Reddit reviews Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist

Definitely depends on how the startup is structured and how much it has raised. Here's a typical example:

-Two founder startup (one techie, one hustler)

-Raised $1M in seed capital at a $4M post-money valuation (how much the startup is worth after the dollars are invested).

The investors get equity equal to (dollars invested) / (post-money valuation). In this case, the investors would get $1M / $4M = 25% of the company.

-A key question is whether the investors have liquidation preferences that give them their money back or a guaranteed return before the founders get anything.

A 1x liquidation preference - meaning the investors get their money back first - is common.

-If the startup raised $1M at a $4M post-money valuation with a 1x liquidation preference and then sold for $1M, the investors would get all $1M because their preference says they get their investment back first. The founders would get nothing.

If the startup sold for $2M, the investors would get their $1M back and the other $1M would be split among the founders.

(I'm ignoring the case of participating preferred, where investors get their money back AND their percentage of the company from the rest.)

A startup usually has to sell for at least its post-money valuation for the founders to see much return. If the investors have 2x or 3x liquidation preferences, founders and employees will see little return even if the company sells for 2x-3x its last valuation. Some of the billion dollar unicorns are struggling with this.

Thus, if the startup has raised any venture money and only sold for $1M, the founders are unlikely to see much of it. :(

If you're interested in learning more about how venture investments are done, I recommend Venture Deals by Brad Feld and Jason Mendelson.

My mentor in San Francisco is always railing me on "LEARN TO CODE." I'm okay at coding, and yeah I guess it would help if I was amazing at it... But there are plenty of start-ups with not coding founders. But they are always tech, or industry specialist founders. Never just a guy with an idea.

I am pretty well connected, so I asked a friend of a friend to connect me with an owner of a huge marketing agency, that decided to invest in the company and partner with me. I would say though, never asking for money is kinda the best way to get money for 2 reasons:

1. It lets them come to you and ask you to invest, rather than you convincing them... so if it's a really good idea, then you know. You can never trust friends and family (also, I really don't encourage family funded companies... most the time it's bad).
   
   
2. No one invests (any decent amount of money) out of pity... especially an angel, and it's really hard to ask for money when you have no product, or no revenue, or no experience. So it's best to give the person you end up meeting, a really solid pitch, and play kinda hard to get. I told my investor "we are raising x amount of dollars for investors." That was it, I didn't ask him, I didn't tell him his stake, nothing. I left it open. He ended the meeting with, "I really want to invest, email me." So I did.
   
   Read, Venture Deals (linked below)... kinda says the same thing, don't sound desperate. But that's my opinion.
   
   I'm more than happy to sign an NDA, or whatever you want, and give you my honest feedback if you PM me. I have no time to steal other peoples ideas ;)
   
   http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616

A classic venture basics book is Venture Deals by Brad Feld, who previously co-founded Techstars.
https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616

I recommend reading Venture Deals by Brad Feld

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist https://www.amazon.com/dp/1118443616/ref=cm_sw_r_cp_apa_i_agh9AbVS13D2H

>but series A would be happening soon and it could be my last job and blah blah

>but now I feel unhappy about the pay, given expensive cost of living etc. and plus my peers are making twice as much.

the people who do this aren't the same people who will reward you with a good equity deal or a sizeable stake of options.

Read this thread

and this book carefully.

Don't get your hopes up on the options, that is a long, long road and long time away from seeing anything, likely a loss too.

IMO don't bother renegotiating for more options.

The safe bet is to get a solid salary, and it sounds like they're treating you like crap. Consider looking for another job.

Obvious answers for engineers are tech infrastructure --

Web App: AWS/Heroku

iOS: Developer Account

Have you guys run a company/startup before? The best thing you can do is invest in mentorship and advice. Generally accelerators seem to be heavy on pitch building and raising money but light on actual 'how to run a business' advice.

How about 10 hours of legal consultation from a firm in town and basic incorporation fees? Supplement with your local Small Business Administration office for more general business advice.

Some great startup textbooks:

Startup CEO - Matt Blumberg

The Hard Thing About Hard Things - Ben Horowitz

Venture Deals - Brad Feld

Do More Faster - David Cohen

One of the greatest books on everything VC is Venture Deals .

1. Reddit is not a substitute for attorney who can prepare shareholder agreement which would cover your unique situation.
   
   
2. Having partners and shareholders is more serious then marriage. You can't take someone's equity away for non-performance. You may enter decision making paralysis because you can't reach consensus etc. LLC might not work for all cases and you might need C-corp which is more complicated, and so on. Consider whether your website has that much potential to cover for all that administrative burden.
   
   
3. If you can avoid having equity partners - do so at that stage. Structure commercial agreement for services and commission, performance based compensation. Make sure IP is always transferred to your LLC. If this is not enough for your friends - make option plan which are conditionally vested based on performance.
   
   Giving away equity is easy. Restructuring later when you understand each one true individual contribution is complicated and is a major stress.
   
   If you believe you're really on to something with your website, spend a weekend reading some book on how corporate law works and find a reasonable corporate attorney to help you structure your shareholder agreement.
   
   https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616 you may skip all chapters related to VC deals

A book I haven't read but is suggested all the time in threads like this is Venture Deals. You might consider picking up a copy and reading it so you'll know more about what the logistics would look like if this individual (or another in the future) does want to make an investment.

First, I recommend buying and reading this book if you haven't. It's more geared towards raising funding, but the discussion on the term sheet and earnouts alone is worth it:

http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616/ref=sr_1_1?s=books&ie=UTF8&qid=1369064433&sr=1-1&keywords=venture+deals

Second, it really sucks that there's almost no cash in the deal. From what I understand, the company will sell for $Z in total, $X in cash and $Y in earn out tied to staying with the company and meeting performance goals. Obviously it's in the buyers best interest to have $Y be the largest it can, and it's in the sellers best interest to have $X be as large as it can. But from what it seems there's almost no cash in the deal, which would make me wary from the start.

Personally I don't know if I would ever entertain an offer of <30% the offer price is in cash. Obviously the terms of the earn out matter, but I'm assuming this is an asset deal, not a stock deal - in which case you're still saddled with the liability of the original business in the future and the acquiring company gets tax breaks on the larger the 'earnout' portion - both reasons to argue for a larger cash portion.

Have you thought about seeing if there are any other large players interested in buying your company? From my chair the quickest way to a favorable offer would be to pit two competing companies against each other for yours.

i'm not quite a CFO but i do work in tech / at a startup / in finance. i can give a quick list of stuff I'd recommend to someone making the jump:

• Kind of a no brainer (and judging from your analysis on #1, this probably won't be an issue) but you should be familiar with the VC/ funding/legal side of things. You can be the most valuable person in the room if you like slicing through a term sheet. i'd recommend Brad Feld's Venture Deals to get your feet wet. From a more macro/ company building level, Bussgangs Mastering the VC Game is a nice, light read.
  
  
• Again, probably why they're hiring you, but strong financial modeling skills are important. Being able to do the historical accounting/ cash analysis and then quickly turn that into a forecast grounded in some business logic is essential. You're going to be making shit up sometimes, but I think everyone is to some degree in early stage tech.
  
  
• I'm not sure the size of this company, but it's probably small and you'll probably end up dealing with/managing a lot of unsexy stuff. Running payroll, administering benefits, getting a 401k set up is all very painful but part of building yourself into a real company that can hire top notch talent. of course you can hire some/most of this stuff out, but it will probably be your problem at the end of day.
  
  
• again, not sure what kind of team you're leading, but dealing with the accounting side. judging on the 2 year timeline, you'll probably be due for your first Audit and have to lead a few 409a valuations. deal with taxes/whatever else comes up.
  
  i think great CFOs for early stage can run the finance side but also kick in with the Ops stuff and have a good handle on product. You're more of the grease, and your job is to keep things humming and get out of the way to let people build.

I know you mentioned video, but Venture Deals is a great book outlining complexities.

I have never personally accepted equity funding.

It seems like you are new to learning about VC. i'm not an expert, but I do know a bit. Let me try to help clear some things up.

firstly, if you are interested in learning about venture capital and the terms in VC term sheets (the word we use instead of "contract") you MUST read this book.

http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616

which includes a sample term sheet in the appendix, but more importantly, it explains everything on the term sheet in plain english, and then goes into the economics of VC, negotiating, and more.

you can see sample term sheets here.

http://www.google.com/search?q=sample+venture+capital+term+sheet&client=safari&rls=en&oe=UTF-8&oq=&gs_l=


Term sheets do not spell out when and how a founder leaves a company, or any sort of exit strategy as you defined.

Accepting VC is not an agreement to sell your company. Its an agreement for equity and usually some board seats in exchange for money.

Now, the VC can only get paid in a couple of ways. Either a liquidity event, such as an acquisition or an IPO, or depending on their agreement they can sell their equity back to the company or to other people. (i don't know how common the latter is)
So, the VC expects you to exit in some way, and since accelerators take equity as well, they also only get paid in a liquidity event (or the secondary market, as i explained above as selling equity back to the company or other people).

thats as far as it goes for an "agreement to sell the company".

also companies aren't really ever "finished" being built. Is Ford finished? Facebook? IBM?

Something that I have not personally read (next on the list!) but is on the recommended reading list for a startup incubator I'm involved with is the "Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist" by Brad Feld.

https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616/

http://versionone.vc/resources/ <-- This is awesome.

https://www.amazon.ca/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616/ref=sr_1_1?ie=UTF8&qid=1469897805&sr=8-1&keywords=venture+deals <-- you'll need this. Required reading.

Venture Deals — Brad Feld, Jason Mendelson

http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616/ref=sr_1_1?ie=UTF8&qid=1408478869&sr=8-1&keywords=venture+deals

A deck is a PowerPoint presentation (generally in PDF format) where you present your startup and the problem you are solving. If you're creating someone new and innovative it may be difficult for others to understand. So in a deck you essentially try to explain everything in a clear and concise way. Sometimes you have a short and long version. The short version you attach to emails while the long version is what you present to VCs during in - person meetings. There are many decks from successful startups available online. Just Google "startup decks." Mint's deck is one of the best I've seen. Very clear and concise.

How finished should something be? I don't know but it should be free of typos, clear and straight to the point. On AngelList you can look at other startups, so look there for examples of what to do.

Once a VC decides to invest in your idea or company, they will send you a term sheet. You'll need to know how to understand it. I recommend reading Venture Deals. Very informative.

This book has good explanations of the terms in venture deals: http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616/ref=sr_1_1?ie=UTF8&qid=1369064151&sr=8-1

For more abstract analysis, Paul Graham has some good essays: http://www.paulgraham.com/swan.html

Barbarians at the Gate:

http://books.google.com/books/about/Barbarians_at_the_Gate.html?id=8rVQ6wKWdaYC

Venture Deals: Be Smarter than your Lawyer and Venture Capitalist (Entrepreneur book, some of the writing done by the CEO of twitter, the other 2 authors are venture capitalists)

http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616

I recommend Venture Deals by Bred Feld and Jason Mendelson. It walks through in detail the process of getting venture funding, what to watch out for, what matters and what doesn't.

I second the book Hooked by Nir Eyal–it has great insight into building sticky products.

Couple of others off the top of my head:

• The Startup Life by Brad and Amy Feld - Great if you're building your company and are in some sort of serious relationship.
  
  
• Venture Deals by Brad Feld and Jason Mendelson — One of the best books on how to think about fundraising when you're going through it for the first time. Super entrepreneur focused.
  

Hey!

This is the book I recommend the most on deal structure. Some of it is overkill but it's important to understand the structuring. https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616 People always say "valuation! valuation! valuation!" but the reality is there are several critical terms that could leave you in terrible shape if you dont understand.

I only ever structure preferred NON-PARTICIPATING offerings. Usually as a convertible note, with a flex valuation that's set by the next round.

The critical piece in all of this is to hire EXPERIENCED counsel who have done these, and are lawyers at a sizable firm. That's important because if things go sour, you need a firm that will stand behind their work

Venture Deals by Brad Feld, if you are planning on getting funding. Great, no-nonsense book:

http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616/ref=sr_1_1?ie=UTF8&qid=1373172138&sr=8-1&keywords=venture+deals

I'd check out:

http://www.feld.com/wp/archives/2011/10/how-convertible-debt-works.html

&

http://startuplawyer.com/category/convertible-notes


One note: Equity financing is a lot more complicated than just buying x% of a company valued at $Y. I'd recommend Brad Feld's Venture Deals book: http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616 ( doesn't talk much about convertible, but its the best book out there I've seen on venture financing ).

Read this book. Make sure you buy the second edition. Convertible notes weren't in the first edition. https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616

A lot of the content is also on Brad's blog. http://www.feld.com

He explains all of this better than anyone.

Where do you plan on working in an ideal world?


VC Law is something you can really teach yourself in terms of understanding Term Sheets, which is primarily what that class covers.

Securities Regulation ties into the most important part of VC Law IMO, and you won't learn a lot of the major stuff in a VC course. IE you may discuss Sarbanes-Oxley and 10b5 in marginal detail, but not much more.



edit: If you're interested in VC Law, I would just check this book out and save a few grand:

Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist

If you really like this stuff and can take both courses, great. If not, Securities FTW

Venture Deals Book is a fantastic guide for entrepreneurs new to structuring deals for capital raising. Deal making tends to not be vanilla or chocolate, but requires creativity by the entrepreneur to get it done.

From what ive seen there is no silver bullet. Books like slicing pie helped me learn how to value peoples contributions but a dynamic equity split wasn't the answer.

In my opinion the best book to read is Venture Deals, Be smarter than your lawyer and venture capitalist. Its going to teach you a ton about how to structure your cap table, what terms/concepts you should be aware of, and what investors are looking for.

https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616

Another great thing to read is the founders dilemma. It talks about the trade-off entrepreneurs make. Do you want to be rich or king because you cant be both?

https://hbr.org/2008/02/the-founders-dilemma

In the end you're going to have to make a judgement call.

A good starting place is Venture Deals. It goes into aspects beyond funding, and is co-written by a lawyer/entrepreneur. I continuously find it useful in my practice and recommend it to my clients.

https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616

Kind of unrelated, but I've been around a lot of entrepreneurs and they all swear by this book. Apparently, it's the importance important thing you can read before raising venture capital. No idea. I've never read it since I've never had to raise money. : https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616

​

Also, I really suggest you look at things like Wefunder or Seedinvest. They are basically like Kickstarter but instead most normal people can invest. I think this is a wonderful strategy. Imagine having the collective experiences, word of mouth, and ownership of hundreds, perhaps thousands, of people who are invested in your success.