Watch, enjoy, learn.

After it was taken down on YouTube, I hunted down the Hulu “ok” version. Here it is

LINK

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.

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.

1. Reading the business plans
2. Listening to the entrepreneur pitches (15 minutes)
3. Performing Due Diligence (15 minutes)
4. Creating the deliverables (term sheet and executive summary)
5. 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.

1. 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.
2. 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.
3. 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.

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.

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…

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.

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.