You need a wide range of skills to found and develop a company. Regardless of what type of product or service you are planning to sell, there is much more to building a company than just creating an app, or coming up with a better way to perform a common task. You need money.
Depending on what your company focuses on, you may need a lot of money. It is easy to start up a company that is app-based or web-based with just a few people and a small number of capital. But if you are planning to manufacture anything, or spread your product internationally, then the stakes are much higher.
You may be a skilled coder or designer, or you may have conjured up a unique idea for a service that no one else has thought of. But most likely, you are not an expert in obtaining financing for your business.
The Term Sheet
Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist, by Brad Feld and Jason Mendelson, is a primer to the field of venture capitalism. While its subtitle, Be Smarter than Your Lawyer and Venture Capitalist is overly aspirational. It’s fair to say that there is a huge amount of knowledge that most entrepreneurs lack when they start looking for financing. Venture Deals focuses on the “term sheet,” the document that sets out the terms and conditions for financing a business. This document may be only eight or so pages long, but which is the foundation for a series of more complex legal documents that follow as financing is confirmed. (There is a sample term sheet at the back of the book, and the book’s website includes a number of sample documents you can download and refer to.)
There are a number of key terms that are used in raising funding, and this book explains them all: capitalization, liquidation preference, automatic conversion, vesting, and more. And as it goes through the process of funding, the authors explain how one should consider each of these elements, and what to look out for. While the book is targeted at first-time entrepreneurs, anyone who is raising capital could learn from the many tips the authors present in sidebars called The Entrepreneur’s Perspective. In these brief sections, they talk about gotchas, negotiating techniques, and explain elements that might indicate VCs who aren’t serious or greedy.
A Reference Guide to Fundraising
This book is a serious, dense read, but it is full of wisdom that every entrepreneur should know. For example, they point out how fluid the whole process of valuation is, and the fact that “the only thing you know for sure about your financial projections in the early stages is that they are wrong.” They walk the reader through the process of seeking funding, and explain what the various funding rounds are (pre-seed, series A, series B, etc.). They explain the role of each of the players in VC funding: the founder/entrepreneur, the venture capitalist, the angel, mentor, and syndicate. And above all, they explain how VCs decide to fund companies, and give tips on how to (and how not to) present your company to investors.
VC firms are not charities, and the book explains how they are set up, how they are funded, and how they (almost always) make money from the deals they facilitate. VC funds are essentially mutual funds fed by investors, and VC firms work to maximize their investments, while taking a cut for themselves. It’s important to know why VCs exist and how they work, in order to best fit your company’s demands to the expectations of such funds.
A chapter on negotiation tactics can help new entrepreneurs understand the delicate balance between their world-changing product or idea and convincing people to put their money into it, and ensuring they are not taken advantage of. As they say:
There are only three things that matter when negotiating a financing: achieving a good and fair result, not killing your personal relationship getting there, and understanding the deal that you are striking.
This is the third edition of this book, and the authors explain how much has changed since the first edition. While venture capital funds have become more common, alternative startup financing options have surfaced as new ways to raise money.
Why Read Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist?
Feld and Mendelson are serious and authoritative, but not without bits of humor. This book distills more than twenty years of their experience into just over 200 pages of wisdom, which can serve as an introduction to the process of obtaining venture capital funding, but that can also serve as a playbook as the process progresses. A robust index helps you to find terms you may come across and see what they mean and how they affect your funding.
No matter how much financing you are seeking for your business, you should read Venture Deals. Then, you should read it again, and keep it handy as you go through the process of building your business through investment.