Paul Graham- How to fud a start-up?

What is preferred stock and why is it issued to investors? : Sta Browse > Home / Series A / What is preferred stock and why is it issued to investors? Preferred stock generally has rights senior to common stock. Startup companies typically issue common stock to founders (and options to purchase common stock to employees) and preferred stock to investors. One reason for issuing preferred stock to investors is to preserve the ability of a company to issue options to purchase common stock at an exercise price at a significant discount from the preferred stock price. If a company issued common stock to investors, then the exercise price of options to purchase common stock would generally need to be the same price as the price to investors. Another reason that investors purchase preferred stock is to receive rights, preferences and privileges senior to common stock. Comments

unnamed There’s this dance that entrepreneurs and venture capitalists do when it comes time to negotiate the economic terms of an investment. And it all revolves around valuation. The question is what is the fair value of the business? But I think the concept of valuation is often misunderstood by the people engaged in this process. I do not believe that negotiating a valuation on an early stage venture investment has much to do with the current value of the business. The fact is that almost all venture capital deals are done as convertible preferred stock investments. It’s only in the event that the deal works out that the percentage of the business (the thing that valuation is supposed to determine) matters in terms of how much money we make. Another important factor to consider is that only a relatively small portion of early stage venture investments really work out in the way they were supposed to when the investment was made. The 1/3 rule goes as follows: 1/3 of the deals turn out badly.

Venture Capital Deal Algebra Fred Wilson wrote a useful post on valuation today. It reminded me of a document I had Dave Jilk write when he was doing some work for me. I decided to write this “bladon” (Blog Add-on) post – inspired by Fred. I’ve found that even sophisticated entrepreneurs didn’t necessary grasp how valuation math (or “deal algebra”) worked. In a venture capital investment, the terminology and mathematics can seem confusing at first, particularly given that the investors are able to calculate the relevant numbers in their heads. The essence of a venture capital transaction is that the investor puts cash in the company in return for newly-issued shares in the company. The value of the whole company before the transaction, called the “pre-money valuation” (and similar to a market capitalization) is just the share price times the number of shares outstanding before the transaction: Pre-money Valuation = Share Price * Pre-money Shares Investment = Share Price * Shares Issued $2m / ($3m + $2m) = 2/5 = 40%

Term Sheet: Price - Mozilla Firefox A the end of the year, I completed a financing that was much more difficult than it needed to be. As Jason Mendelson (our general counsel) and I were whining to each other we decided to do something about it. At the risk of giving away more super-top-secret VC magic tricks, we’ve decided to co-author a series of posts on Term Sheets. We have chosen to address the most frequently discussed terms in a venture financing term sheet. The early posts in the series will be about terms that matter – as we go on, we’ll get into the more arcane and/or irrelevant stuff (which – ironically – some VCs dig in and hold on to as though the health of their children depended on them getting the terms “just right.”) The specific contract language that we refer to (usually in italics) will be from actual term sheets that are common in the industry. In general, there are only two things that venture funds really care about when doing investments: economics and control. Alternatively:

How do you calculate Series A price per share? : Startup Company Browse > Home / Series A / How do you calculate Series A price per share? The formula is: [Series A price per share] = [valuation] / [fully-diluted pre-money shares] Obviously, there are two ways to affect the Series A price per share (and the resulting dilution to pre-Series A stockholders): (1) change the valuation, or (2) change the number of fully-diluted pre-money shares. Arguing for a change in valuation is probably difficult. However, arguing for a different number of fully-diluted pre-money shares might be an easier way to affect the Series A price per share. Fully-diluted pre-money shares typically includes (1) all outstanding common stock, (2) all outstanding preferred stock (if any, on a converted to common basis), (3) outstanding warrants, (4) outstanding options, (5) options reserved for future grant, and (6) any other convertible securities on an as converted to common basis. Decreasing the size of the option pool is one way to increase the Series A price per share. Comments