robert Maynard’s Essential Venture
Capital Terms

2. Preferred stock - a class of
ownership that has rights not
ascribed to common shares. Usually
a liquidation preference or a
participating preference, voting
preference or dilution preference.
(terms defined below) Do not,
under any circumstances, give a
dilution preference.

3. parre passu - latin for “we all get
what the other gets.” ( I take some
literary license here). IOW, if one
class of stock is going to get diluted,
everyone is getting diluted at the
same rate. Insist on this in any deal
you make.

4. Liquidation preference - if the company
sells, the stock with a liquidation
preference gets all their money back
before the remaining proceeds are split.
Sometimes they get more than their
money back. For instance, a 1X
liquidation preference gets the amount
they put in back first. A 2X gets twice
the amount and so on. This is usually a
big deal only if the company does not
perform well.

5. Participating Preferred - a clause on
Preferred Stock that allows the holder to
be paid back his money, or some
multiple thereof, when the company is
sold. For instance, a 3X participating
preferred share would get three times
what he put in before common
shareholders get paid. Participation
usually falls off in the event of an IPO. I
would never give more than 1X
Participation.

6. Observation rights - The right for an
investor to sit in on all board meetings
and exec committee meetings without
actually being on the board. Many VC’s
are taking positions like this instead of
board seats in order to mitigate liability.
You can often counter a request for a
board seat with observation rights. Say
he wants two board seats out of five.
Counter one with one observer. They’ll
usually take that.

7. Vesting - award of ownership or
options over a period of time. Set it
in months rather than years. Thus, a
three year option would vest 1/36th
per month.

8. Reverse vesting - When the founders are
stripped of their ownership rights of some
amount of their founding stock (usually half)
at the inception of the A round and they have
to re-earn it over the vesting period. Do not
make these options, make sure they remain
as stock and that you control the voting rights
even though they’re not vested. Don’t be
offended or frightened off by this. It is a
standard golden handcuff to ensure that the
main guys they are investing in stay the
course.

9. pre-money valuation - the
enterprise value of the company
without the investment. Let’s say
$8mm.

10. post-money valuation - the
enterprise value plus the amount of
the investment. If you get $2mm in
investment and your pre-money
valuation is $8mm, then your post-money
is $10mm.

11. tranches (pronounced “traunches”) a
staging of the investment dollars subject
to hitting specific performance goals.
Do not, for any reason, do this. If it’s a
deal point, walk away. This is a great
way to get screwed. They’ll make it
sound so reasonable, but it’s just a
recipe for disaster because nothing goes
according to plan, so they can always
renegotiate the terms of the deal when
you run out of cash. (Many do).

12. Option Pool - usually the investor will want to set aside 25%
of the equity of the company in an option pool to be split by
employees. I use a different bonus structure for my guys that
is very well received and much less expensive for the owners.
Basically, they get a dollar-for-dollar bonus on every dollar
they were ever paid during their tenure six months after a
change in control. They must be continuously employed and
be employed on the payment date. I find that rank and file
love this because it gives them a hard number to look to. If
you pay them market rates (I always do) then this is a fair
distribution in return for the work they had to do as a
startup. It is MUCH cheaper for the owners/founders, is
much less distracting from a management perspective and
serves as a poison pill for someone who wants to buy you
cheap. I save equity awards for C-Suite execs and Directors.

13. Strike Price - the amount paid for a share of
stock when an option is exercised. The value
of the compensation is the market value -
strike price. Always make the strike price the
same as the last round of financing or more.
There is no need to provide cheap options
anymore. Indeed, accounting for cheap
options is a nightmare. If you're bringing
someone on after the first investment is
made, price the option at whatever the
investor paid for his shares.

14. Rule 144 shares - You have to hold this stock for a
year (if the company is public) before you can trade
it. This is especially important in the case of options
in that you will be taxed for the value of the
compensation at the time you exercise the options,
but you will not be able to trade for a year. This
means that you come out of pocket to buy the stock
and pay the taxes a year before you get the money
from the sale of the shares, all the while taking the
market risk on the appreciation of the shares. This
is a hidden poison pill that makes options almost
impossible for normal people to take advantage of.
A good VC would never try this, but an unscrupulous
investor or acquirer might.

15. Rule 8A - the filing that makes
options tradeable immediately so
that you can exercise your option
and sell it on the same day. Insist
that there is a clause in any vested
options you give that force an 8A
filing at some trip point, usually six
months after an IPO.

16. Exercise date - the amount of time you have
to buy your vested options before they are
retrieved by the company should you leave
before a liquidity event. Remember that,
unless you’re public, these options will be
treated as rule 144 stock until the stock is
registered and publicly traded. This is a very
important component of comp plans. Even if
you vest, if you can’t afford to exercise and
pay taxes, you lose the vested options if you
leave.

17. Due diligence - They will look up
your ass and out your eyes. Don’t
get offended when they ask the
same question 15 times. They're
not stupid (usually), they're just
trying to see if you've thought
through all sides.

18. Cap Table - the list of who owns what in
the company, how much they paid,
when they paid, what they paid with
(cash or services) their tax id #s, contact
info including phone, email and hard
address as well as any vesting schedule.
Once this is published after a funding, it
is almost impossible to change. Make
sure it's right from day one and that it is
kept completely up to date.

19. Deferred compensation - if you have been
taking a smaller than market (or no) salary
(this should be true of any of the execs at
seed stage) make sure you record the full
market salary as an expense and setup a
liability account called deferred comp for that
amount that is not paid in cash. This account
would be paid on closing of the round (or
some negotiation about it). It’s a good way to
get your market rate even though you haven’t
been taking it the whole time.

20. Board meetings - do not agree to any more than
four formal meetings a year. Otherwise, you will be
spending your days doing decks for the board rather
than running the business. However, communicate
with your board at least every month in writing with
financials, waterfall reports, good bad and ugly
developments. Remember to always communicate
bad news early and loudly. No one expects you to
be perfect and anyone on your board should be
experienced enough to understand the rough times.
Indeed, they are there to help you through them,
not to whip you when they happen.

21. Accredited investor: Someone who has earned $200k per year for the
past two years if single, $300k per year for two years if married or has
$1mm in net investible assets excluding their home. (There are other
requirements for things like trusts, corporations, etc. Your lawyer can
help you with these) You want to ensure that all of your investors are
accredited for two reasons: first and foremost: you should never take a
dollar from someone who can’t afford to lose it. Chances are you’re
going to fail. When people can’t lose the money and don’t understand
the risk, they get very upset, file lawsuits, make noise on social media
and just generally try to ruin your reputation. Don’t ever take money
from people who can’t afford it. Stress in your presentations that the
money is completely at risk. I liken it to putting it all on Red 00 in
roulette. You’re either going to win big or lose it all. The second reason
is for regulatory purposes. Different states have different rules for
registering if your investor pool is not entirely accredited. The rules are
basically the same as being public. No startup can afford that type of
regulatory cost.

22. Term Sheet: This is the non-binding
agreement that the VC will give you if
he's ready to proceed to making a deal.
It outlines the basic terms (wow, what a
circular definition) of the deal. Get the
term sheet right, but don't over-complicate
it. It should be produced on
one sheet of paper. Remember that it's
non-binding, so you don't have to get
crazy with legal language.

23. No-look: This is a term of time
when you agree not to shop your
deal to any other VC's. For the most
part, this is a bad idea, especially if
you are not cash-flowing. Under no
circumstance give this away without
getting something in return
(expedited diligence, breakup fee if
they don't fund, more elastic terms,
higher valuation, something).

24. Seed Round: This is the tranche of money
you raise, usually from yourself or friends and
family, that is used to get a working product
put together and get a little traction in the
marketplace. You usually have to get to
something like $50-100k per month in
revenues on your seed round with a good
growth trajectory in order to attract a good
VC. Consider this the proof-of-concept stage.
This is by far the hardest money to raise.
Treat every dollar as if it were worth $100.

25. Series A Round: This is the tranche where you get your first
one or two good VC's. It's usually priced at about 20% - 25%
of the overall company (meaning, you get $2.5mm and they
get 25% or whatever the ratio ends up being). With this
money, you should be able to prove out that there is a viable
market for your product and that you have the ability to
penetrate it. I personally believe that you should have a
viable business when you run out of A money. That is, if you
had to, you could turn off the growth engine and have a
business that cash flows. It's growth that costs money. If
you're not able to raise another round of financing, you'd
better be able to stop growing and live on what you've killed.
The big lesson here is treat every dollar as if it's worth ten.
Do NOT get crazy with hiring at this point, especially
administrative types.

26. Series B Round: This is the tranche where
you turn on full afterburner. You've proven
the market exists and that your product is
accepted. You've proven that you have the
team that can exploit the market. Series B is
where you lay on the staff to make it a big
business. You should have an operating
business when this money runs out, including
financing the growth engine. Typically, VC's
will get 15% of the company for a B round
and the amount can be as high as $200mm.
Whatever it is, it will be a big number, usually
8-10X of your A round.

27. Series C and beyond: These rounds are saved so
that you have a big business that is ready to go
public or be bought for big dollars. Your executive
team is well established. You may want to use some
of this money to go into new products or buy
another company. Whatever it is, be careful taking
this money. If you're a hot company, everyone will
want to give it to you, but it's easy to get over-diluted.
It's also easy to let the success go to your
head. Don't be afraid to cash out a bit if you take a
C round. Meaning, sell a bit of your stock to the
investor so that you're diversifying and put some
cash in your pocket. They might give you a bit of
grief for it at first, but it's not an unusual use of
proceeds for a later round.