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Want to Know How VC’s Calculate Valuation Differently from Founders?

Want to Know How VC’s Calculate Valuation Differently from Founders?
Back in 1999 when I first raised venture capital I had zero knowledge of what a fair term sheet looked like or how to value my company. Due to competitive markets we ended up with a pretty good term sheet until we needed to raise money in April 2001 and then we got completely screwed. It was accept the terms or go into bankruptcy so we took the money. But the truth is that I didn’t really understand just how screwed I was until years later when I finally understood every term in a term sheet and more importantly I understood how each term could actually be used to screw me. Back then VentureHacks didn’t exist. I don’t feel that as a VC sneaking in nefarious terms into a term sheet that the entrepreneur doesn’t understand is a good way to build a long-term relationship nor to build a long-term reputation but this does happen and more frequently than we all would like. This starts with understanding how VCs and entrepreneurs often see valuation differently. I turned them down.

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One Feat, la start up incomprise à Paris va lever 500 000 dollars dans la Silicon Valley La vie est un jeu. Un jeu qui peut rapporter. Ils sont trois à en être persuadés. Souheil, Julien et Arnaud. Tellement persuadés que, lassés de leurs rencontres improductives avec les banquiers et business angels français, ils ont acheté, début 2012, 3 billets éco pour San Francisco et ont débarqué dans la Silicon Valley sans même savoir où ils allaient dormir. « Ce n'est pas parce qu'on n'a pas de business model, qu'on n'a pas de valeur » One Feat a-t-il un avenir ? « Une start up n'est pas faite pour avoir un business model et Facebook n'en a toujours pas» One Feat n'a pas, ne peut pas avoir de business model et dans la Valley ce n'est pas un problème. « Une start up n'est pas faite pour avoir un modèle business, elle est faite pour le chercher et lorsqu'elle l'aura découvert, elle pourra devenir la société qui l'exploite et l'optimise », explique Eric Ris, fondateur de Lean Startup. "A notre stade, la monétisation ne compte pas"

Valuation and Option Pool One of the more contentious things in the negotiation between an entrepreneur and a VC over a financing, particularly an early stage financing, is the inclusion of an option pool in the pre-money valuation. As my friend Mark Pincus likes to say, "it's just another way to lower the price". I'll accept that critique. And take it one step further. The option pool is absolutely a piece of the price negotiation. But it is a very important one as I'll explain. But first, let me lay out a few things for those who aren't well versed in these matters. But to the entrepreneur it might be a lot more dilutive due to the inclusion of the option pool in the pre-money valuation. In the case of the $5mm post money valuation, that means there needs to be $750,000 worth of options in the pre-money valuation. I am sure I lost a few of you on all of that math. So it is not surprising that entrepreneurs hate this provision and fight about it every time. I'll wrap with a true story about this provision.

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Pourquoi Facebook et Google devraient avoir complètement disparu d’ici 5 ans ? - Blogs La lecture de la semaine est un post de blog hébergé sur le site de Forbes, blog tenu par un certain Eric Jackson (@ericjackson), fondateur de la société de capital-risque IronFire. Le post est intitulé “Voici pourquoi Facebook et Google devraient avoir complètement disparu d’ici 5 ans”. Ce qui est intéressant, c’est que ce post a été écrit fin avril, bien avant donc les déboires qui accompagnent l’introduction de Facebook au Nasdaq en début de semaine. Mais il donne des pistes pour comprendre à quel point Facebook a été survalorisé. deadend Image : Dead end photographié par ashley adcox. Eric Jackson commence par expliquer que deux théories s’affrontent pour expliquer les cycles de vie des grandes entreprises. Voici l’analyse d’Eric Jackson, dont je rappelle qu’elle précède les événements des derniers jours. Cette fragmentation se fera sans doute au détriment de l’essence de Facebook. Voilà pour ce post lu sur Forbes. Xavier de la Porte

Options on early stage companies – chris dixon's blog I believe that what I’m about to say is accepted by venture capitalists as fact, even trivially obvious fact, yet very few entrepreneurs I meet seem to understand it. An option on a share of stock of an early stage company is (for all practical purposes) equal in value to a share in that early stage company. Not less, as most entrepreneurs seem to believe (and god forbid you think “the VCs have the option to put in more money” is economically advantageous to you). The volatility of the value of a seed stage startup is incredibly high. So if your share price is $1, an option (European Call is a fancy word for options similar to what are given out in startups) is worth $0.9993 dollars. This is good news for start up employees, directors, and advisors who are awarded stock options. Here’s the bad news. - The first way they create options is by simply doing nothing – telling the entrepreneur “great idea, come back in a few months when you’ve made more progress.” - Super pro rata rights.

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Crunchies 2011 Here's Why You Need A Liquidation Preference I get a lot of heat every time I mention that I won’t invest without a liquidation preference. People say that it means I don’t want to take a risk. I am happy to take a risk. We do it every time we make an investment. We lose money on some of them and I can live with losing money. It is the price you have to pay for the opportunity to make money. What I am not OK with is an unfair deal. Let’s look at who got what from the sale of Slide to Google. Max Levchin – $39mmScott Banister who also took part in the series A made $5m from the sale.BlueRun Ventures, who invested $8m in the series B round made $28m.The Founders Fund and Mayfield Fund, both investors in the series C, each made their money back.Fidelity Investments, part of the series D: also made their money back. The reason Fidelity, Founders Fund, and Mayfield got their money back is they had a liquidation preference. I have no issue with Max making $39mm.

5 Lessons from 150 startup pitches I just reviewed several hundred startup pitches for Capital Factory. Most were on paper and video; 20 were invited to pitch in person. Interesting patterns emerged: Everyone makes the same classes of error.Those who avoided just one of those errors stood out in the crowd.These are problems with the business concept or the founder’s attitude, not specific to raising angel money. You’re probably making a lot of these errors too. Not that I blame you! So for the next few weeks I’m doing a series on these mistakes and what to do about them. Here’s the list: Invalid competitive advantages “Superior SEO” and “unique features” are not competitive advantages.Lacking an unfair advantage You need one killer advantage that no one on Earth can beat you on. There’s also this list, equally common but I didn’t feel the urge to write an entire blog post on each one: Unable to describe the company in 60 seconds.