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Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist?
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Equity for a lawyer is rare, and implies they're fulltime and not taking a salary.
It's typically in the half-percent range unless the startup is a legal startup and they're a core contributor. This person tacked on a zero.
> I'll ignore the other parts because I think you're missing my point
You sure aren't doing much to express your point.
> Founders will generally take common stock as well
[citation needed]
Seems you have a lot of misunderstandings about VC. Here's a book that really helped jump-start my education on the subject. Was handed to me when I landed at my first A-round startup.
> this is only an issue if the FMV of your shares is lower than strike price at exit/IPO/change of control
No one has a crystal ball. 67% of startups die or become self-sustaining (source: crunchbase) which is terrible odds to fight. And with each round of funding the common pool gets diluted w/ the addition of more preferred stock.
Saying "this is only an issue if" is a bit disingenuous. The odds are stacked heavily against you as a common share holder.
This is all to say that it's naive to believe that options are an incentive. They're just the cherry on the sundae and you're most likely never to taste it.
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.
If you're serious about it read Venture Deals - it has every bit of info you can think of on this subject
> It IS their valuation
Valuation is a number on the term sheet a VC presents a start-up when providing funding. It is part of the basis by which fractional ownership is calculated.
LinkedIn is not a startup. Calculating a business's value is a much more murky process, which includes both tangible and intangible assets. Shareholder value (which is the value you're talking about) is the only variable in flux here.
Might I suggest a little reading for you, for future reference? Venture Deals is a great, quick read on exactly what goes on between a startup and a VC. Explains valuations, term sheets, IPOs, everything in between.
Agreed, it's tempting to take the first check that comes your way, but sticking to what your term sheet states does weed people out. A great book on the subject is Venture Deals. Brad Feld is the man!
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
What is the current setup like? What is everyone else holding? Is it shared? What classes of equity are there? Preferred stock? Options? How long will it take you to get fully vested in your 1%? Are there kickers? Can you buy in or lock in a per share value? Hit your library and read this book to start with. https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616
At the end of the day an equity play only for something with no product, market , fit or paying clients is a suckers game.
A convertible note is a loan to the company with the option to convert to equity at a future financing. If the option is not exercised then the loan is simply due back from the company and no equity is granted. As these are speculative investments the interest rate on convertible loans is typically modest compared to conventional loans. There should be no personal liability associated with it, unless there are some unusual terms embedded. You should consult an attorney to review the deal.
Whether you think your startup is worth more than $500k is not something we can answer for you. Traditionally, convertible notes are offered under one of four structures:
- No valuation cap, no discount
If exercised by the investor, conversion to equity happens at the same valuation of your next financing round. There is no discount applied. This is the most founder-friendly option, but of course not all founders will have the negotiating power for this sort of deal. - No valuation cap, with discount
If exercised by the investor, conversion to equity happens at the same valuation of your next financing round but with a pre-determined discount applied to that valuation. Typical discount ranges are between 10-20% but obviously the founder will want the lowest possible discount. - Valuation cap, no discount
If exercised by the investor, conversion to equity happens at the time of your next financing round, but is capped at a pre-determined valuation. This is effectively what your current offer reflects. The valuation cap is set at $500k. - Valuation cap, with discount
If exercised by the investor, conversion to equity happens at the time of your next financing round, but is capped at a pre-determined valuation and is subject to a discount. This is the least founder friendly option as it gives the investor a cap on valuation and a discount on the future price.
I strongly recommend you read the book Venture Deals by Brad Feld to understand how investments into startups are structured, and what you should look out for as a founder. It is a technical field full of jargon you need to understand even if you have good legal representation. And you should have good legal representation; the details in the terms of these deals can be a killer if you aren't careful.
Good luck!
Not exactly but recommend reading:
https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616
Not directly on point but if you haven't already you should read Venture Deals.
It sounds like getting investment won't be the challenging part for you, but choosing the right investor will be.
As one of my previous investors likes to say "we look for companies that already have the fire going, just add a little bit of fuel and watch it grow" (mostly talking about existing team + product + traction and just missing some extra cash to grow the business)
If you're looking where to begin, I'd say it's
- figuring out how much you need (which you probably already know).
- figuring out which types of investors match your needs (angels vs VC vs PE).
- figuring out how much you're willing to give up, considering both equity and control. (voting rights, board seats, decision making are going to be a big thing)
- make your deck, practice your pitch and then reach out.
A couple of books I'd recommend are:
- Venture Deals by Brad Feld (finance stuff if you're going with VC or angel money)
- Blitzscaling by Reid Hoffman (hr/operations stuff as your organization is going to shift with influx of capital and new hires/people)
We live in a world where it's extremely easy to qualify and / or disqualify an idea. You indicated that you ran some numbers for your idea, however, running the numbers should only serve one purpose. Running numbers gives you the data you need to know whether or not you should proceed to step 2.
Step 2 - Validating Your Idea
There's only one way to validate your idea and that's to put it in front of potential customers. You market the offering as if it exists, as if it's real. For example, let's rewind time and say you wanted to build Instagram. You have no money, no connections, but an awesome idea. You could whip out adobe illustrator, build a collection of graphics and use Adobe Premiere pro to render it into a great video showcasing how great your offer will be. Then, you push traffic to that page and measure how many people have opted to give you their e-mail address to receive a notification of when it launches, vs. total traffic received. If 40% of people give you an email address, you might have something.
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Step 3 - Market Your Findings
The likelihood of your raising $1M in a first round is pretty low nowadays. Incubators have value (been through one). Access to the network of fellow entrepreneurs is gold, while being able to collect business cards of REAL investors to engage in on going dialogue is huge. Not all incubators are made the same. Some are trash. The leading incubators have proven to help winners, win. Period. So, if there are significant financial barriers to your being able to actually build the product, marketing your findings and pitching the product to incubators can be a good start. "Hey, we spent $5,000 on traffic, generated 50,000 visits and 20,000 people opted in... there's something here." Data wins arguments and clears all doubt.
"I have done all that but no one will bite..."
Continue pushing. If your product is heavily reliant on lines of code vs. the purchase of tangible goods, then your findings (data) can be the fuel you need to grow a team of people willing to invest sweat equity to get it shipped out the door.
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Finally, these books are MUST. You should nearly memorize them:
Venture Deals by Brad Feld and Jason Mendelson of Foundry Group is also a solid resource https://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616
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.
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.
Venture Deals by Brad Feld is by far the best book on startups and associated stuff.
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
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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.
Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist
http://www.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist/dp/1118443616
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