Venture Hacks: The Cheat Sheet

We show you how to negotiate a great deal with VCs.
Why? Your investors know more than you do.
How? Venture Hacks—look below.
Want more? Read the blog.

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“Knowledge is Power.” – Sir Francis Bacon, 1st Viscount St Alban

Introduction #

  1. Get a great deal
    Read Term Sheet Hacks and learn how to negotiate a great deal with your Series A investors. Work with your lawyers to implement the hacks. We strongly recommend you read the full articles because the devil is really in the details.

Summary #

  1. Our top 10 term sheet hacks
    Slides from Venture Hacker Naval Ravikant’s presentation.

Pitching #

  1. Send an elevator pitch
    An introduction captures an investor’s attention, but a great elevator pitch gets a meeting. The major components of the pitch are traction, product, and team.
  2. Send a deck
    An introduction and elevator pitch are critical to getting a meeting. You can also provide a “ten-slide” deck that tells a compelling story about your team, product, traction, and plans.
  3. Determine whether you should send a deck
    A deck can help you get a meeting but it can also get in the hands of the competition. Whether you send a deck depends on who wants the meeting most. If you want the meeting more than they do, provide what they want. If they want the meeting more than you do, provide what you want. Finally, keep your secrets secret.
  4. Don’t send a business plan and don’t ask for an NDA
    Don’t send long business plans to investors. Don’t ask for NDAs. Don’t share information that must remain confidential. Understand that investors care about traction over everything else.
  5. Write a high concept pitch
    A high concept pitch distills a startup’s vision into a single sentence. It’s the perfect tool for fans and investors who are spreading the word about your company.

Negotiation #

  1. Create a market for your shares
    You need strong alternatives to hack a term sheet. Create alternatives with focus: pitch and negotiate with all your prospective investors at the same time. Focus compounds the scarcity and social proof which close deals. It also yields a quick yes or no from investors—either way, you will soon get back to building your business.
  2. Get first meetings.
  3. Get partners meetings.
  4. Get the first term sheet.
  5. Get a lead investor, Part 1
    Financings happen when you find a lead investor, negotiate a term sheet, and if there’s room, politely tell followers that they can take it or leave it. Alternatively, if you have a group of seed investors who aren’t asking you to find a lead, you can mass syndicate the round without a lead. Finally, ‘find a lead’ often means ‘no’.
    Part 2
    Here are 3 microhacks for finding a lead investor: (1) If followers have good reasons to not lead, ask them for introductions to potential leads. (2) If you’re early stage, find seed investors who invest in people and high risk startups. (3) If every prospective investor says “we don’t know the market,” find investors who have invested in your market or similar markets.
    Part 3
    Here are 2 more microhacks for finding a lead investor: (4) Incent followers to lead by telling them the truth: there probably won’t be room in the round for followers. (5) The best way to find a lead is to build something that attracts a lead: keep building your company and reducing risk.
  6. Improve your alternatives
    A deal is only as good as its best alternative. Keep improving your alternatives until you have a signed term sheet. And keep developing your current offers or they will die. Finally, don’t say “shopping around”, it puts investors off their stroke.
  7. Complete business diligence
    Complete business diligence and prepare for legal diligence before you sign a term sheet. Signing a term sheet early is a recipe for a hostage negotiation.
  8. Sign a term sheet.
  9. Close the deal.
  10. Trust, but verify
    Investors trust the entrepreneurs they back. But they verify their expectations with contracts and control. You should do the same—with the same tools investors use: contracts and control.

The Board of Directors #

  1. Create a board that reflects the ownership of the company
    Create a board of directors that reflects the ownership of the company and don’t let your investors control the board through an independent board seat.
  2. Make a new board seat for a new CEO
    Create a new board seat for a new CEO. Don’t give him one of the common seats.
  3. Control is a one way street
    Control is a one way street that runs towards investors. Control doesn’t run backwards toward founders or common stockholders. In each round of financing, the percentage of investor board seats goes up (or stays the same). Once the investors have more board seats than the common, you’ve lost control of the board and you’re never getting it back. Your best bet is to be stingy with board seats and hope you never have to raise a round without good leverage

Valuation #

  1. Beat the option pool shuffle and raise your valuation
    Don’t let your investors determine the size of the option pool for you. Use a hiring plan to justify a small option pool, increase your share price, and increase your effective valuation.
  2. Focus on your share price, not your valuation
    Focus on your share price and the number of shares you own — metrics like valuation and percent ownership can fool you.
  3. Build your own cap table
    A cap table shows you who owns what in your company. It calculates how the option pool shuffle and seed debt lower your Series A share price. This article includes a spreadsheet you can use to build your very own cap table.
  4. How to set the valuation for a seed round
    How much money do we need? How do we set a valuation from this budget? How do we express our valuation to investors? What’s the range for seed round valuations? How low do seed round valuations go? How much money can we raise in a seed round? How much dilution should we expect in a seed round?

Vesting #

  1. Get vested for time served
    Don’t agree to vest all of your shares just because it is supposedly “standard”. Get vested for time served building the business.
  2. Accelerate your vesting upon termination
    You made a commitment to the company by agreeing to a vesting schedule — the company should reciprocate and commit to you by granting acceleration upon termination.
  3. Accelerate your vesting upon a sale
    Negotiate some acceleration if you sell the company ahead of schedule — you don’t want to stay at the acquirer for an unreasonable period of time. Also negotiate 100% acceleration if the acquirer terminates you and deprives you of the ability to vest your stock.
  4. Supersize your vesting with microhacks
    Reclaim a terminated co-founder’s unvested shares. Run screaming from the right to purchase vested stock. Accelerate your vesting upon hiring a new CEO. Keep vesting as a consultant or board member.

Convertible Debt #

  1. Understand the benefits of convertible debt in a seed round
    Convertible debt is often the best choice for a seed round. It is convenient, cheap, and quick. It lets you close the financing quickly and turn your focus back to your customers—that’s good for the company and its investors.
  2. Compare the economics of debt vs. equity
    If you raise convertible debt for a seed round, you should negotiate simple and short documents, close quickly and cheaply, and maintain your options for the Series A. But first, determine if you should raise debt or equity—debt is better for small financings with small discounts.
  3. Make your debt attractive to investors
    Seed investors often argue that debt doesn’t incent them to (1) help the business and (2) increase the share price of the eventual Series A. Actually, (1) debt does incent investors to help the business and (2) equity may also incent investors to decrease the Series A share price. That said, you can make your debt much more attractive to investors with a few concessions.
  4. Keep your options open if you raise debt
    Raising convertible debt from venture capitalists can restrict your Series A options and lower your Series A valuation—whether or not your investors have a right of first refusal on the Series A. You can keep your options open by raising debt from angels exclusively or raising debt from more than one VC.
  5. Supersize your debt with these microhacks
    Convert your debt into equity if you can’t pay it on time. Determine your lender’s return if you sell the company early. Reserve the right to raise more debt. Finally, reserve the right to amend the debt agreement.

Protective Provisions #

  1. Understand why investors want protective provisions
    Protective provisions let preferred shareholders veto certain actions, such as selling the company or raising capital. They protect the preferred, who are minority shareholders, from unfair actions by the common majority. However, the preferred shouldn’t use protective provisions to serve their other interests.

Picking Investors #

  1. Unbundle money and value-add
    Smart money is money plus the promise of help that’s worth paying for, dumb money is money plus hidden harm, and mostly money is mostly money. Weed out the dumb money with diligence. Evaluate supposedly smart money with the smart money test. Finally, assume your investors are mostly money: unbundle money and value-add to get money on the best terms possible and value-add on the best terms possible.
  2. Hire investors for money-add and employees for value-add
    In one study from the Harvard Business School, investors refered 18% of hired executives, employees refered 65%, and “other sources” refered the remaining 17%. Investors do add value, but you should assume their primary contribution will be money. Most of your value-add will come from employees, not investors.

Lawyers #

  1. Lawyers are referees, not coaches
    Lawyers are referees, not coaches. Advisors are the coaches of the startup game. Lawyers say whether you can do something, within the confines of the law and your existing contracts. Lawyers will also write the contracts and do the filings. But they usually can’t tell you what to do—that’s what coaches do.
  2. Pay your investor’s legal bill
    Venture capitalists don’t want to pay their legal fees for financings. Don’t fight this term—that’s a “big move on a little issue.” Instead, cap your contribution to the investor’s legal bill. And watch the legal bills in small financings: don’t spend a large portion of the investment on lawyers or give up a lot of equity for the privilege of paying your investor’s legal bill.
  3. Let your lawyers invest instead of giving them free equity
    When lawyers defer their legal fees, they expect equity for the risk of not getting paid. If their risk is low or they’re not deferring fees, you can say no. In any case, offer them the right to invest $25K-$50K in your financing instead of giving them free equity.

Advisors

  1. Everything you ever wanted to know about advisors: Part 1
    What do advisors do? Should I put together a board of advisors? How do I get good advice? How do I apply advice? How do I find advisors? How can I tell if an advisor is any good?
  2. Everything you ever wanted to know about advisors: Part 2
    What should I pay advisors? What are advisory shares? Why should I pay advisors? When do advisors get terminated? Should I give advisory shares to my investors?
  3. Don’t follow our advice
    Advice is for learning, not copying. It is useful if it helps you perceive and evaluate the outcomes of today’s actions.

Budget

  1. Raise as much money as possible
    Raise as much money as possible. With these caveats: (1) maintain control at any cost, (2) monitor your liquidation preference, and (3) act like you don’t have a lot of money. Also understand that if you do raise a lot of money, you will have to (1) “go big or go home” and (2) make a lot of progress if you ever want to raise money again. Alternatively, if you would rather maintain your exit options, at least raise enough money to run two experiments.

Execution

  1. Speed as the primary business strategy
    Mike Cassidy’s talk on building companies fast is a must-read for all entrepreneurs.

Directions: For optimal results, apply each of these Term Sheet Hacks liberally before you sign a term sheet. Apply regularly at each term sheet thereafter.