A Bottom-Up Education in Venture Capital

Everybody has some understanding of what venture capitalists do, right?

  • They sell money
  • They invest in [technology] startups hoping to get 10x returns
  • They invest in people, not technology or companies
  • They invest in market segments, not companies or technologies
  • They take risk hoping to yield superior returns
  • They eliminate risk by systematically isolating it
  • Yes, they invest money, but the real value they provide is in support

Well maybe it’s not so clear. :-)

By the way, personally, I’d argue there is some truth in all of the above statements. But that’s not the purpose of this post. While the popular adages appeal to the big picture intuitive side of us, they leave one feeling rather empty when you want to understand VC at a more mechanical level. How do the deals work? What’s binding when? What shape to liquidation preferences and/or dividends take? How about anti-dilution? Just to mention a few of the items one runs into on a “term sheet.”

To help people better understand the rubber-meets-the-road mechanics of venture capital, I’d recommend carefully reading these template documents conveniently posted on the website of the National Venture Capital Association.

For example, you can find a sample term sheet, a sample stock purchase agreement, and a sample investor rights agreement, among others. This stuff isn’t for the faint of heart. But if you want to get a concrete sense for how these deals are structured and how some of the variously Draconian terms (e.g., full ratchet anti-dilution) work, then take a look at these documents.

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