Fundamentals of Venture Capital

Written in highly readable layman's language, Fundamentals of Venture Capital is a concise introduction to the key issues facing both investors and entrepreneurs as they embark on the journey of turning a good idea into a profitable reality.

What Is All the Talk About?

1

(10)

What Is Venture Capital?

3

(3)

How Venture Capitalists Talk

6

(1)

Should You Start Your Own Company?

7

(2)

``You Can Make It.... Will Someone Buy It?

9

(2)

Where Should I Look for Seed Capital?

11

(15)

Introduction

11

(1)

Angels

12

(1)

Seed Capital from VCs

12

(2)

State Aid

14

(1)

Federal Grants and Loans

15

(1)

Commercial Banks

16

(1)

Should I have a Placement Agent?

17

(2)

Venture-Capital Clubs

19

(1)

Concept IPOs

19

(1)

The Shell Game

20

(1)

Multiple-Round Strategy

21

(2)

Case Study in Finding Money: A Reality Check

23

(3)

How on Earth Do I Put a Value on My Company?

26

(5)

Portfolio Management

29

(1)

Nonnumerical Factors

30

(1)

What Legal Form Works Best for You?

31

(9)

S Corporations

31

(2)

Limited Liability Companies

33

(3)

Corporation versus Limited Liability Company

36

(4)

What Will My Corporation Look Like?

40

(13)

Corporate Charter

40

(2)

Payment for Stock

42

(1)

Purposes

42

(1)

Miscellaneous Charter Provisions

43

(1)

Restrictions on Transfer

43

(3)

Preferred Stock Provisions

46

(1)

Preemptive Rights

46

(1)

Indemnification

47

(3)

Bylaws

50

(1)

Other Organizational Documents

50

(1)

State of Corporate Domicile: Delaware or Somewhere Else?

51

(2)

Tax Discussion for the Nonlawyer: Minimizing Taxes in the Early Stages

53

(9)

Cheap Stock to Employees and Promoters: The ``Eat-'em-All-Up'' Preferred Stock Approach

56

(2)

Stock for Services: The ``Passage-of-Time'' Approach

58

(1)

Section 83 and Stock Subject to Vesting

59

(3)

Drafting the Business Plan and the Placement Memo

62

(17)

Risk Factors

65

(3)

Certain Transactions

68

(1)

Business Plan

69

(1)

The Marketing Section: The Single-Most Important Section for Early-Stage Investments

70

(2)

Business Strategy and the Single-Product Problem

72

(1)

Management

72

(1)

Beefing up the Board of Directors

72

(1)

Other Issues

73

(1)

Projections---The ``Bull's-Eye'' Theory of Forecasting: ``Shoot High,''

74

(2)

The Promissory Nature of the Forecast: ``Shoot Low,''

76

(3)

You've Set up the Company and Negotiated the Price: What Are the Investors' Terms?

79

(19)

Herein the Term Sheet

79

(1)

What Will the VCs Want for a Security: Common Stock? Preferred Stock? Debt? Warrants?

80

(2)

Common Stock

82

(1)

Warrants

82

(1)

Preferred Stock

83

(3)

Conversion and Redemption

86

(1)

Preferred Stock Redeemable at the Option of the Holder

87

(2)

Participating Preferred

89

(1)

Antidilution Protection for Investors

90

(4)

Who Controls: Me or Them?

94

(2)

Registration Rights

96

(2)

I Have a Letter of Intent: What's in the Contract?

98

(10)

Stockholders Agreement

106

(1)

Rights of First Refusal

107

(1)

Selling Stock, Privately...and Legally

108

(9)

If Reg. D Is Not Available?

114

(3)

Compensating Your Key Executives

117

(16)

The ``Carrot'' Approach: Equity Incentives

117

(2)

Stock Options

119

(1)

Incentive Stock Options

119

(2)

Nonqualified Stock Options

121

(1)

ISOs versus NSOs

122

(2)

``Grossing Up,''

124

(1)

Miscellaneous Items

124

(1)

The Carrot-and-Stick Approach: The Employment Agreement

124

(4)

Restrictions on Post-Employment Behavior: Noncompetition, Nondisclosure, and ``Work-for-Hire'' Clauses

128

(5)

How to Go to the Promised Land (i. e., Go Public)

133

(15)

Whether or Not to ``Go Public,''

134

(2)

Preparation for the Public Offering

136

(4)

Liability

140

(2)

``Directed Shares'' and ``Hot Issues''

142

(1)

Lock Ups and Other Obstacles to Liquidity

143

(5)

Financing with Strategic Investors: Joint Ventures

148

(8)

Typical Business Contexts

149

(2)

Negotiation Points

151

(4)

The Duty of Candor

155

(1)

Corporate Opportunity and Self-Dealing

155

(1)

Conclusion

156

(3)

Index

159

(8)

about the author

167

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Fundamentals of Venture Capital

Summary

Table of Contents

Supplemental Materials