2010/The Naive Developer's Guide to Venture Capital

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What you need to know before you even think about raising venture or angel capital, presented by a Silicon Valley founder who raised $9m from top tier firms.

Speaker: Joyce Park

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Naive Developer's Guide to Venture Capital

"Marriage without the love"

 * connection is made 
 * pitch desired VC 
 * invite to partner-pitch, send deck (9am monday a.m.) 
 * term sheet
 * lawyers, guns, money

Typically pitch between 50 and 120 VCs, were asked to partner-pitch 5 times.

How long? 6 months minimum. (If you're taking less than this amount of time, you are probably not getting the best deal.)

How much? depends more on where funding cycle is than on you. Ease not necc. correlated to amount. Understand the cap table!

Each round is supposed to last 10-18 months

VC arithmetic (cap table)

 * pre-money valuation ($5mm)
 * Angel round, might need outside valuator (You and investor agree
   on someone with domain knowledge)
 * You sell 33% of company for $5mm, resulting in post-money
   valuation ($10mm)  [Arithmetic error alert!]
 * they want 15% minimum, implied valuation (in later rounds) 

Who?

* Who NOT to take money from
* Does prestige matter in a funder? 
* advisory board? (no) 
google: person's name, firm's name, + "lawsuit"

2.5 characters to know

* A panda (well-connected friendly) 
* A startup lawyer
* valuator

Example panda: Adam Rifkin

* founder
* well-connected
* not famous
* does it for the love

Do not want: someone who is in the business of introducing people to VCs.

Want a lawyer who does startups all day long.

Three n00b mistakes

* stealth
* location (excessive focus on location, there will be pressure to
  move to where the VCs are) 
* founders as execs (founders are working for company, not for
  selves) 

Need to be able to speak frankly to funders.

Your founding team:

* Two
* ideally one techie, one org builder
* if both techie, you'll need a CEO from outside sooner
example: it's extremely important that someone from the founding team
read every page of the 500-page draft of the funding agreement.

The new pitch deck: a site or product with traction. (You'll still need a pitch deck, but just for the partner-pitch. Ask your panda to show you a sample -- one that worked.)

Limit your Angels

* EVERY major move should have majority consent of all shareholders
* Angels are rich dudes ... "herding kittens" worldwide
* Angels are busy dudes
* many have ties to specific VC firms
* sometimes easier to go straight to VC

FOSS biz nix

- reasons VCs say they don't invest ... rules seem to be
  changing. VCs will listen to many more things. 

The big terms -- things you can't change easily

* Board composition (one of the reasons two founders are better than
  one -- both can be on board) 
* Independent board member (not a funder, not an officer of the
  company. Often this person will break a tie. Someone w/ experience
  in corporate governance.)
* Voting mechanics 
* Liquidation prefs

Venture glossary: players

* venture partner -- not a real VC, not a real partner
* general partner - VC
* limited partner - 
* Managing partner -- VC++
* EIR -- entrepreneur-in-residence or exec-in-residence

Money

Convertible notes -- loan instead of stock, converts to stock at next
  valuation
Common vs. preferred

Q&A

* ask for complete list of every founder the VC has funded 
* Density of services is where locality matters. Issue: companies
  get to a certain size and then move out of PDX. 
* Non-local funders are different enough in their expectations to
  make things uncomfortable. 
* The one and only thing the board really does is hire & fire the
  CEO, and set the CEO's compensation. 

Post-Q&A

 * community is important, builds over time.