Title Details

Jason Mendelson has over a decade ofexperience in the venture capital and technologyindustries in a multitude of investing, operational, and engineering roles. Prior to cofounding FoundryGroup, he was a managing director and general counsel for Mobius Venture Capital, where he also acted as its chief administrative partner overseeingall operations of the firm. Mendelson was also an attorney with Cooley LLP, where he practiced corporate and securities law with an emphasis on representation of emerging companies in private and public financings as well as mergers and acquisitions.

Preface xiii

Acknowledgments xix

Introduction: The Art of the Term Sheet 1

1 The Players 5

The Entrepreneur 5

The Venture Capitalist 6

The Angel Investor 8

The Syndicate 10

The Lawyer 11

The Mentor 13

2 How to Raise Money 15

Do or Do Not; There Is No Try 15

Determine How Much You Are Raising 16

Fund-Raising Materials 17

Due Diligence Materials 23

Finding the Right VC 23

Finding a Lead VC 25

How VCs Decide to Invest 26

Closing the Deal 28

3 Overview of the Term Sheet 31

The Key Concepts: Economics and Control 32

4 Economic Terms of the Term Sheet 35

Price 35

Liquidation Preference 41

Pay-to-Play 47

Vesting 50

Employee Pool 54

Antidilution 55

5 Control Terms of the Term Sheet 61

Board of Directors 61

Protective Provisions 63

Drag-Along Agreement 68

Conversion 70

6 Other Terms of the Term Sheet 73

Dividends 73

Redemption Rights 75

Conditions Precedent to Financing 77

Information Rights 79

Registration Rights 80

Right of First Refusal 83

Voting Rights 84

Restriction on Sales 85

Proprietary Information and Inventions Agreement 86

Co-Sale Agreement 87

Founders’ Activities 88

Initial Public Offering Shares Purchase 89

No-Shop Agreement 90

Indemnification 93

Assignment 93

7 The Capitalization Table 95

8 How Venture Capital Funds Work 99

Overview of a Typical Structure 99

How Firms Raise Money 101

How Venture Capitalists Make Money 102

How Time Impacts Fund Activity 106

Reserves 108

Cash Flow 110

Cross-Fund Investing 111

Departing Partners 111

Fiduciary Duties 112

Implications for the Entrepreneur 112

9 Negotiation Tactics 113

What Really Matters? 113

Preparing for the Negotiation 114

A Brief Introduction to Game Theory 116

Negotiating in the Game of Financings 118

Negotiating Styles and Approaches 120

Collaborative Negotiation versus Walk-Away Threats 123

Building Leverage and Getting to Yes 124

Things Not to Do 126

Great Lawyers versus Bad Lawyers versus No Lawyers 129

Can You Make a Bad Deal Better? 129

10 Raising Money the Right Way 133

Don’t Ask for a Nondisclosure Agreement 133

Don’t Email Carpet Bomb VCs 134

No Often Means No 134

Don’t Ask for a Referral If You Get a No 134

Don’t Be a Solo Founder 135

Don’t Overemphasize Patents 136

11 Issues at Different Financing Stages 137

Seed Deals 137

Early Stage 138

Mid and Late Stages 138

Other Approaches to Early Stage Deals 139

12 Letters of Intent—The Other Term Sheet 145

Structure of a Deal 146

Asset Deal versus Stock Deal 149

Form of Consideration 151

Assumption of Stock Options 152

Representations, Warranties, and Indemnification 155

Escrow 157

Confidentiality/Nondisclosure Agreement 158

Employee Matters 159

Conditions to Close 160

The No-Shop Clause 161

Fees, Fees, and More Fees 162

Registration Rights 163

Shareholder Representatives 164

13 Legal Things Every Entrepreneur Should Know 167

Intellectual Property 167

Employment Issues 169

State of Incorporation 170

Accredited Investors 170

Filing an 83(b) Election 171

Section 409A Valuations 172

Authors’ Note 175

Appendix A: Sample Term Sheet 177

Appendix B: Sample Letter of Intent 197

Glossary 205

About the Authors 213

Index 215

"...offers hard-headed advice on dealing with lawyers and venture capitalists, so you can make the right decisions for you and your business..." (FT.com, 30th January 2012)

"Long term horizons, coupled with clear analysis in the book, provide a clear understanding and historical perspective into financial crises" (Ad-Hoc-News, November 2011)