Just Say No: VC terms that can really hurt. Guest Author · December 2nd, 2009 Thanks to Atlas Venture for supporting Venture Hacks this month. This post is by Fred Destin, one of Atlas’ general partners. If you like it, check out Fred’s blog and tweets @fdestin. And if you want an intro to Atlas, send me an email. If you believe the blogosphere chatter, the entrepreneur-VC relationship seems strained like at no time in the past. I see a lot of misguided commentary out there focused on the wrong issues, such as “how can you ask for liquidation preferences and call yourself entrepreneur friendly?”
What I wanted to do here instead is focus on a few of the clauses that entrepreneurs should absolutely avoid; the wrong tradeoffs which later expose them to really “losing” their company. Now we own you: Full ratchet anti-dilution Anti-dilution says “your company has no tangible value and as result I accept 20% ownership today but if we don’t create value I want some protection on potential share price reduction”. Just Say No: VC terms that can really hurt (Part 2) - Venture Ha. Guest Author · December 9th, 2009 Thanks to Atlas Venture for supporting Venture Hacks this month. This post is by Fred Destin, one of Atlas’ general partners. If you like it, check out Fred’s blog and tweets @fdestin.
And if you want an intro to Atlas, send me an email. I’ll put you in touch if there’s a fit. Thanks. – Nivi In Part 1, I discussed a few of the term sheet clauses that entrepreneurs should absolutely avoid; the wrong tradeoffs which later expose them to really “losing” their company. “Thank You and Good Luck” for options: Limited exercise period I am going to get some of my colleagues mad at me here. That forces startup employees to fork out cash and often crystallizes tax liabilities. Things I cannot get too excited about Multiple liquidation preferences: This means investors get a multiple of their money back before you see anything. Cumulative dividends: Sometimes an 8% dividend is slapped on, and it accrues over time when it isn’t paid.
The trap of complexity. Start-up Advice. I usually tell people that everything I learned about being an entrepreneur I learned by F’ing up at my first company. I think the sign of a good entrepreneur is the ability to spot your mistakes, correct quickly and not repeat the mistakes. I made plenty of mistakes. Below are some of the lessons I learned along the way. If there’s a link on a title below I’ve written the post, if not I plan to.
The summary of each posting will be here but the full article requires you to follow the links. For now it’s mostly an outline for me to follow (in no particular order). Disclaimer: I ran two SaaS software companies. 1. 2. You also need to consider founder scenarios, ownership, prenuptials and stock options. Learning to work with lawyers. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24Lies, Damn Lies and Statistics 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42.
Founders, Ownership and Prenuptials. Yesterday I wrote a blog post in which I urged people to not have too many founders. Best case scenario in my mind is just 1, but at most I recommend 2. I knew this topic would be controversial because when I tell people this in person it always elicits shock. To be clear – it is not about being stingy with or hoarding equity – it is about having a prenuptial agreement.
Let me give you some scenarios that do happen in real life: You start a company 50/50 with a good friend. If it becomes the next YouTube you always stay friends. 99.99% of companies do not become the next YouTube. In fact, most go through tough times at some point. If you’re not an overnight success or if you do struggle what happens? - What if one guy needs to pay bills and takes a full time job somewhere. . - What if you have to make really tough calls on cutting costs, biz dev deals, fund raising and you violently disagree on direction?
- What if the person performs OK, but not great and you need to hire above him? Are Business Plans Still Necessary? This is part of my ongoing series of posts and I need to file this one under both Raising Venture Capital and Startup Advice. I remember going to an Under the Radar conference in 2006 in the heat of the Web 2.0 craze. There were tons of young entrepreneurs showing their latest Web 2.0 wares. Ajax was the new buzzword and many companies went overboard. People mistook extra doses of Ajax for a successful product. Unfortunately this was reinforced by the many conferences that rushed to espouse the benefits of Web 2.0 and the subsequent acquisition sprees of companies like Google, Yahoo! , Cisco and others went out to fill out their Web 2.0 portfolios. The last 12 months has seen the rise of many new trends. The last couple of years has also seen the huge initial success of Ycombinator, the Lean Startup and many other product driven approaches to going to market.
In all of these new product and cost-focused new trends, a big problem has emerged that all of these movements have not addressed. Startup Founders Should Flip Burgers. This is part of my ongoing series Startup Advice. This is a story of one of the risks of venture capital. When you’re an early-stage startup that hasn’t raised any institutional money you end up doing almost every job function of the company yourself. But some companies have entrepreneurs that seem talented on paper, are in a space that seems interesting to investors and are able to raise venture capital early in the company’s existence. This can often happen when there is a good product built but no real customer adoption yet. This is what happened to me. When I founded my first company along with Brian Moran (whose idea it was) I had no real experience running startups.
My company had raised a seed round of capital in late 1999 even before either of us were full time in the company (ominous side note: on the way to pitch our seed investor, Delta Partners, a man walking right in front of me died of a massive heart attack making me late to the meeting.