Venture Hacks Hack
Venture Hacks has to be the best collection of info for entrepreneurs period. I am going to read every article they have and summarize the highpoints below. This is the hack's hack to Venture Hacks. Get all of their great stuff here.
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High Concept Pitches for Startups
A high concept pitch distills a startup’s vision into a single
sentence. It’s the perfect tool for fans and investors who are
spreading the word about your company.
“Flickr for video.” (YouTube)
“Friendster for dogs.” (Dogster)
People should already understand the building blocks of the pitch.
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Quotables
Traction speaks louder than words.
The great danger of dealing with venture capitalists is the ’slow maybe’
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How much money needed for a seed phase?
First,
figure out how much money you need to run at least two experiments.
Then tack on 3 more months of runway so you can raise another round
before you run out of money. Your experiments should be constructed
such that a positive result will let you raise more money at a higher
valuation.
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The End Game
The
End Game generally takes place after you have gotten a term sheet,
but before you actually sign it. How well you manage this process can
make a big difference in the actual terms and pricing you ultimately
get, so it pays to approach this process as thoughtfully and diligently
as you do any other part of fundraising. Get a second term sheet.
Ignore term sheet “expiration dates”. Do some due diligence of your
own. Negotiate.How you “return serve” can make a big difference in the
outcome as I've
seen VCs increase their initial offers anywhere from 25–50% when these
principals are applied.
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How much money should we raise?
Raise as much money as possible. With these caveats: (1) maintain
control at any cost, (2) monitor your liquidation preference, and (3)
act like you don’t have a lot of money. Also understand that if you do
raise a lot of money, you will have to (1) “go big or go home” and (2)
make a lot of progress if you ever want to raise money again.
Alternatively, if you would rather maintain your exit options, at least
raise enough money to run two experiments. 3) Raise enough money to run more than one experiment.
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Term Sheet: Liquidation Preference
The liquidation preference determines how the pie is shared on a liquidity event.
from http://www.feld.com/blog/archives/2005/01/term_sheet_liqu.html
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On Pitching:
Summarize the company’s business on the back of a business card.
A great elevator pitch gets a meeting. The major components of the pitch are traction, product, and team.
You can also provide a “ten-slide” deck that tells a compelling story about your team, product, traction, and plans. Whether you send a deck depends on who wants the meeting most. Finally, keep your secrets secret.
Don’t send long business plans to investors. Don’t ask for NDAs.
Write a high concept pitch
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On Negotiating:
pitch
and negotiate with all your prospective investors at the same time.
Focus compounds the scarcity and social proof which close deals.
Get first meetings.
Get partners meetings.
Get the first term sheet.
A deal is only as good as its best alternative. Keep improving your alternatives until you have a signed term sheet. Spending time developing alternatives is as good as spending time developing your current offer. You need two or three offers from investors who make it a habit to invest in startups at your stage. These investors should create enough demand, social proof, and scarcity among themselves to improve your terms and clear the market.
Finally, don’t use the words “shopping around” or “auction” with investors.You’re not “shopping around”, you’re “looking for the right partner”.
Many of the successful companies that we all read about in the news didn’t negotiate good deals simply because they didn’t get good advice. With few exceptions, most law firms advise their clients to accept “standard” terms. Don’t bother trying to apply any of these term sheet hacks if you don’t have leverage.
Companies are worth what people pay for them.
Pitch all your prospective investors at the same time. Negotiate with all interested investors at the same time. Focusing your fund raising on a short period of time (about 4-8 weeks) means you will raise money quickly.
The best way to find a lead investor is to build something that attracts a lead: keep building your company and reducing risk.
Complete business diligence and prepare for legal diligence before you
sign a term sheet. Signing a term sheet early is a recipe for a hostage
negotiation.
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On Traction
Whether they’re reading an elevator pitch or listening to a presentation, investors care most about actual traction in a seemingly large market.
If you don’t have incredible traction but the market seems large, your product and team are both critical to raising money.
If the market doesn’t seem large to them, investors won’t care about your product or your team.
Traction is demonstrated profit, revenue, customers, pilot customers,
or users (in order of importance), and their rates of change, and the
rates of change of the rates of change, and the rates of change of…
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On Boards
The
composition of the board of directors is the most important element of
the Series A investment. It is more important than the valuation of
your company.
After the Series A investment has closed, the common stockholders are
probably going to own most of the company. The common stockholders
should therefore elect most of the board seats. Early-stage companies with good leverage can negotiate this democratic board structure in a Series A. If your investors tell you that a democratic board is a deal-breaker
and you want to move forward with them, use the fallback position: an investor-leaning board. If you have a strong BATNA, you should reject anything less than an investor-leaning board.
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On Installed CEOs
Create
a new board seat for a new CEO. Don’t give him one of the common seats,
otherwise the common shareholders will not have the right to elect that
seat. If
the new CEO turns out to be aligned with the investors, the new
coalition of CEO + investors will control the board of directors. A new
CEO will probably be a professional manager who does a lot more
business with VCs than he is likely to do with you.
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Option pools
Don’t let your investors determine the size of the option pool for you.
Use a hiring plan to justify a small option pool, increase your share
price, and increase your effective
valuation. Putting the option pool in the pre-money benefits the
investors in three different ways! You can beat the game by creating
the smallest option pool possible. Make a hiring plan for the next 12
months. Add up the options you need
to give to the new hires. Almost certainly, the total will be much less
than 20% of the post-money.
Discuss your hiring plan with your prospective investors before you discuss valuation and the option pool.
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Share price & Cap Table
Focus on your share price and the number of shares you own — metrics
like valuation and percent ownership can fool you. Understand how any
proposed change to the company’s capital structure affects the share
price.
Great cap table tutorial at: http://venturehacks.com/articles/cap-table
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Vesting
By the time we did the financing we had been working on [the company
for] 2 years, but they only vested us a year. So, they got a year of
free vesting from us. Don’t agree to vest all of your shares just because it is supposedly “standard”. Get vested for time served building the business.
The best vesting agreement we have seen for a founder in a Series A is
25% of shares vested up-front with the balance vesting over three years.
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Vesting Accelleration
You made a commitment to the company by agreeing to a vesting schedule
— the company should reciprocate and commit to you by granting
acceleration upon termination.
As your relative contribution to the company diminishes, everyone at the company has an incentive to terminate you and benefit ratably from the cancellation of your unvested shares.
50% to 100% of your unvested shares should accelerate if you are terminated without cause or you resign for good reason.
A founder’s most important contributions generally occur in the early stages of a business but he earns his shares evenly over time. If I clash with a new CEO and he terminates me, I should receive the equity I earned with those contributions. Which will make me much more comfortable with hiring a new CEO.
Negotiate some acceleration if you sell the company ahead of schedule — you don’t want to stay at the acquirer for an unreasonable period of time. Also negotiate 100% acceleration if the acquirer terminates you and deprives you of the ability to vest your stock.
The most common acceleration agreement these days combines 25% - 50%
single trigger acceleration with 50% - 100% double trigger
acceleration. The median of this range is probably 50% single trigger
combined with 100% double trigger.
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Convertible (seed) debt
Why is debt a great alternative to equity in a seed round? Convenience, suitability, control, cost, and speed.
Raising debt avoids setting a valuation, delays negotiating detailed investor rights, avoids the option pool shuffle, and gives the seed stage investors an upside through a discount and/or warrants.
The purpose of the conversion discount is to give the investor an appropriate return for investing in the company before the VC Series A round.
The seed stage is the worst possible time for the founders to negotiate an equity financing. The company is nebulous, the founders are inexperienced, and the company is starved for cash and time. The team should be testing hypotheses about their business, not negotiating complicated term sheets.
You should sell debt only if you can use the money to increase today’s share price by over 25% before the Series A financing.
If you are raising a large seed round, say $1M, you may want to sell equity instead of debt.
If you buy $100K of debt, you get $100K worth of shares in the Series A, plus some shares for your discount. You’re not losing money by contributing to the business—the Series A share price may go up but your share value remains $100K, plus a discount.
you can make your debt much more attractive to investors with a few concessions (ordered from small to large):
Don’t let the company pre-pay the debt.
Anticipate a potential sale before the Series A and negotiate your investor’s share of the sale price.
Increase the discount by a fixed amount and/or 2.5% per month, up to a maximum that can range from 20% to 40%.
Set a maximum conversion price for the debt
Raising convertible debt from venture capitalists can restrict your Series A options and lower your Series A valuation—whether or not your investors have a right of first refusal on the Series A. You can keep your options open by raising debt from angels exclusively or raising debt from more than one VC.
A Right of First Refusal can restrict your options and lower your valuation.
Tips:
Convert your debt into equity if you can’t pay it on time. Determine
your lender’s return if you sell the company early. Reserve the right
to raise more debt. Finally, reserve the right to amend the debt
agreement.
Details for how to draft a convertible debt deal: http://www.startupcompanylawyer.com/2007/04/26/whats-on-this-site/
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Protective Provisions
Protective provisions let preferred shareholders veto certain actions,
such as selling the company or raising capital. They protect the
preferred, who are minority shareholders, from unfair actions by the
common majority. However, the preferred shouldn’t use protective provisions to serve their other interests.
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On Money
Most investors are mostly money but very few of them act like
their primary contribution is capital. They spend too much time selling
you on their value-add and not enough time getting you a quick yes or
no.
Don’t assume any investor won’t be harmful. Do the diligence to prove otherwise. [Good checklist at source.]
Would you add the investor to your board of directors (or advisors) if he didn’t come with money? If the answer is no, he is mostly money (see below). If the answer is yes, subtract some dilution from his investment since he’s eliminating the cost of a value-add director or advisor. You’re paying for the smart money investor—with his own money!
You can buy advice and introductions for 1/10th of the price
that most investors charge. An investor will buy 15–30% of your
company. An advisor or independent director will require 0.25–2.5% of
your company with a vesting schedule of 2–4 years.
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On Advisers
Create a board if it makes you and your advisors happy. Perhaps some
advisors feel fancy if they’re on a board. But it really doesn’t mean
anything.
Ping advisors as needed and skip the advisory board meetings. advisor paradox: hire advisors for good advice but don’t follow it, apply it.
Does the prospective advisor give you the best answers you have ever heard? Could he teach a course at Harvard on the topic? Would you invest in him? If no, move on. If yes, engage him and squeeze his brain dry.
What should I pay advisers?:
Nothing—get them to pay you. Ask advisors to
invest. You get
money, save stock, and amplify the advisor’s social proof in the
process. But lots of good advisors can’t or won’t invest,..Advisors are
not paid by the hour—they’re paid for results. They’re not
paid for their inputs—they’re paid for their outputs. If an advisor can
uncork a million dollars of your company’s latent value with 15 minutes
of conversation or a single introduction, you should pay him
appropriately.
The normal advisor gets 0.1%-0.25% of a company’s post-Series A stock. Normal advisors are also assembled by naive entrepreneurs who think the mere presence of an advisory board will create social proof and help them raise money. But investors don’t take these mock advisory boards seriously.
The super advisor can get as much stock as a board member: 1%-2% of a company’s post-Series A stock. Super advisors help make your company happen. Most super advisors are unique and Y Combinator is a great example. [see article for guidelines on compensation]
Advisors can get terminated when they don’t add value at the level they originally agreed to. They can also get terminated if the company is “reset”,
