Venture Capital Insights for Entrepreneur Magazine

April 22, 2014

Bo Yaghmaie is a senior contributing editor at Entrepreneur Magazine , head of the Business and Technology practice in New York and an active participant in the New York startup and venture capital ecosystem.

The 3 Essential Things Needed in a Founders' Agreement

Q: How do you suggest structuring a founders' agreement?

When getting a new enterprise off the ground, there is nothing more important than having a clear agreement amongst the founders around a handful of key issues that are critical to your ability to safeguard the future viability of your new enterprise and to raise venture money. These key issues cover three really important areas: the roles and responsibilities of the founding team, equity ownership and vesting and IP ownership.

Confused? Here is a more detailed breakdown.

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Finding the Right Angel Investor for You

Q: What is the best way to locate the right angel investor or venture capitalists?

Finding the right investors is really important. It's kind of like marriage. A great spouse makes for a great life, while a bad spouse could cause a lifetime of misery or an ugly divorce.

In finding the right investor, you're looking for a great, life-long partner and someone you can count on in good times and bad. So, chemistry is critical.

If you check the box on chemistry, you will want to find investors that will add bench strength to the management team.  That is, investors with domain expertise -- either through prior investments or operational experience -- or investors with access to additional sources of capital that can further fuel your growth. The best investors will be able to advise you on strategy and help with introductions to potential customers, partners or key hires.

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The 7 Elements Investors Look for in Your Funding Pitch

Q: How can we work to land a successful investment?

Here's the short answer: start with a great pitch deck. The pitch deck is arguably the most important single document you will generate in the life of your company. It is the opening salvo and "the hook" by which you will (or will not) capture the attention and imagination of a potential investor.

There is no such thing as a "perfect" pitch deck. Pitch decks are continually refined to optimize for the immediate audience to whom the deck is being presented. There are some basic guidelines, however, that can help you prepare a pitch deck that will answer the questions most investors will ask.

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What a VC Insider Learned in the Past 10 Years About Startup Funding

Q: If you go back five to 10 years what advice would you give yourself?

With the benefit and hindsight of 20 years of experience in the space, I think the single most important advice that I could give an entrepreneur is the simple admonition to be mindful of the fact that venture capitalists deploy cash in ebbs and flows.

Investment levels and valuations are fundamentally driven by broader market conditions and the venture investors' perception of market dynamics, and frankly, the competitive landscape in finding and pricing deals.

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Consider Control and Voting Rights When Making Venture Capital Deals

Control is a critical component of every venture capital deal.

Control can be used to dictate desired outcomes or, through "negative controls," to block undesired outcomes. Negative controls are typically enumerated as "protective provisions" that give the venture investor the right to unilaterally block a variety of corporate actions.

A majority of the board and a majority of the stockholders generally control the outcome of all decisions that require a vote. Venture capital funds, which typically own minority positions, rely on protective provisions in the corporate charter to block actions they do not support. There is nothing sinister about protective provisions. They are a standard part of the basic covenant the entrepreneur enters into with the venture capital investor: "thou shall not do anything that will impact my investment and financial terms without my blessing."

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Determining Board Control Doesn't Have to Be Stressful. Here's What to Do.

While securing capital to allow your startup dream to flourish is considered a stressful time in a startup's life, another very critical, and often angst-inducing element, of raising venture capital is determining board control.

At a high level, you, as the founder, have to come to terms with the notion that as you raise venture capital (and as you effectively sell a piece of your business to investors), you will be taking on partners who will want to have a voice in shaping the future of the business. So it is vital you create the appropriate structure and governance mechanisms that strike the right balance between the investor's desire to participate in guiding the business and your ability to execute on your vision.

There are typically two areas in which control matters are implicated. The first one is the structure of your board of directors. The second one is voting rights and voting blocks that govern a variety of actions that affect the business. Let's discuss the former, structure.

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Vesting: A Founder's Need to Earn Equity

Vesting is absolutely standard in venture deals. It is predicated on the notion that the founding and management teams must earn their equity ownership by contributing to value creation through so-called "sweat equity," or hard work. Vesting requirements address free-riding issues by mandating a commitment to the enterprise -- a requirement around which both investor and founder interests are aligned.

When vesting is imposed on a founder's stock, the unvested shares held by the founder become subject to a contractual right of repurchase, often at a nominal value, if the founder is no longer providing services to the company. The founder's stock vests once the right of repurchase terminates, usually upon the occurrence of a specific event or simply with the passage of time.

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Why You Need to Take a Close Look at Dividend Provisions

In the last two installments of this series, I tried to deconstruct two important aspects of a venture capital term sheet, namely how to analyze the valuation proposed by an investor and the manner in which the liquidation preference provisions can affect valuation. There is one other economic term that deserves careful consideration: the dividend provision.

So what exactly is a dividend? A dividend is a payment or distribution by the corporation to its stockholders. But here's the catch: In over 20 years of practice in the venture capital space, having worked with hundreds and hundreds of venture-backed companies, I have never seen a private, venture-backed company pay a cash dividend to its stockholders.

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Everything You Wanted to Know About VC Liquidation Preference But Were Afraid to Ask

In the last installment in this series of articles on venture capital deals, I discussed what every entrepreneur needs to know in order to properly assess valuations. So, after thinking through the various nuances that affect the valuation you have been offered, you are still elated. Is there anything else that you should think about before you pump your fist in triumph? Yes. There is another important thing: the liquidation preference.

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What Every Entrepreneur Should Know About Valuations

Getting your first term sheet from a venture-capital firm is among the most exhilarating moments that you'll experience as an entrepreneur. It probably sits up there with the college acceptance letter in the pantheon of milestones. Getting a call from an entrepreneur who has just received a term sheet is one of the highlights of my day. The excitement is palpable. But unlike the college acceptance letter, a venture term sheet can quickly be followed by the dread of trying to understand the gobbledy-gook that you've been presented with. To manage that inevitable angst, you'll quickly need to wrap your head around what matters a lot, what matters less and what doesn't really matter in a term sheet.

So, what really matters in a term sheet? In a series of articles, starting with this one, I will try to give you an insider's look at the things that really matter by deconstructing a venture term sheet. So it's fitting that we start with valuation, arguably the single most important thing in a term sheet.

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