1. 1. The Players
   1. Founders
      1. Shouldn't outsource their involvment in financing
   2. VC
      1. People
         1. Managing Director or General Partner
            1. Decision makers, insist on building relationship with them
         2. Principals, directors
            1. Partly involved
         3. Associaltes
            1. Not making decision – scouting, due dilligence
         4. Analysts
            1. junior
         5. Venture partners
         6. Entrepreneurs in residence
            1. looking to build next company
   3. Angels
      1. Check if qualify
      2. if friends they need to undertsand 1) invesmtment is a lottery ticket, 2) it's not an investor relationship meeting each time they see you
      3. Don't be a hostage, needing to chase 75 signatures before each move
   4. Syndicate
      1. There's a lead (can be 2 or 3)
      2. Better negotiate terms with lead
      3. Still need to communicate with all
   5. Lawyer
      1. should be experience in working with VCs
      2. Usually cap their fees in advance
      3. in 2011 eraly stage deal is $5-15k
      4. Typical $25-40k
      5. if there are items from past – cost will increase
      6. if dont get along with VC, bill can skyrocket
      7. Better be paid on closing, it's reasonable
   6. Mentor
      1. not usually advisors, who take a cut, stay away from them on early stage
2. 2. How to raise
   1. Goal: Get several term sheets
   2. Do or Don't, there's no Try
   3. Determine how much you're raising to talk to appropriate people
   4. Focus on time oto the next milestone, rather than specific amount
   5. early stage fin projections are 100% wrong
   6. Materials:
      1. Prototype or demo is ideal
      2. Shortdescription of business
      3. Executive Summary
      4. Presentation: 2-8-30 mins
      5. BizPlan? not for early stage
      6. Private Placement Memo (PPM)
         1. only when investment bankers are involved
   7. Finding a lead VC
      1. 'Interested' will catalyze
      2. 'Maybe' should be around
      3. 'Slow no' and 'no' – spend no time on them
      4. Do backgorund check (both ways)
   8. Closing the Deal
      1. Reputable VC will follow up on termsheet
      2. Unless they find unexpected bad facts or you do anything stupid
      3. Then lawyers do the heavy lifting
      4. Just keep track of things, lawyers can ruin the deal
3. 3-4. Termsheet: Overview/Terms
   1. Key Concepts: Economics & Control
      1. Others shouldn't be important to VC
   2. Valuation
      1. Basically = # of shares x price
   3. premoney / postmoney valuation = price before and after investment
   4. The best entrepreneurs we've dealt with are presumptive
   5. and say something like “I assume you mean $20 million premoney.”
   6. option / employee pool – another trap, can be asked to increased before the deal
   7. Prepare the budget, plus there're workaround (higher pre/post money)
   8. Warrants – like options, can help VC to jump on a lower price
      1. unnecessary complexity
   9. bridge loan / convertible debt
      1. additional risk from VC, paid by up to 20% discount
   10. The more VCs, the better terms
   11. Liquidation Preference
       1. Preference
          1. 1x money invested
          2. paid in the given order
       2. Participation
          1. 5 of 15 postmoney (investor 33%, founder 67%)
          2. Case 1: 1× preference, nonparticipating: In this case, the Series A investors will get 33 percent, or $10 million, and the entrepreneurs will get 67 percent, or $20 million.
          3. Case 2: 1× preference, participating: In this case, the Series A investors will get the first $5 million and then 33 percent of the remaining amount, or $8.3 million (33 percent of $25 million) for a total return of $13.3 million. The entrepreneurs will get 67 percent of the $25 million, or $16.7 million.
          4. Case 3: 1× preference, participating with a 3× cap: In this case, the preferred will not reach the cap ($15 million), so this will be the same as Case 2. Greedy from VC point
       3. on a liquidity event
          1. e.g. merger, acquisition, sale, bankruptcy
       4. Pay-to-Play
          1. Generally good for company and investor
          2. Preffered > common if not investing at same stake
       5. Vesting
          1. typically 4 years
          2. unvested stock
             1. lead to reverse dillution
             2. if founders > just vanishes
             3. employee options go back to pool
             4. key component:vesting schedule in case of merger
             5. single-trigger acceleration whe merging
             6. double trigger acceleration e.g. merger+getting fired
             7. VC prefer latter
       6. Employee pool
          1. ~10-20%
          2. VC sneak by asking for bigger pool
          3. if you're sure – secure them by antidillution protection for next round
       7. Antidilution
          1. weighted average antidilution
          2. rachet-based antidilution (secures VC if next round price is lower)
          3. for company/entrepreneurs more inclusions are better
   12. Board of Directors
       1. seek for balance
       2. usually 4-5, mature 7-9
       3. compensated with stocks
   13. Protective Provisions
       1. veto rights on main control/economics decision
       2. saves VC, but not from themselves
       3. critical to have single vote from investors on this
       4. wary of inappropriate veto rights for small investors
   14. Drag-along rights
       1. no objection on liquidation
       2. try to get these tights to pertain to majority of common stock, rather then preffered
       3. one of things that matters most when thing fall apart
   15. Converion
       1. nonnegotiable is nonsense
       2. in most deals VC have right to convert preferable to common, but not back
       3. if VC would be better of
       4. can be automatic on IPO with threshold (e.g. 3x)
       5. as bankers won't like multiple classes of stock
4. 5-6. Termsheet: Control / Other
   1. Dividends
      1. private equity guys love, VC don't care
      2. material in case of sale below the value
      3. typically in 50M+ investments
      4. can be accounting nightmare, especially if cumulative
      5. ensure dividends are approved by the majority
   2. Redemption rights
      1. VC fear if company is successful, but not looking for liquidation
      2. also if VC life span (e.g. 10 years) is coming to end
      3. is accounted as a liability
      4. never agree to adverse change redemtion
      5. if you control board, it's less important
   3. Conditions Precedent to Financing
      1. termsheets are mostly nonbinding
      2. investors will try to make a few things binding, e.g. legal fee paid no matter if deals happpen
      3. try to avoid as much as possible
      4. #1 Approval by investors clause
      5. #2 Rights offering to be completed by company
      6. #3 Emplotment agreement signed by founders as acceptable to investors
      7. Insist on spelling out key terms
   4. Information rights
      1. shouldn't matter much to the entrepreneur
      2. can ask for NDA if paranoic
   5. Registration Rights
      1. lawyers seem genetically incapable of leaving this section untouched
      2. don't focus much, if you're up to IPO life's good
   6. Right of First Refusal
      1. negotiate threshhold if many small investors
      2. check the multiple factor
   7. Voting rights
      1. how the preferred stock and the common stock relate to each other in the context of a share vote
      2. simply a FYI
   8. Restriction on Sale
      1. Same as in IPO, but for private
      2. easier to include in the bylaws
   9. Proprietary Information and Inventions Agreement
      1. mechanism that investors use to get the company to legally stand behind the representation that it owns its IP
   10. Co-Sale Agreement
       1. if a founder sells shares, the investors will have an opportunity to sell a proportional amount of their stock as well
       2. eliminating chance is ~0, but you can floor it
   11. Founders' Activities
       1. 100% time to the company
       2. No win situation for founder
       3. If you can't agree, don't look for pro VC financing
   12. IPO shares purchase
       1. nice problem to have
   13. No-Shop Agreement
       1. almost always part of final term sheet
       2. do not negotiate other fin deals
       3. for 45-60, somtimes 30 days
       4. should expire immediately if VC terminates the process
       5. More of an emotional commitment rather then legal
       6. carve-out for acquisition
   14. Indemnification if directors
       1. Just live with it
       2. can negotiate insurance
   15. Assignment
       1. don't let the loophole “assignment without transfer of the obligation under the agreements”
       2. New holder shall have the same rules
5. 7. Capitalization Table
   1. can be tricky
   2. don't round to shares before the very end
   3. Entrepreneur should understand cap table
   4. find some fin help with that if not
6. 8. How VC work
   1. Structure
      1. Management company owned by the senior partners
         1. employes staff
         2. pays for everyday activities
         3. general partnership / limited partnsership
         4. e.g. franchise
      2. limited partnership funds
         1. contains investors in the fund
   2. VC also raise funds
      1. Limited partnsership agreement
      2. money don't sit on account
      3. takes ~2 weeks on "capital call"
   3. How managers make money
      1. management fees 1.5-2.2% of fund / year to cover all expenses
      2. Carried interest ~20% of profit gained
      3. reimbursment for expenses associated with board meetings
   4. Time impact
      1. 5 year commitment period to identify and invest
      2. then only invest more in portfolio
      3. that's why they raise every 3 to 5 years
      4. can be zombies past the commitment period
      5. the closer to the end, the more difficulties can arise
      6. specifically with additional investments
   5. Cash Flow Trap
   6. Cross-Fund Investing
   7. Departing Partners
   8. Fiduciary Duties
7. 9. Negotiation tactics
   1. Only matters
      1. Achieving good and fair result
      2. Not killing personal relationship
      3. understanding the deal
   2. know your opponent
      1. There's always an advantage
      2. Like timing
   3. Game theory
      1. one time kill
      2. or repeat, reputational?
   4. ask: what are 3 most important terms?
   5. Styles:
      1. The Bully (Aka Union Negotiator)
      2. The Nice Guy (aka Used-Car Salesman)
      3. The Technocrat (aka Pocket Protector Guy)
      4. The Wimp (aka Marty McFly)
      5. The Curmudgeon
      6. Always be trasnparent
   6. When to walk away
      1. know your best alternative
      2. don't make a threat, that you aren't willing to back up
   7. don't set price first, get offer from VC
   8. unless you have other concrete offer
   9. please your opponent based on his negotiation style
   10. Go by points in order, not revealing which are most important
   11. start with easier points where you can agree, then distribute the issues
   12. valuation is the last subject to address
   13. listening more than you talk
   14. it's market! why this market conditions apply to you?
   15. know the ethical code of your counterparty
   16. You'll probably be least experinced person, great lawyer will help balance things out
   17. smaller firm with partner attention is better the 1st class with junior people
   18. there are ways to improve a bad deal afterwards
8. 10. Raising money the right way
   1. Don't ask NDA
   2. Don't email carpet
   3. No often means no
   4. if you get no – don't ask for referral
   5. Don't be a Solo Founder
   6. unless you're a successful serial entrepreneur
   7. Don't overemphasize Patents
9. 11. Issues at different Fin Strategies
   1. Seed
      1. can get overvaluated
   2. Early Stage
      1. big issue: liquidation preference
      2. collapse protective provisions so all preferred stockholders vote together
   3. Mid & Late Stages
      1. board and voting control
      2. you can put a cap on % of non managing directors
      3. or establish executive committee
   4. Other approaches to early stage deals
      1. light preffered by angels
      2. convertible debt
10. 12. Acquisition
    1. Letter of intent – the Other Term Sheet, mostly nonbinding
    2. Structure of a Deal
       1. price stated is the best-case scenario
       2. escrow can decrease the price
       3. working capital
       4. earnout – tricky, can be stock
    3. Asset Deal vs Stock Deal
       1. Buyers wants assets
       2. Seller wants stock
       3. Can be stock or cash on both options
    4. Form of Consideration
       1. if Stock – mind liquidation preference
       2. also check if it's freely tradable
       3. Cash is king
       4. don't get locked with price until negotiating form of consideration
    5. Assumtion of stock options
       1. if nothing stated – stock options will be killed
       2. which sucks for their holders, employees
       3. or can require immediate conversion and dillution of other stakeholders
       4. scenarios differ if buyer is public and private (non-cash)
       5. Who pays the basic balue of stock option
       6. do not sell employees short
    6. Representation, Warranties, Indemnification
       1. Who's actually making the reps
       2. Sketch out what the indemnification should look like
       3. try avoiding nonspecific, not reciprocal terms
       4. "to the extent currently known" is ok, arguing against is a red flag
       5. there're no standard terms for escrow
       6. in all cases the max carve out should be the aggregate deal value, not more
       7. escrow form of consideration
          1. cash is easy
          2. if stock – mind the price, to not pay in addition
       8. NDA
          1. almost always mandatory
          2. should work both ways
    7. Employee Matters
       1. better be detailed after accepting LOI
       2. but do not hold to the very end
    8. Conditions to Close
       1. Buyer can easily decide to walk away
       2. You can push back a few provision to understand how negotiation process would look like
    9. The No-Shop Clause
       1. Negotiate terms (e.g. 45-60 days)
       2. Can be extended
       3. you can add carve out (e.g. financing done by the existing syndicate) to keep preassure
       4. Also auto cancel if buyer terminates the process
    10. Fees, Fees, and More Fees
        1. Buyer will try to move as much to seller
        2. Resist the break-up fees
        3. but there are rare exceptions (e.g. if buyer is competitive, or there customer/employee risks)
    11. Registration Rights
        1. if public – check that you have registered stock, not soon to be
    12. Shareholder Representative
        1. Deal's not finished on the closing date
        2. Smbd should followup escrow and other relationships
        3. time consuming, usually non-paid
        4. If you're this guy – make sure you allocate the pool of money to get pro's helping you
        5. can be a separate escrow, to shield a bad-acting buyer
        6. shouldn't be the guy working for the buyer afterwards
        7. VC can pay little to no attention to that
        8. you can hire smbd for this
11. 13. Legal things
    1. IP
       1. Can easily kill startup
       2. smbd you've discussed your idea with can claim IP
       3. Probably won't get any, but can slow VC funding
       4. NDA won't save
    2. Employment Issues
       1. make sure you're hiring "at-will employees"
       2. It determines how easily you can fire them
       3. determine upfront severance
       4. know at least 1 good employment lawyer
    3. State of Incorporation
       1. VC prefer Delaware, state where company is, or VC is
       2. Delaware is mostly recomended
       3. Downsides of Delaware – extra taxes (modest) and comply with comply with your actual state laws in some cases
    4. Accredited Investors
       1. there're laws that allow only rich people to be accredited investors
       2. Otherwise they can request their money any time
       3. also lifelong problems / troubles with SEC
    5. 83(b) Election
       1. Sign in 30 days after receiving
    6. Section 409A Valuation
       1. penalties for wrong valuations
       2. solved by valuation companies
       3. cost $5-15k per year