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Shark Tank – extreme negotiation

admin — Fri, 23 Oct 2009 17:29:40 +0000

Pitching Element Bars, with entrepreneur Jonathan Millers, is one of the best negotiations I’ve seen on either Shark Tank or Dragons’ Den.

Watch, enjoy, learn.

Liquidation preference in Dragons’ Den negotiation

admin — Thu, 22 Oct 2009 16:16:53 +0000

Two shows I watch every week are Dragons’ Den (BBC) and Shark Tank (ABC). After watching a recent episode of Dragons’ Den, I was surprised by James Caan offering a liquidation preference as part of his offer using participating preferred stock. Typically in either show the negotiations are only focused on valuation with common stock.

In Dragons’ Den: Series 6: Episode 3 – 5 of 6, fast forward to 4:30 for the beginning of the pitch and negotiation.

It is the first time I’ve seen any Dragon or Shark refer to preferred stock type features. It was a very odd attempt, given that there were other offers at the same valuation without these features.

I’ll include this post in the VCIC section of our site in the hopes that teams prepare by watching some episodes before their events.

Summer 2009 Internships

admin — Sun, 31 May 2009 16:53:39 +0000

LearnVC.com, Inc. provides a web-based application for entrepreneurs and investors to model investments into startups. On LearnVC.com we have free educational material with interactive examples for the “levers of valuation” powered by our modeling software. Our full modeling software is currently in an invite-only beta and will be demonstrated to those interested in working with us this summer.

We are seeking technical and business people for non-paid summer internships. For the technically inclined, the majority of the tasks will be developing functional tests of our web application using Selenium (www.seleniumhq.org). For the business oriented, we have a variety of potential projects depending on the interests of the person.

If you are interested, or know someone who is, please contact me directly at jeff@learnvc.com with a resume and list of interests.

(Updated) Example Term Sheets and Term Sheet Generator

admin — Tue, 28 Apr 2009 15:46:35 +0000

In November last year, I posted about a few great examples of term sheets and related equity financing documents. Since then a few things have happened warranting a new post to summarize everything.

First, there’s the Class F stock documents created by Wilson Sonsini and hosted on TheFunded Founder Institute. This is by far the most entrepreneur friendly of the three example term sheets.

Second, the Y Combinator hosted Series AA documents, available here. These are representative of Angel funding documents, and were created by Wilson Sonsini.

Third, the NVCA hosted documents, available here. These are more representative of Venture Capitalists, as you may expect.

Last, but certainly not the least, is Wilson Sonsini again (seeing a pattern?) providing an exceptional tool to automatically generate term sheets after answering a questionnaire.

Example Term Sheets and Equity Financing Docs

VCIC 2009: Pitch, Due Diligence, and Negotiation

admin — Tue, 27 Jan 2009 19:57:45 +0000

The five main components of the VCIC are:

Reading the business plans
Listening to the entrepreneur pitches (15 minutes)
Performing Due Diligence (15 minutes)
Creating the deliverables (term sheet and executive summary)
Performing the negotiation (18 minutes, 7 minutes Q&A with judges afterwards)

#2, #3, and #5 are shown in even tighter time constraints on BBC’s Dragon’s Den TV program. This show (available on BBC America) has Dragons (the VCs) hearing entrepreneur pitches, asking some due diligence questions, and then making decisions to invest or not. Absolutely fantastic for a variety of reasons, but most importantly a great way to get some perspective for VCIC participants.

New VCIC summary page in topics

admin — Mon, 26 Jan 2009 16:38:19 +0000

As part of the ramp-up in posts specifically related to VCIC, a new summary page is available under the topics drop down menu on this site. Additionally the VCIC summary page can be found under the Students’ Guide TOC (Table of Contents).

Venture Capital investments in C-Corporations

admin — Mon, 26 Jan 2009 16:31:05 +0000

In most circumstances, a company must be a C-Corporation when taking investments from venture capital firms. There are a few reasons for this:

VC Limited Partners (LPs) contractually obligate the VC General Partners (GPs) to avoid any pass through tax liabilities that may result in an investment into a portfolio company that wasn’t a C-Corp.
Even if the company was a non pass-through tax entity (like an LLC with an election to be treated as a non pass-through entity), the governance of the company would be non-standard as compared to a C-Corporation. VCs focus on C-Corps, and even though it is possible to invest in an entity like an LLC, they don’t to avoid complexity.
Lastly, if the company was an S-Corp, the company would immediately be converted to a C-Corp when a VC invests, as the fund is a non-person. See this post for more information.

VCIC 2009: Due Diligence Q&A session, Part 1

admin — Wed, 21 Jan 2009 16:14:06 +0000

Having attended many VCIC competitions as a competitor, observer, and judge I wanted to share with everyone a few pieces of advice for the due diligence session. With such a limited amount of time, it is critical to prioritize your questions and manage the response time.

Manage the entrepreneur’s responses

Your time will quickly run out if the entrepreneur begins a long winded response. Set expectations at the beginning of the meeting that you may have to interrupt. Nothing is worse then to have 5 minutes of time elapse before either the entrepreneur finishes their response or someone finally interrupts. Just remember, be polite.

Prioritize your questions

Each team member that asks questions should have their list of questions prioritized. There are some questions that are simply more important than others, especially with the change to the negotiation format for the competition. A few examples:

“What are your expectations for valuation?” Other teams may ask, and then the judges know the expected valuation for the entrepreneur. If you offer a term sheet with a higher pre-money valuation than needed you’re starting off on the wrong foot even before the negotiation.
“What milestones will this round allow you to reach?” In an investment into a startup the use of the funds should be to achieve a higher valuation in the least amount of time. Identifying the key milestones is a must for any entrepreneur, therefore it is a good idea to ask them.
“How much total capital is needed to achieve an exit?” Most likely, a single round will not sustain a company until exit. Hopefully the entrepreneur has based their expected total capital required off of a financial model with meaningful assumptions.
“What potential exits do you see for the company, and when?” It is best to understand the expectations of the entrepreneur with regards to exit, especially if they have a few potential acquirers in mind. See comparables.

VCIC 2009: MBA competition season starts

admin — Tue, 20 Jan 2009 12:52:43 +0000

One of my most beneficial experiences in business school was the VCIC (Venture Capital Investment Competition). Many of my fellow VCIC alumni as well as those in the startup industry feel the same and support the competition through a variety of means.

In the next few weeks a variety of content will be posted on LearnVC.com to support the teams as they come up the steep learning curve for the competition. Stay tuned for more…

Revenue recognition impact on company valuation

admin — Tue, 16 Dec 2008 16:52:59 +0000

One of the key aspects when looking at comparables (revenue, EBITDA, etc) is revenue recognition. To help illustrate revenue recognition, let’s take a company that charges clients $120,000 for services over a year long period. The income statement shows that income at $10,000/month accounting for when the services are performed and realized by the customer (part of GAAP, the Generally Accepted Accounting Principles). The cash flow statement, however, shows the $120,000 from the date the money is received (let’s assume it is all pre-paid).

As discussed with the comparables article, the revenue amount is critical for valuations of revenue producing startups. The important component then of revenue recognition is that startups are valued on their income statement revenue, and not the cash flow. This reflects when the company is building up value as measured by their customers, and not just cash.

The implication of pre-paid revenue can be advantageous, as it determines when additional capital needs to be raised. As given in our example, the company receives the $120,000 up front which means that the company may not need to raise money as early as a company that was paid month to month for the same services. The longer the company can forgo raising additional capital (assuming revenues are increasing) the higher the valuation put on the company when it does raise capital.

Valuation techniques: Round and Exit Comparables (comps)