LearnVC.com » Future Investors

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.

(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.

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.

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: 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.

Learning how to teach through a web-site

admin — Tue, 25 Nov 2008 18:52:24 +0000

When I meet with entrepreneurs or students in person, it is inevitably easier to cover the basics of raising capital. Even when teaching to a classroom it is easier than through this web-site. The missing component being the interactivity of the audience.

It would be of great help to me if those using the web-site would provide additional feedback. Either through the IntenseDebate commenting system, or emailing me directly at moc.cvnraelnull@ffej.

In the coming weeks, we’ll be adding more and more content utilizing new interactive examples. We are in the process of developing the technology to power these examples at this time.

It is my hope that my ability to teach will be further enhanced. The only way I will know, however, is by hearing from those trying to learn on this site.

Compensation for founders and executives in startups

admin — Thu, 20 Nov 2008 15:05:03 +0000

Every founding team wants to know if their equity split is fair. Additionally, outside executives are often brought into early stage companies as “hired guns” and desire to be fairly compensated. After spending quite a bit of time researching the best sources of information on early stage company compensation, we’ve linked to a variety of posts by Noam Wasserman at Harvard. The amount of information available on his blog is absolutely amazing and invaluable for any early stage company. In addition to the posts, he also has a Compensation Study report available (current year is abridged if you didn’t participate, but previous years are complete and available for free). Below are the links for IT and Life Sciences companies. It should be noted that they include both founder and non-founder compensation information (salary, bonus, equity with founder stock and stock options).

For the IT reports, fill out this survey.

For the Life Sciences reports, fill out this survey.

Wasserman’s research also clarifies that a discount exists for founder compensation. Another interesting posts talks about splitting the pie, how the founding team splits equity.

Rich vs. King posts

Rich vs. King – Core Concept
Rich vs. King – Charts and Impressions

The Idea person

Idea person’s initial role
Second look at Idea person’s initial role, should vs. do.
Idea premium, how much equity is it worth?

Example Term Sheets and Equity Financing Docs

admin — Wed, 12 Nov 2008 15:05:40 +0000

Two great resources that we’ve come across are included in the links below. The first from Y Combinator and Wilson Sonsini Goodrich & Rosati is an open source set of equity financing documents. This set of documents can save startups a lot of time and money.

The second set of documents is from the The National Venture Capital Association (NVCA) and was created by a leading set of VC lawyers.

The intention is similar with both sets of docs, to reduce the time and money required for early stage investments. If you have never seen a Term Sheet before, these might be a bit much to dive into. We’d suggest starting with our Term Sheets topic page or one of our guides.

External Links

Y Combinator hosted Series AA documents, available here.

NVCA hosted documents, available here.