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Showing posts from July, 2009

Raising Capital: Liquidation Preferences

One of the "standard" terms in VC term sheets is the liquidation preference. Google it, learn it, love to hate it and learn to live with it, because it's unlikely you'll get a deal without it. I call it the "have-your-cake-and-eat-it-too clause for VCs".

Here's how it works (or, How 20% becomes 28% without even trying).

Let's say you raise $1 million from a VC at a miraculous $4 million pre-money valuation. Your post-money valuation is $5 million, and the VC stake is 20%. The next week you sell the company for $10 million (because you're so amazing). How much does the VC get?

$2 million. Wrong! Yes, but 20% of $10 million is $2 million, right?

Well, yes and no. The liquidation preference means that the investor gets the$1 million back first, leaving you with $9 million, and then you take 20% in addition to the initial investment, making it $2.8 million total, or 28%.

So instead of merely doubling its money, the VC firm has almost tripled its money, w…

Founders

I'm a serial founder, and am starting two tiny efforts at the moment in separate companies with a few people I know while continuing to coach startups (which is fun, if not highly profitable). The ideas are mine, but I'm a lousy coder and want great software, and don't have a lot of money to invest, so it's a joint effort with a bit of skin in the game by everyone in the form of sweat equity. Not equally a joint effort, though.

Deciding who and what a founder is at the beginning of a business is critical. Sometimes it's clear--the business is a going concern, you've invested your time and money, taken all of the risk, and hire a few people who don't take those risks or make those investments, and you're the founder and they are employees. You might give them stock options, or exchange stock for intellectual property, but that doesn't imply any particular founder status.

Founder status matters and is an earned and fact-based status: it's the person…

Venture Capital Drops Dramatically in Q2

National Venture Capital Association reports a huge drop in new capital placed with venture firms--another good case for bootstrapping and raising from individuals.

Raising Capital: Some Things Not to Do

I met with one of my favorite venture capitalists this week for about a half hour just to catch up. I made the mistake of not really having an agenda, so it was a bit all over the place, and there was that moment when you know it's time to wrap it up and move on.

Two things I asked about were his views on third parties raising money for startups--when you hire someone to raise capital for you--and angel conferences, incubator boot camps, and venture financing conferences.

As I've suspected for a long time, he and a lot of VCs don't think very highly of companies that use agents or brokers. It says to them you don't have the drive, ambition, and curiosity to find and pitch VC yourself. And that likely means you don't have the drive, ambition, and curiosity to push you company the way it needs to be pushed to get from seed stage to exit.

What he's saying is something I've believed for a long time: tenacity is more important than opportunity, differentiation, int…