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¡  VC	  motivations	  	  §  Driven	  by	  their	  model	  §  Impacts	  their	  terms	  and	  expectations	  	  	  ¡  M...
¡  1,000	  companies	  ¡  10	  investments	  §  2	  may	  be	  widely	  successful	  (usually	  1)	  §  6	  “land	  of...
¡  A	  company	  that	  doubles	  isn’t	  enough…	  ¡  Every	  opportunity	  has	  to	  have	  the	  potential	  to	  be...
¡  You	  Tube	  sold	  to	  Google	  for	  $1.65	  Billion	  ¡  Sequoia	  invested	  $11.5M	  received	  	  $495M	  §  ...
¡ Great	  deal!	  
¡  6-­‐9	  months	  to	  raise	  capital	  ¡  Several	  meetings	  §  Want	  to	  get	  to	  know	  you	  	  §  Assess...
¡  Personal	  Recommendation:	  	  	  §  Get	  to	  know	  the	  VC	  	  ▪  Process	  (who	  makes	  the	  decision,	  w...
¡  Non-­‐binding	  offer	  to	  invest	  ¡  Outlines	  the	  general	  terms	  and	  conditions	  of	  investment	  §  W...
¡  Non-­‐heart	  ache	  terms	  	  §  Company	  name	  §  Investors	  §  How	  much	  §  Date	  	  	  
¡  Founders	  ¡  Employees	  ¡  Consultants	  ¡  Students/universities/research	  organizations	  etc	  	  ¡  Avoid	 ...
¡  Non-­‐competition	  ¡  Non-­‐solicitation	  §  Customers	  §  Employees	  	  ¡  IP	  Assignment	  
¡  Ensure	  one	  common	  motivator	  	  ¡  Need	  to	  attract	  talent	  ¡  15%-­‐20%	  (low	  as	  10%/12%)	  ¡  N...
¡  Pref	  shares	  §  Accrue	  §  Price	  +	  dividend	  convert	  	  
¡  Protects	  an	  investor	  from	  down	  round	  §  Keeps	  the	  investor	  whole	  in	  bad	  times	  §  As	  if	 ...
¡  VC	  can	  ask	  to	  have	  the	  company	  buy	  back	  shares	  ¡  Life	  of	  the	  fund	  ¡  Investors	  in	  f...
¡  Power	  of	  “OPM”	  §  Get	  to	  know	  your	  VC	  	  §  Won’t	  matter	  in	  good	  times	  §  Can’t	  tell	  ...
¡  60-­‐66	  2/3%	  §  Change	  nature	  of	  the	  business	  (acquire/divest)	  §  Change	  capital	  structure/artic...
¡  Monthly	  prepared	  financial	  provided	  	  §  20-­‐30	  days	  from	  month	  end	  ¡  Quarterly	  financials	  	 ...
¡  Founder	  restrictions	  ¡  Drag	  Along	  §  VCs	  need	  exit	  ¡  Tag	  Along	  §  I	  can	  sell	  a	  portion...
¡  Friends	  and	  family	  ¡  Move	  to	  5	  §  2	  investor	  §  2	  founder	  §  1	  independent	  §  Expect	  m...
¡  Acceptance	  &	  Exclusivity	  §  Deadline	  for	  acceptance	  §  Use	  the	  time	  to	  negotiate	  	  §  No	  “...
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
What do VC's want? - Entrepreneurship 101 (2012/2013)
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What do VC's want? - Entrepreneurship 101 (2012/2013)

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This lecture focuses on understanding the motivation of private venture capital (VC) firms and how it affects their structuring of term sheets and legal agreements.

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What do VC's want? - Entrepreneurship 101 (2012/2013)

  1. 1. ¡  VC  motivations    §  Driven  by  their  model  §  Impacts  their  terms  and  expectations      ¡  Most  companies  aren’t  VC’able    §  Just  don’t  fit  the  “Big  Money”  model  §  May  be  good  companies  and  businesses  ¡  But  if  you  are  than  you’ll  be  better  equipped  than  most  because  of  tonight  
  2. 2. ¡  1,000  companies  ¡  10  investments  §  2  may  be  widely  successful  (usually  1)  §  6  “land  of  the  living  dead”  §  2  fail  horribly  ¡  Winners  have  to  offset  my  losers    ¡  Start  ups  10-­‐12x  return  in  5-­‐7  years  ¡  Existing  companies  5-­‐7x  in  4-­‐5  years  
  3. 3. ¡  A  company  that  doubles  isn’t  enough…  ¡  Every  opportunity  has  to  have  the  potential  to  be  a  home  run    
  4. 4. ¡  You  Tube  sold  to  Google  for  $1.65  Billion  ¡  Sequoia  invested  $11.5M  received    $495M  §  $3.5m  and  $8m  (in  2005/2006)      §  30%  of  the  company  ¡  43x  return  ¡  Only  VC  in  the  deal    
  5. 5. ¡ Great  deal!  
  6. 6. ¡  6-­‐9  months  to  raise  capital  ¡  Several  meetings  §  Want  to  get  to  know  you    §  Assess  your  “Say/Do”  factor  §  Close  to  truth  ▪  Builds  confidence    
  7. 7. ¡  Personal  Recommendation:      §  Get  to  know  the  VC    ▪  Process  (who  makes  the  decision,  when  &  how  often)  ▪  Where  are  they  in  their  fund  life  cycle  ▪  What  was  their  last  deal  ▪  Talk  to  their  existing  CEO  ▪  Cash  available  to  invest/reserves  ▪  No  “Yes”  means  “No”  §  Have  to  be  able  to  live  with  them  “til  exit  do  you  part”  
  8. 8. ¡  Non-­‐binding  offer  to  invest  ¡  Outlines  the  general  terms  and  conditions  of  investment  §  Which  may  change  ¡  Not  the  definitive  agreement  simply  a  place  to  start  ¡  Everyone  uses  it  
  9. 9. ¡  Non-­‐heart  ache  terms    §  Company  name  §  Investors  §  How  much  §  Date      
  10. 10. ¡  Founders  ¡  Employees  ¡  Consultants  ¡  Students/universities/research  organizations  etc    ¡  Avoid  convoluted  IP  structures  §  Only  going  to  be  unwound  ¡  Never  give  a  VC  a  reason  to  say  no  
  11. 11. ¡  Non-­‐competition  ¡  Non-­‐solicitation  §  Customers  §  Employees    ¡  IP  Assignment  
  12. 12. ¡  Ensure  one  common  motivator    ¡  Need  to  attract  talent  ¡  15%-­‐20%  (low  as  10%/12%)  ¡  New  CEO  ¡  New  executives  (sales,  tech  &  CFO)  ¡  Board  members  §  Non-­‐VC  ¡  Pre-­‐$/Post-­‐$?  §  Dilutive  to  you  
  13. 13. ¡  Pref  shares  §  Accrue  §  Price  +  dividend  convert    
  14. 14. ¡  Protects  an  investor  from  down  round  §  Keeps  the  investor  whole  in  bad  times  §  As  if  their  investment  had  been  done  at  the  current  lower  price  §  Full-­‐ratchet  §  Weighted  average  
  15. 15. ¡  VC  can  ask  to  have  the  company  buy  back  shares  ¡  Life  of  the  fund  ¡  Investors  in  funds  want  their  money  back  ¡  Outcome:  §  Forces  a  sale  §  Get  minimum  investment  back  (P+dividends)    
  16. 16. ¡  Power  of  “OPM”  §  Get  to  know  your  VC    §  Won’t  matter  in  good  times  §  Can’t  tell  you  what  to  do  but  prevent  you  from  doing  things  
  17. 17. ¡  60-­‐66  2/3%  §  Change  nature  of  the  business  (acquire/divest)  §  Change  capital  structure/articles    ▪  Default  approval  over  future  financing  §  Approve  business  plan/operating  plan  §  Change  in  key  employees  (defined  term)  §  Creation  of  ESOP  §  Unbudgeted  expenditure  in  excess  of  $5,000  §  Non-­‐arms  length  transactions  §  ….  
  18. 18. ¡  Monthly  prepared  financial  provided    §  20-­‐30  days  from  month  end  ¡  Quarterly  financials    §  Actual  vs  budgets  ¡  Board  material    ¡  Yearly  operating  plan    §  (30  days  prior  to  beginning  of  fiscal  year)  
  19. 19. ¡  Founder  restrictions  ¡  Drag  Along  §  VCs  need  exit  ¡  Tag  Along  §  I  can  sell  a  portion  if  you  can  
  20. 20. ¡  Friends  and  family  ¡  Move  to  5  §  2  investor  §  2  founder  §  1  independent  §  Expect  material  in  advance  of  meeting  §  Only  a  meeting  if  the  VC  is  there  ▪  Defer  once    
  21. 21. ¡  Acceptance  &  Exclusivity  §  Deadline  for  acceptance  §  Use  the  time  to  negotiate    §  No  “shop”  ▪  Applies  to  company,  depending  on  stage  founders    Be  careful  what  you  ask  for  …don’t  send  the  wrong  message    

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