« swipe left for tags/categories
swipe right to go back »
At the HBS VC Alumni event I was at last week (no – I didn’t go to HBS – I was a panelist) I heard a great line from a wise old VC who has been a VC about as long as I’ve existed on this planet.
“VCs only need three rights: Up, Down, and Know What The Fuck Is Going On”
If you’ve read Venture Deals: How To Be Smarter Than Your Lawyer and Venture Capitalist, you already know that Jason and I agree with this statement. And even though a term sheet might be four to eight pages long and the definitive documents might be 100 pages or more, other than economics, there are really only three things a VC needs in a deal.
Up: Pro-rata rights. When things are going well (up) a VC wants the ability to continue to invest money to maintain their ownership.
Down: Liquidation preference. When things don’t go well (down), a VC wants to get their money out first.
Know What The Fuck Is Going On: Board seat. Beyond demonstrating that older VCs also swear in public, many people believe that with a board seat comes great power and responsibility. In reality it mainly gives one the ability to know what’s actually going on, to the extent that anyone knows what’s actually going on in a fast moving startup.
As I was writing this up, I remembered that Fred Wilson had a post about this a while ago. I searched his blog (using Lijit and the term pro-rata) and quickly found a great post titled The Three Terms You Must Have In A Venture Investment. He attributes this to his first VC mentor, Milt Pappas, and the three terms are the same ones referenced above. It’s a great post – go read it.
Entrepreneurs – don’t get confused by the endless mumbo-jumbo. If you haven’t read Venture Deals: How To Be Smarter Than Your Lawyer and Venture Capitalist grab a copy. Or read blogs. Or do both. And VCs – don’t forget what terms you really care about – focus on making it simple.
For some time Jason and I have felt that VC’s have had an unfair advantage when it comes to understanding term sheets. So a few years back we wrote a whole series of blog posts (the Term Sheet series) which became the basis for the book Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist. Our goal with all of this was to help put entrepreneurs on a more even footing in negotiating a deal with a VC.
In some ways, I’ve always seen writing (both books and this blog) as a form of personalized teaching. It let’s me efficiently share whatever knowledge I have. But a few months back while I was visiting TechStars NYC, I had the chance to meet the guys over at Veri and pretty quickly realized they have a really interesting format for teaching things like how a term sheet works in an even more personalized way.
The result is Veri’s Understanding Term Sheets. The experience works like it would if we were learning it together one on one, namely that I ask you a series of question to figure out what you do and don’t know. When you know the material you get to quickly prove you’re a champ. When you don’t know something, I help bring you to the exact snippet of information you need to know. In other words, we figure out what you know, and help you learn only what you don’t. And hopefully have some fun in the process.
Let me know you think about Understanding Term Sheets, especially if there are ways to improve it.
While some people hate the phrase “failing fast”, I find it instructive when it’s used to signify that one isn’t going to pursue a particular path in the context of a larger set of activities. A few weeks ago, I wrote a post about The Proliferation of Standardized Seed Financing Documents. It generated several hundred email responses and a handful of phone calls. A week or so later, my partner Jason Mendelson wrote a post titled Why There Will Never be a Standard Set of Seed Documents. I’ve concluded that Jason is right so rather than torture myself, I’m failing fast with regard to trying to help create a set of standardized seed documents.
Since I received so many private responses to the original post, I thought I’d summarize them here by type of respondent.
Lawyers: By far the largest numbers of responses were from lawyers offering to help (thanks!) I didn’t count them up, but I got well over 100 emails from all over the US. In many cases, the lawyer offered to come to the meeting, share their seed documentation, and work to make sure that seed documents were complete and acceptable to their firm. The vast majority of lawyers provided solid background on all the seed investment work they had done. Several weighed in with their views of the potential issues, often sighting the NVCA standard document process which everyone seemed to refer to as some version of “a mess.” A few made sure to remind me that east coast lawyers needed to be involved or the docs wouldn’t work on the east coast. A few brave ones told me why I was destined to fail but wished me luck anyway. Fortunately, due to the magic of Gist, I now have contact information for a whole bunch of lawyers I didn’t know before.
Entrepreneurs: The next largest number of respondents were entrepreneurs. I think all of them cheered me on, told me how much they hated paying lawyers for their seed documents, and asked if there was some way to reduce everything to a few standard pages, not unlike a mortgage document. A few told me “don’t include lawyer X in the process – he charged me $70,000 for my seed deal” and a few suggested that lawyers should have to use paper and crayons instead of word processors. Several asked if I’d be interested in funding their companies. All demonstrated a sense of humor about the situation.
VCs: The VC comments came in a few different flavors. A few said “I don’t see the problem – it’s fine having multiple seed documents.” Another reminded me that “great is the enemy of good” (although the real, and more relevant quote is “The perfect is the enemy of the good”) and the existing forms floating around are “very good – much better than they used to be.” Another suggested that none of the standard docs worked for him, but he was perfectly happy to sign the forms from Law Firm Z without any modification. Several asked me whether I was still watching 24 (yes, I will watch it to the bitter end.) I received private emails from each of my partners containing a slightly different version of “are you out of your fucking mind?”
LPs: I only had one email from an LP. It was a short one. “Don’t waste your time on this.”
After pondering all of this, I realized that I was both trying to solve a problem that didn’t really want to be solved while at the same time falling into a common trap of working on something that, while on the surface seems like a good idea, isn’t really my issue to solve, at least not in this way. As many of you know, the issue is not only the term sheet, but also the underlying documents supporting the deal. I think this is a nuance that is often missed, as the seed docs need to be robust enough to easily support a next round financing (Series A or Series B) since the seed financing is rarely the last one. So, while a simple term sheet might be able to be agreed on, I realized that getting the actual docs agreed on would be a miserable, and likely impossible, thing to try to deal with.
Hence my failing fast. While in theory this might be a great idea, I’ve concluded that I can’t be successful at this. There are plenty of people – namely all the lawyers that work with startups – that have a much greater incentive than I do to get this right, be efficient for the entrepreneurs they work with, and be cost-effective for the companies they bill. So, I’m going to leave it to them.
Over the years my partner Jason Mendelson and I have heard from numerous people that they’ve been exposed to our Venture Capital Term Sheet Series as reference material in a college course. We are delighted by this and whenever we’ve been asked, we’ve always said (and will continue to always say) “with our blessing.” However, we haven’t kept track of any of this over the year and have a few ideas for things we can do to update the material now that five years have passed.
So – I’m writing with a simple request. If you’ve used, or encountered, our Term Sheet series in a college (undergraduate or graduate) course or any other teaching / seminar environment, can you leave a comment below with the information (school / program / year / professor) or email me the information?
For those of you concerned about nefarious plots on our part, I assure you that we are delighted this material is out there in the public and are happy to have it freely used and passed around for all eternity. I promise we won’t send Jack Bauer your way.
Sim is a dynamite entrepreneur who has also done a tour of duty as a VC so he knows the drill well. In the email he sent me about it he said it was inspired to put it together after reading several of the posts in the Term Sheet Series that Jason Mendelson and I wrote several years ago.
Sim – next up – how about a simple liquidation preference and exit analysis calculator?