Posted by Anonymous on 2007-12-05
I feel like I have been suckered into starting LLC's by law firms over and over again, and here is what happens every time: (1) it costs twice as much to get all of the papers done, (2) we start growing and need to layer in complex partnership concepts for the equivalent of employee options, (3) we have to convert to a C Corporation to take any real external financing, and (4) the conversion costs twice as much as you expect since you need to transform a convoluted partnership structure into an equity structure.
Using an LLC structure for a fast growing start-up seems like a trick play to generate ten or twenty times the legal fees. My next company is going to be a corporation, starting with an S corp for preferential tax treatment and migrating to a C corp when the business starts to scale. Any other thoughts on this strategy are welcomed in the feedback.PRIVATE: Members Only
Posted by Maddog on 2007-09-12
Tags: Negotiation Participation
Commonly included in term-sheets and sometimes only revealed in longer-form documentation...but effectivley way for Series-A to get their cake and eat it too, by essentially cashing out...and getting paid again before the pie is carved up for founders, management etc....definitely worth learning about.PRIVATE: Members Only
Posted by RichieBlueEyes on 2007-12-16
This post isn't meant so much to learn about investors but is key to starting a company and attempting to not destroy your current relationships and your company in the process. Yes, I'm aware I'm posting this at 12:37AM on a Saturday night (I suppose I have no life so my advice here take as you wish :) ... well, in my defense my gf is sleeping beside me.
But most of us crazy entrepreneurs, myself included tend to get tunnel vision, tune out the world and forget about family and friends and hyper focus while we are in the honeymoon period with our idea (according to my GF, i'm in a relationship with my macbook more than with her - to be honest I'm not sure why she stuck by me during my last venture but that's a story for a beer, not here). So while in the honeymoon period, try to take 15 minutes a day out and kiss your gf, your wife, your mother, your dog, call a friend, LEAVE YOUR LAPTOP and go for a walk and attempt to have a semblance of a life. I'm still struggling with this issue myself but if you're a first time entrepreneur especially, make sure you have an outlet, a hobby, a hookup buddy, anything to leave your computer alone. No, a girl across the country on AIM doesn't count nor does poking random girls on facebook.
One great way to kill a company (and i've done this) is by being so focused on it, you can't see the writing on the walls where there are issues and they blow up when they didn't have too. Too much work hurts more than helps. Life is about balance.
With that said, i think all entrepreneurs (including myself) need shrinks. Now, I've been saying this for a while but I haven't gone to see one so I suppose it's far harder to do than suggest. I do need one, ya know, the frequent highs/low, tunnel vision, ADHD etc...
Maybe attached to term sheets should come a prescription for Ritalin and a weekly appointment with a shrink" (just kidding...or am i" :)
RichiePRIVATE: Members Only
Posted by fnazeeri on 2009-03-08
Tags: Venture Business Crisis
I wrote this post on how the VC market is imploding which is not news to anyone on TheFunded, but I tried to take it a step further and talk about what it will look like post recovery. I read a great post on Seth Godin's blog about how everyone talks about the "crisis in our face" but not the "crisis in the distance." Anyway, here's a crack...let me know what you think.PRIVATE: Members Only
Posted by Anonymous on 2008-06-12
Tags: Venture Business Events Advisor
Posted by Mr. Smith on 2008-05-13
Tags: Preparation Introductions Email
Almost every introduction to a venture capitalist is done through email, and most introductory emails are poorly crafted. The two most common mistakes are: (1) overwhelming a potential investor with too much irrelevant information or (2) avoiding any valuable company information and focusing on the pleasantries.
Companies would be much better served by including a standardized and brief paragraph that described the business in a way that a potential investor can digest quickly. Read on...PRIVATE: Members Only (1937 Characters)
Posted by HBRuby on 2007-08-30
Posted by Anonymous on 2009-07-02
Entrepreneurs always talk about the pitch. A Mike Tyson knock out pitch can get you another meeting, but what about after the pitch? How about before? Hell, how about from the moment you step off your front porch to the second you return?. A 24/7 game face will drive you to the promise lands 3x faster than simply wielding the magic when you've got the mic. Here are 3 tips I've found to work wonders before, during, and after the pitch.
1. Smooth entry. VC's and angel's alike will judge you from the second the tip of your polished shoes crosses that door jam. Chin up, calm stride, and eye contact from the moment you have a line of sight. If you've done your research you'll know exactly what their hobbies are, portfolio consists of, and hopefully a mutual acquaintance you can reference off the bat. Don't hold it for longer than a minute. They want to see that your personable, but professionalism and punctuality are key. Make a point to note that you have another pitch later that day that starts 2.5 hours from now. They need to know that you're sought after, busy, and they aren't the only duck in the pond.
2. Practice your pitch in front of a mirror starting with the entry. Everyone looks foolish when they're putzing with the projector, so practice the pitch from the top with a computer and projector handy. It detracts from the great introduction you just made, and allows them to push their pencils and think about how badly they want to get home to watch Jack Bauer in 24. From the moment you've loaded the deck you should be on fire. Eyes lit, smile wide, and rotating eye contact the entire show. VC's and angels invest in entrepreneurs, not companies. They need to feel your fire, align with your mission, and ultimately know that you are the captain that can navigate their $ to $$$$$. Vary your tonality, conduct the tempo of the pitch, and ultimately you will command their attention and peak their interest. Mr. Smith has a great post on the 5 rules of pitching. I highly recommend it.
3. Do not, and I repeat, DO NOT leave right after questions. Get your business cards into their hands, have a quick chat, and get that 2nd meeting. How many VC's or angels can acutely assess how bad ass your opportunity is in one 10-20 minute pitch? Very few. If you didn't give them enough kick in the pitch, that's your fault and they'll simply want you out the door as quickly as possible. But if you did your job in the pitch, they've either got a "yes" in their head and you'll be invited back anyhow, or they have a "well we've got a ton of other deals to look at. This one's good, but I need more." More often than not it's the second one, and that's a result of the massive entrepreneurial talent here in the Valley.
A 24/7 Game Face can make the difference between getting the 2nd meeting and being shown the door. If you can't stand behind your vision with pride, confidence, and flare, no one else will, even if they'd like to.PRIVATE: Members Only
Posted by Mr. Smith on 2009-06-26
Getting a meeting with an investor is hard these days, but it can be done. Once in a meeting, here are five strategies to make the meeting go well:
>> STICK TO THE FACTS
Sell your idea on factual information only. Avoid adjectives and superlatives whenever possible. You do not have the best, the most, or the greatest anything. Most investors see 2,500 deals per year. They need basic information to determine interest. Suspect information is a red flag, and it only takes one red flag for an investor to lose interest.
>> KEEP YOUR PITCH SHORT
You should be able to explain your company in 10 slides that take about 20 minutes to present. If you want to succeed, then videotape yourself giving the pitch. Watch the video and write down everything that you want to improve in a list. Repeat this process until you are happy with the results. At the end of your pitch, say: "does anyone have questions that I can help you with?" The shorter your pitch, the more questions that will you have, and more questions are good.
>> ANSWER EVERY QUESTION BRIEFLY
Answer every question with one or two sentences and with as few words as possible. Uncomfortable silence is a tool that you can use to elicit another question. If you do not have or know an answer, say: "I don't recall the answer to that off the top of my head, can I look it up in my files and get back to you through email." Questions are an excellent sign of interest and engagement. When an investor gets into 'question mode,' they usually have a series of 5 to 10 questions that they need answered quickly to evaluate the opportunity. You are doing well in a pitch when the investors are talking.
>> ASK FOR FEEDBACK AND TAKE NOTES
Make sure to leave a few minutes to collect feedback. Ask the investors, 'do you have any recommendations for the business?' Have a pen and paper out, and write down everything that the investors say. It's a common courtesy to take notes, and it is expected. After an investor says something, say 'thank you.' Do not get defensive. Nothing sours a relationship faster than getting into a debate.
>> BE AN EXPERT IN YOUR INDUSTRY
You should read every recent blog post and know about every key development in the primary industry and all related industries to your idea. It is very likely that an investor will have seen and researched a very similar idea within the last 45 days. It is also very likely that this investor will ask you about mundane developments or other companies in the field as a test of your knowledge and to show off their own expertise. When confronted, you say, 'Yes, I was aware of that. Thank you.' This will lead to more questions.
As a closing point, be confident and assured. A common misperception is that a deal can be done in one meeting. It usually can't. So, the goal of any meeting should be (1) to get another meeting and (2) to specify follow-up items.
Do members have some other suggestions to add in the feedback?PRIVATE: Members Only
Posted by Mr. Smith on 2008-03-14
Tags: Venture Business
As a funded CEO and as a careful observer of the venture market, it looks to me like a giant game of Roulette. When a new game begins, venture capitalists throw large sums of money at start-ups in a particular industry, just like throwing chips on numbers across a Roulette table. When the wheel starts spinning and the little white ball is rolling, more and more money gets thrown across companies in the chosen industry, until the table is brimming with chips and the dealer calls "no more bets." The ball lands, bouncing around for suspense, and the winners are called. As the table is cleared and a new game starts, a new industry is chosen, sometimes related and sometimes not.
This bizarre financing phenomenon makes some sense. Flooding an industry, like social networking or Web 2.0, with money helps raise industry awareness. Invested capital gets spread around between firms in an industry through licensing and other strategic deals. Venture partners learn the ropes as industry know-how and events emerge. And, covering the entire market with investments ensures that the one big winner will be venture backed. Having that winner in a VC portfolio makes up for all of the bigtime losses that the VC has racked up over the years, too.
I wonder who kickstarts the industry selection...
(You can quote me without atrribution.)PRIVATE: Members Only
Posted by Mr.Smith on 2008-01-24
Tags: Preparation Resources
The Funded has some excellent resources for a first-time fundraise. You need to dig a little, as not all of these posts have floated to the top. Members should agree with the good posts more so that they stick out! Also, you need to be a member to see the discussion, where a lot of the good pointers are.
Overview of Fundraising:
-- The Game of Innocence
-- Avoid An Llc For Vc
-- Venture Legal: A Conflict Of Interest And A Complicated Mess
Raising the Capital:
-- Practice In The Second Tier
-- Reduce Time By Going Online
-- Pick The First Investors Really Wisely
-- Don't Confuse Raising Money With Running Your Business
-- Keep Funding Prospects Informed Of Your Progress
Negotiating the Deal:
-- The Term Sheet Shuffle
-- How To Set Valuations
-- Need Advice: What Kind Of Valuation Can I Expect"
-- Kill The Participating Preferred
-- Avoid "Participating Preferred"
-- Avoid Exclusivity
-- Closing Costs
Posted by Anonymous on 2008-01-18
An online pitch and diligence room can save you a lot of headaches and time by getting ready up front... As a general rule of thumb, it is best to pitch as many venture firms in as little time as possible, and then aggressively follow-up with the best leads. Once you have interest, you need to get information out quickly. Here are some pointers for generating interest and syndicating materials by leveraging online resources:
>>>> Develop an Online Pitch Room: Polish your pitch materials and put them in a customized web site for download (the non-confidential materials, that is). The site can be very simple (one page), but it needs to have your branding. Also ensure that everything is password protected and that anyone who views the materials is tracked. Track each login and each document downloaded. If possible, add a screencast or video pitch to better sell your offering.
>>>> Invite Target VCs: Research 25 to 75 appropriate venture capitalists and invite them through a two paragraph email to speak with you, including a link to the Pitch Room in your email. Invite one partner per fund, and try to have some type of reference, such as an introduction by another CEO. Anyone that you invite should be given a custom username and password for tracking purposes.
>>>> Follow-up on the Results: Keep a careful eye on the activity over the next two to three weeks, and call the partners that have downloaded the files and logged in to the site. Wait to call until at least three days until after the files were downloaded. Write off funds that have not engaged. Take a lack of follow-up as a sign to avoid.
>>>> Develop a Diligence Room: Make sure that all of your key corporate documents, financials, budgets, resumes, contracts, etc. are all in a digital format (PDF") and online in a secure location. This could be a SharePoint server, for example. Once you have interest from a VC, they will quickly want to dive into the diligence, and you need to be ready. Like with the Pitch Room, make sure that you track all activity in the Diligence Room by individual VC.
Of course, nothing ever works out exactly as planned, but you will never lose by being prepared and one step ahead. Inevitably, you will need to face-to-face pitches and compile a ton of custom diligence. However, being ready up front will save you a ton of downstream hassles. Do other Members agree" What other experiences have Members had with online pitching and diligence solutions"PRIVATE: Members Only
Posted by Anonymous on 2007-11-09
Tags: Funding Sources Angels
Just reading a post about having many shareholders as a result of pitching angel groups, and it got me thinking about my own experiences. In my last company, we had two separate angel groups invested with a total of nearly 50 shareholders between the two, some shareholders with just a $25,000 total stake. This presented a tremendous headache when trying to secure shareholder approval for future rounds or a the ultimate merger. Read on for some advice.PRIVATE: Members Only (746 Characters)
Posted by Anonymous on 2008-12-04
Tags: Operations Crisis Burn Rate
I'm fundraising right now and it is absolutely brutal. I want to to tell all entrepreneurs, "Fight through this. You can raise capital." But that isn't true. You may not be able to raise capital until 2010 no matter how good your product or company is. It is not a reflection of you, just the external factors that are largely out of your control.
Survive until 2010 and position your company to take off as the next economic cycle does. These things always come back. While it is bad now, it will eventually get better. The Wall Street guys will get tired of losing money and companies will start hiring again.
I hope I am wrong. (Boy, do I hope I'm wrong.) Maybe Obama will follow through on his plan to eliminate capital gains tax on investments to startups. That would help us immensely. But I have heard nothing about that since it was mentioned during the campaign.PRIVATE: Members Only
Posted by RichieBlueEyes on 2008-10-14
This is basic advice, applicable to any sales situation and a mistake people often make. If you are meeting a potential client (or investor) first make sure they are interested in your product (your company) and agree to go out again (meet again) and provide more background on yourself (your materials) before trying to to sneak into the bedroom and score (discuss terms). Often times terms come up early, I'd recommend saying "first lets see if we click before talking specifics" and drag it out a bit... a meeting or two .... before talking numbers. This way, you know there is an actual interest, potentially leading to a term sheet before entering any type of negotiation which can cause the whole thing to go sour if there is a disagreement. However, if you already are all over each other, you're more likely to settle the disagreement then storm away unhappy. This holds true for selling anything. First gain interest, then sell. Many people just jump the gun and try to sell before knowing if they customer wants anything and while it can work, it changes the tide of leverage.PRIVATE: Members Only
Posted by Mr. Smith on 2008-09-03
It is one of the single greatest things in fundraising to get a quick "no" from an investor. The prolonged "maybe" is a far worse alternative. Yet, after receiving a quick "no," most CEOs tend to either (1) argue their point ad nauseam or (2) disappear without a trace. Both of these are the wrong course of action.
Before going into what to do, there is such a thing as getting a "no" too quickly. If you 10 minutes into your presentation and an investor says "no," then there is a bigger problem. The problem is probably with your pitch itself, as any investor would not even book a meeting unless there was some basic interest in the idea. In the case of a "no" that comes too quickly, it is really important to try and learn what you did wrong by asking a lot of questions, such as "could you understand me clearly," "was my presentation bad," "did you understand the market opportunity," "did you understand the offering," etc.
For the cases where the quick "no" comes after a couple email exchanges, a call, and maybe a meeting, the best outcome is to:
(1) get some advice on how to improve the presentation / business,
(2) ask for advice on other investors to speak with, and
(3) secure a time to get back in touch and report on progress.
Keep in mind that there is no such thing as a permanent "no" in venture capital, so you always want to leave the door open. Arguing your points or walking away cold will close the potential for future engagement with an investor. When you get the "no," send an email like the following:
"Thank you for taking the time to learn about XYZ Company. We would appreciate any quick thoughts on how to improve our pitch.
We are going to continue executing against our plan over the next couple of months. Let me know if you would like an update on our progress. Also, do you know of any other investors that might be interested in our space" I hope that we will have an opportunity to work together in the future."PRIVATE: Members Only
Posted by fnazeeri on 2008-06-20
Tags: Preparation Convertible Debt
I just posted this over on my blog [http://tinyurl.com/3n4wsz] but figured some folks might be interested here as well.
There are two scenarios where convertible debt is typically used: bridge financing and angel financing. I've raised convertible debt a few times and I have to say that in most angel funding scenarios it sucks as a way to finance a startup (I think it's okay for bridge funding, but I'd avoid that too if possible). Why"PRIVATE: Members Only (3971 Characters)
Posted by Mr. Smith on 2008-04-28
Tags: Negotiation Terms Strategy
This advice is applicable in most negotiations, but it is particularly important to heed in venture capital: don't accept your first offer.
Venture capitalists are betting that they can pressure you to take the terms that they offer, and there are countless stories told by venture capitalists about how they duped CEOs with below-market valuations, excessive control provisions, and aggressive economic terms. I have heard venture capitalists laugh out loud when mentioning a company name and sat on a call where a VC actually whispered the pre-money valuation that was below $1 MM, referring to it as "unbelievable."
Practically speaking, why would any venture capitalist make you a good offer in the first pass of terms" If anything, they will make the lowest reasonable offer and then aggressively pressure you to take it with only minor changes. The good news is that, once a venture capitalist has decided to invest, you now have the negotiating leverage.
Members, read on for some very specific advice...PRIVATE: Members Only (1979 Characters)
Posted by Mr Smith on 2008-02-21
Over the years, I have heard many VCs say that "the market is not large enough" in the first or second meeting. New entrepreneurs should know that this means "no."
Pocket edition of "Theoretical Future Market Values through 2020 - 3rd Edition" does not exist, nor is there a team of analysts at a VC firm inventing new markets to value. From the way that some VCs can confidently look you in the eye and say that "the market is too small" after fingering your PowerPoint, you would think that they have flipped to page 128 of the market reference guide while pecking away on the Blackberry.
The reality is (a) you have likely done a bad job explaining the market size in your pitch and (b) there is not a lot of anecdotal data for the VC to make an off-the-cuff mental estimate. When you pitch your business, you must reference concrete market data points, the best examples of which are recent liquidity events, that a VC can understand quickly. Read on...PRIVATE: Members Only (913 Characters)
Posted by MedTech Expert on 2008-01-01
Tags: Preparation Experience
Many venture funds today "employ" people with little or no venture experience, much less actual in-the-trenches operating experience. Many newcomers are merely resource allocators and could function just as well in a mutual fund.
Take the time to seek out those partners who have real business experience and, if at all possible, venture experience. These people are jewels when faced with problems to be solved. Those without experience can freeze. They lack know-how in working through the tough issues and tend to become dysfunctional and a major distraction.
Don't let the newcomers gain their experience with your company as there may be big price you pay for their education.PRIVATE: Members Only
Posted by Anonymous on 2007-12-23
Tags: Preparation Lawyers
With the average venture closing costing more than $50,000 and with the bills being paid for all parties by the investors, there appears to be a conflict of interest. AND, there is. A number of my entrepreneur friends have commented how they feel under-represented when it comes to the many issues relating to a closing. A common complaint is that their lawyers cave on important yet small issues that come back to haunt them months or years later. So, what is actually going on"
First, it's important to keep in mind that any competent venture lawyer makes a lot more from venture capitalists than from any one company, especially in the early stages. If a venture lawyer really fought for your interests, they would risk being blackballed by VCs from doing other venture deals. Imagine a VC saying that will not work with your lawyer. What would you do" Fire them, of course. Hmmm. Second, there is always a rush to get the deal done these days after a cumbersome diligence process, which forces the company to compromise. Lastly, every point that you fight as a company costs you double, since the bill for everyone comes out of the fundraising proceeds. It's like losing a full time employee, a marketing campaign, and nicer offices to make the terms reasonable. Ouch!
The best you can do as an entrepreneur is to come to the table prepared with your eyes open, and this takes a decent amount of tedious research BEFORE you get your first terms. Terms that appear harmless on paper, like a mandatory cumulative dividend, can eat away at your returns as a founder and make your life much more complicated as you do later rounds. You need to know what the terms mean in good times and in bad, and you need to be prepared to lead the fight directly during the term sheet negotiation. Don't rely on your advisors, as that is a craps shoot.
Fortunately, there are resources to help. The best overview that I have found is a tediously long document by the law firm of Fenwick and West, outlining all of the terms, sample outcomes, historical data, and even sample term sheets. Here is a link to the 70-add page document:
For a quick primer, you can take a look at an article from VenutreHacks below:
It is far too common for entrepreneurs, whether they are seasoned or inexperienced, to get nailed by some unexpected term. It's the unbridled optimism that nails the seasoned guys, thinking that they can beat the 3x clearing for participation, for example. I certainly have been nailed. Does any other Members have some resources or opinions to share"PRIVATE: Members Only
Posted by Anonymous on 2007-09-11
Tags: Preparation Convertible Debt
I've had a few people recommend this as a viable (and even preferable) option for us. I know there have to be others out there who are looking for honest feedback as well.
Experienced entrepreneurs - post your thoughts (as comments) on whether its a good, a bad, or (as I suspect) a conditional thing.PRIVATE: Members Only (151 Characters)
Posted by Gunnar Holmsteinn on 2010-07-28
Tags: Operations Bootstrap
When I first heard that we should "Bootstrap" it left a huge question mark on my face. I immediately thought about my statistics courses in the university; why in the world would my start up need to to derive estimates of confidence intervals for estimators of parameters of some statistical distributions. I actually thought about some of the R programs I wrote and started thinking how that could be applied. I eventually said that there was no need for that anytime soon, maybe a few years down the road. That left an even bigger question mark on the face of the guy I was chatting with.
It turns out that Bootstrapping is also a phrase in business finance. It's about keeping a tight fist on all your expenses and knowing that Cash Flow is more important than your mother. Something we've always been keen on doing but never had the correct lingo for it. In the past two years, we've put a huge emphasis on doing stuff that people, especially the people that pay us, like. The team has been very focused on organic growth and building our company the way we want.
In my mind, starting with little to no cash and working your way up is a very healthy start for a young company having to figure out how to make a great product.
Here are my Top 6 reasons why I think it's important to start by bootstrapping:PRIVATE: Members Only (4533 Characters)
Posted by Anonymous on 2009-06-13
Entrepreneurs build companies and hope to make money.
Investors invest and hope to make money.
Customers buy products and hope to make money.
Advertisers advertise and hope to make money.
Employees work and hope to make money . . . . . . . . .
Using a Finder or Consultant to help you raise money is perfectly OK.
A Finder or Consultant who asks for any money upfront is not OK. If the Finder / Consultant doesn't believe in your product or service enough to base his / her compensation on the successful raising of money - then why should an investor believe in what you are doing.
The only time a Finder or Consultant should be paid is if you need extensive help with your business plan, etc. You can avoid this by creating a Board of Advisors (one of whom can help with your business plan) that would be paid in stock options down the road.PRIVATE: Members Only
Posted by RichieBlueEyes on 2009-03-12
So the NYC investment climate is going through serious issues. The angel market has drastically changed as most angels are from the world of finance and no longer have disposable investable cash and the few angel deals that are getting done are at far lower valuations. On the venture side, 'risk' is not being funded. Unless you have revenue (and don't need money) or extreme traction it's probably not worth the time raising money. Sure people who have made money for that exact investor in the past can still raise some money but beyond that, unless you're 'perfect' you'll have a hard time. Even then expect 2-3X liquidity preference, restrictive employment agreements and flat to down rounds even for high growth companies. I saw a company that is trending towards $20MM in revenue in a high growth category doing a flat round at a 3X liquidity preference. Times are tough. Time to call on the old friends and family and Bootstrap. It will not be fun. Still talk to investors and get coverage so they know you so if you happen to hit a stroke of luck or genius and take off, you can create some competition and maybe get decent terms but don't expect to easily raise money. Sure, you can get meetings and maybe even some feedback, don't expect an easy check from angels or VC's in NYC. Seed Capital has been crushed, Angel money is crushed and Series A money is trending towards Series B money or to pump into existing companies or entrepreneurs proven to that investor.
With all that said, always keep pitching but Bootstrap your ass off.PRIVATE: Members Only