In this series, I will be posting articles on Venture Financing, and in particular, how as a startup founder you will navigate the landscape. The posts will be a concicse summary of the book that inspires me, Venture Deals by Brad Feld which is the best-seller on startups and entrepreneurship. The authors are venture capitalists, and give you the insight on how venture firms think.
In this first post, I will outline the various players in a venture deal. In the subsequent posts, I will go through what Term Sheets are, the Capitalization Table, Convertible Debt, then go over Negotiation Tactics.
Contrary to popular belief, there are more than two players in a financing deal, being the entrepreneur and venture capitalist, but we will start off with the more familiar actors.
You would generally have more than one *Entrepreneur/Founder *, each playing a unique role in the proposed startup, with one co-founder acting as a CTO, one perhaps may be a CFO. Your team of founders are usually ones you know personally, friends or colleagues, and the ones you would trust the most in the company.
Venture Capitalists or VCs have their own hierarchies, starting with the most senior being the managing director (MD) or general partner (GP), whom are responsible for the final investment decisions, and sit on the boards of directors of the companies they invest in.
Next down the hierarchy are Pricipals or Directors, junior deal partners that have some deal responsibility but usually require the support of the MDs or GPs prior to making a decision.
Then we have Associates, whom work for one more more deal partners (such as an MD), and I tend to think of them as scouts, crawling the world for new startups and then hooking up the startups with the associates or directors. They also do the leg-work in working with capitalization tables (cap-tables).
Finally we have Analytics, the most junior position, recent graduates who do most of the memo writing, crunching numbers and so forth. Whilst having a lot of academic knowledge, they lack experience, power and responsibilities.
These are individual investors and are normally utilized for early-on investments, being very active at the seed stage (first round). Angels can be professional investors, successful entrepreneurs, family or friends and usually comfortable investing alongside VCs early in the life of the startup.
It is unusual for angels to invest in future rounds when VCs are fully invested, but do enjoy the greater risk of the earliest investments. The authors of Venture Deals advocate ensuring that each of your angel investors qualify as an accredited investor as there are specific SEC rules in place.
Angel investors also shouldn't overplay their cards, so you shouldn't be held hostage to them, as even though they are important, they shouldn't be in a position to determine your startup company's position. You should also try in a group of angels, to have one of them representative of a collective, which makes it easier to deal with, rather than chase down tons of signatures.
These are a collection of investors, and whilst they are generally VCs, they may also include a conglomeration of VCs, angels, super angels, strategic investors, or anyone that ends up purchasing equity in the financing, and are usually representated by a lead investor.
It is invaluable to have an experienced lawyer who understands VC financing, as he or she will be your go-to-person to help in negotiations, as well as help the founders focus much clearly on what matters. Getting a bad lawyer will inevitably lead to having the wrong focus on the wrong issues, running up a bill on both sides when dealing with VCs. One thing to remember is, a lawyer is a reflection on you, your reputation and how venture capitalists will see you.
At an early stage, you could also negotiate for your lawyer to take a lower cap or even get paid out of the proceeds of future deals, if you are unable to afford a good one at the start.
These act as advisors and it is important that every founder has menotors to lean onto, those that are highly useful in financing, and usually don't command a fee, but do it out of good will. They help out entrepreneurs early on and many do end up being early angels, but rarely ask for anything upfront.
It is important that Entrepreneurs do their research and understand the structures of the venture capitalist firms they work with, whom they should be talking to, obviously aiming higher up at directors so they can move things forward more expeditiously. Brad Feld, the author of Venture deals recommends that whilst you should treat everyone with respect, try to build a direct relationship with MDs or GPs, those that are likely to be at the firm for 'the long haul'.
I found the first chapter of Venture Deals by Brad Feld served me well in referencing the different players on the startup scene, how to look and treat each of the players, and what to look out for.
In the next installment, I will go over Raising Money and then look at Term Sheets.