VC  motivations      Driven  by  their  model    Impacts  their  terms  and  expectations      

 Most  companies  aren’t  VC’able      Just  don’t  fit  the  “Big  Money”  model   May  be  good  companies  and  businesses  

  But  if  you  are  than  you’ll  be  better  equipped  than  most  because  of  tonight  

  1,000  companies    10  investments  

  2  may  be  widely  successful  (usually  1)    6  “land  of  the  living  dead”    2  fail  horribly  

 Winners  to  offset  my  losers      Start  ups  10-­‐12x  return  in  5-­‐7  years    Existing  companies  5-­‐7x  in  4-­‐5  years  

  VC is high risk   Winners have to be “BIG”   Example: $100M Fund

  20% IRR   6 Years   3x

  Target Exit Value: $300M The 2/6/2 Rule

  20% Fail $20M = $0   60% Modest $60M = $120M   20% BIG Win $20M = $180M

$300M

  WINNERS HAVE TO BE at least 9X

  A  company  that  doubles  isn’t  enough…    Every  opportunity  has  to  have  the  potential  to  be  a  home  run  

  You  Tube  sold  to  Google  for  $1.65  Billion    Sequoia  invested  $11.5M  received  $495M  

  30%  of  the  company    43x  return    Great  deal!  

  6-­‐9  months  to  raise  capital    Several  meetings  

 Want  to  get  to  know  you      Assess  your  “Say/Do”  factor    Close  to  truth  ▪  Builds  confidenc  

  Personal  Recommendation:        Get  to  know  the  VC    ▪  Process  (who  makes  the  decision,  when  &  how  often)  ▪ Where  are  they  in  their  fund  life  cycle  ▪ What  was  their  last  deal  ▪  Talk  to  their  existing  CEO  ▪  Cash  available  to  invest/reserves  ▪  No  “Yes”  means  “No”  

  Have  to  be  able  to  live  with  them  “til  exit  do  you  part”  

  Non-­‐binding  offer  to  invest    Outlines  the  general  terms  and  conditions  of  investment   Which  may  change  

  Not  the  definitive  agreement  simply  a  place  to  start  

  Everyone  uses  it  

  Non-­‐heart  ache      Company  name    Investors    How  much    Date    

  Founders    Employees    Consultants    Students/universities/research  organizations  etc    

  Avoid  convoluted  IP  structures    Only  going  to  be  unwound  

  Non-­‐competition    Non-­‐solicitation  

  Customers    Employees    

  IP  Assignment  

  Ensure  one  common  motivator      Need  to  attract  talent    15%-­‐20%  (low  as  12%)    New  CEO    New  executives    Board  members  

  Non-­‐VC    Pre-­‐$  

  Dilutive  to  you  

  Pref  shares    Accrue    Price  +  dividend  convert  

  Protects  an  investor  from  down  round    As  if  their  investment  had  been  done  at  the  current  lower  price  

  Keeps  the  investor  whole  in  bad  times    Full-­‐ratchet   Weighted  average  

  VC  can  ask  to  have  the  company  buy  back  shares  

  Life  of  the  fund    Investors  in  funds  want  their  money  back    Outcome:  

  Forces  a  sale    Get  minimum  investment  back  (P+dividends)  

  Power  of  “OPM”    Get  to  know  your  VC     Won’t  matter  in  good  times    Can’t  tell  you  what  to  do  but  prevent  you  from  doing  things  

  60-­‐66  2/3%    Change  nature  of  the  business  (acquire/divest)    Change  capital  structure/articles    ▪  Default  approval  over  future  financing  

  Approve  business  plan/operating  plan    Change  in  key  employees  (defined  term)    Creation  of  ESOP    Unbudgeted  expenditure  in  excess  of  $5,000    Non-­‐arms  length  transactions    ….  

 Monthly  prepared  financial  provided      20-­‐30  days  from  month  end  

  Quarterly  financials      Analysis  vs  budgets  

  Board  material      Yearly  operating  plan    

  (30  days  prior  to  beginning  of  fiscal  year)  

  Founder  restrictions    Drag  Along  

  VCs  need  exit    Tag  Along  

  I  can  sell  a  portion  if  you  can  

  Friends  and  family   Move  to  5  

  2  investor    2  founder    1  independent    Expect  material  in  advance  of  meeting    Only  a  meeting  if  the  VC  is  there  ▪  Defer  once  

  Acceptance  &  Exclusivity    Deadline  for  acceptance    Use  the  time  to  negotiate      No  “shop”  ▪  Applies  to  company,  depending  on  stage  founders  

Be  careful  what  you  ask  for  …don’t  send  the  wrong  message