concentration of venture-backed companies in the US public markets since 1974: Gornall and Strebulaev, “The Economic Impact of Venture Capital.”
Chapter Three: How Do Early-Stage VCs Decide Where to Invest?
“I knew nothing about airlines”: “Herb Kelleher: Father of Low-Cost Airline Travel Dies at 87,” BBC News, January 4, 2019, https://www.bbc.com/news/world-us-canada-46755080.
Chapter Four: What Are LPs and Why Should You Care?
Financing a whaling venture: Tom Nicholas and Jonas Peter Akins, “Whaling Ventures,” Harvard Business School Case Study 9-813086, October 2012 (revised December 9, 2013).
the 1930s passage of the Glass-Steagall Act: Kurt Jaros, “The Men Who Built America: J. P. Morgan,” Values & Capitalism,” http://www.valuesandcapitalism.com/the-men-who-built-america-j-p-morgan.
the endowment tops $25 billion: Josh Lerner, “Yale University Investments Office: February 2015,” Harvard Business School Case Study 9-815-124, April 2015; Yale Investments Office, 2016 Yale Endowment.
Chapter Six: Forming Your Startup
$245 million in Uber equity paid to Waymo: Aarian Marshall, “Uber and Waymo Abruptly Settle for $245 Million,” Wired, February 9, 2018, https://www.wired.com/story/uber-waymo-lawsuit-settlement.
US Congress passed in 2002 the Sarbanes-Oxley Act: Sarbanes-Oxley Act of 2002, July 30, 2002, https://www.govinfo.gov/content/pkg/STATUTE-116/pdf/STATUTE-116-Pg745.pdf.
SEC began promulgating various rules: Nicole Bullock, “SEC Urged to Review Rules for Equity Market Trading,” Financial Times, March 30, 2017, https://www.ft.com/content/ac12e7b0-14c9-11e7-80f4-13e067d5072c.
Chapter Eight: The Art of the Pitch
for $1 billion: Megan Garber, “Instagram Was First Called ‘Burbn,’” Atlantic, July 2, 2014, https://www.theatlantic.com/technology/archive/2014/07/instagram-used-to-be-called-brbn/373815.
Chapter Thirteen: In Trados We Trust
Burbn later pivoted into the photo-sharing space: Garber, “Instagram Was First Called ‘Burbn.’”
Trados raised a total of $57.9 million: In re Trados Incorporated Shareholder Litigation, 73 A.3d 17 (Del. Ch. 2013).
“did not have a realistic chance of generating a sufficient return:” In re Trados Incorporated Shareholder Litigation, p. 111.
Chapter Fourteen: Difficult Financings
WARN Act: Worker Adjustment and Retraining Notification of 1988, https://www.law.cornell.edu/uscode/text/29/chapter-23.
Chapter Fifteen: Exit Stage Left
filing an IPO under the JOBS Act: Equity Capital Formation Task Force, From the On-Ramp to the Freeway: Refueling Job Creation and Growth by Reconnecting Investors with Small-Cap Companies (November 11, 2013).
trading at nearly four times its IPO price: Shayndi Raice, Ryan Dezember, and Jacob Bunge, “Facebook’s IPO Sputters,” Wall Street Journal, updated May 18, 2012, https://www.wsj.com/articles/SB10001424052702303448404577411903118364314.
ABCDEFGHIJKLMNOPQRSTUVWXYZ
INDEX
The page numbers in this index refer to the printed version of this book. The link provided will take you to the beginning of that print page. You may need to scroll forward from that location to find the corresponding reference on your e-reader.
Note: Page numbers in italics refer to illustrations.
accelerated vesting, 99–101, 186–187, 250–251
Accel Partners, 39–40, 86–87, 137
accredited investors, 35–36
acquisitions, 248–257
and board responsibilities, 254–257
and employees’ job status, 251, 255
and escrow accounts, 252–253
and exclusivity periods, 253
exit of VC following, 2
and fiduciary duty questions, 226, 236
and indemnification, 253
and networking and building relationships, 248
price and price protection in, 249
and publicly traded companies, 259–260
and shareholders’ approval, 252
terms of, 249–254
and Trados case, 224
and vesting, 100, 250–251
adaptability, value of, 136–137
aggregate proceeds, 142, 278
Airbnb, 45–46, 52, 127
Amazon, 11, 25, 41
Amazon Web Services, 12, 13, 271
Andreessen, Marc
and Andreessen Horowitz, 21–22, 270
angel investing, 19
on founders’ leadership capabilities, 47
interview with, 12–13
and LoudCloud, 12–13
and Netscape, 14
Andreessen Horowitz (a16z)
active support exercised by, 3
author’s experience at, 2, 8
competitive differentiation of, 270, 273
and evolution of VC industry, 270, 273
founding of, 21–22
growth of, 22
angel investing. See early-stage financing/investors
antidilution provisions in term sheets, 165–167, 193–196, 280–281
Apple, 25, 41
aspirin/vitamin analogy, 50
asset classes, 29–30
attorneys and law firms, 91, 102, 125, 286
bankruptcies, 2
banks and bankers
and ensuring a good process in acquisitions, 229
and initial public offerings, 260–261
loans from, 26, 27–29, 54
batting average of venture capital, 37–40
BigFix, 46
Black-Scholes option model, 78
Blank, Steve, 45
Bloodhound case, 236–239
board of directors, 199–209
and acquisitions (Revlon duties), 254–255
and business judgment rule (BJR), 216–218, 222
and CEOs, 171, 202–204, 207–209
cofounders’ seats on, 97–98
and common vs. preferred shareholders, 215–216
and compensation, 204–205
and compliance and good corporate governance, 206–207
and conflicts (see conflicts of interest)
and D&O insurance, 183
and drag-along provisions in term sheets, 182
and dual fiduciaries, 201–202, 212
duty of candor, 215
duty of care, 211–212, 215, 217
duty of confidentiality, 212–215
duty of loyalty, 212, 215, 218
and employee option pools, 205
and entire fairness rule, 218–220, 222, 226–229
good processes exercised by, 217–218, 229–230, 231, 237–238
involvement of VCs on, 28
and meeting agendas, 209
and meeting minutes, 239
networks of, 208
overreach of, 207–209
and preferred shareholders, 215–216
private versus public, 200–202
role in approving corporate actions, 204–206
role in guiding strategic direction, 203–204
term sheets on, 171–173, 281
VC-specific roles on, 207
bonds, 59, 60, 63
branding, 258
Breyer, Jim, 86
bridge financing, 233
Burbn, 130, 213
business judgment rule (BJR), 216–218, 222
Butterfield, Stewart, 137
buyout funds and investors
control exercised by, 16–17
and economic incentives of GPs, 73
and opportunity cost of money, 83
as private equities, 57
size of industry, 41
and Yale University endowment, 62, 64
Caldwell, Dalton, 213
“calling capital,” 72, 75
Campbell, Bill, 17–18
candor, duty of, 215
capitalization in term sheets, 154, 278
capitalization tables, 190–196
capital required for startups, 20, 270–271
capped/uncapped notes, 143
cardinal sins of venture capital, 44, 50–51, 179–180
care, duty of, 211–212, 215, 217
carried interest, 74–77, 82
Carsanaro v. Bloodhound Technologies, 236–239
Casado, Martin, 45, 131–132
cash
as deflationary hedge, 59, 63
role of, 17–18
and Yale University endowment, 63
“cashless exercise option,” 184–185
C Corporations, 92–94
chief executive officers (CEOs)
and board of directors, 171, 202–204, 207–209
compensation of, 205–206
and informal coaching by VCs, 207
and over-involvement of VCs, 203
of publicly traded companies, 268
role of, 199
strategic direction of, 203–204
Chinese wall strategy for managing conflicts, 214, 215
choosing a venture capital firm
and ability to raise new funds, 67–68
and life cycles of funds, 66–67, 68
and state of fund, 84
Cisco, 11
clawbacks, 80–81
closing the company, 243–246
cloud computing, 20
cofounders, 94, 96–101
Columbus, Christopher, 53
commodities investments, 58
“common-controlled” boards, 172
common stock/shareholders
about, 93, 141
and acquisitions, 252, 254–255
and Bloodhound case, 236–239
conversion of preferred shareholders to, 160–165, 177, 235, 280
and dilution of equity, 154, 167
and dividends, 155
and drag-along provisions in term sheets, 182
and fiduciary duty of board members, 211–215, 216, 231
and liquidation preference, 157, 158
representation of, on board, 171, 172
separate vote for, 230
and stock restrictions in term sheets, 181
“company-first company” concept, 44–45
comparable company analysis valuation method, 77–78, 79, 149–150
comparing finance deals, 189–198
and capitalization tables, 190–196
and governance terms, 196–198
compensation, 204, 244
competing companies, 212–215
competition for venture capital, 271–272
compliance, maintaining, 206–207
confidentiality
addressed in term sheets, 285
duty of, 212–215
conflicts of interest
anticipation/understanding of, 228, 230–231, 239
and Bloodhound case, 237
and duty of confidentiality, 213–214
managing, 214, 215, 230–231
resulting from a pivot, 213–214
and Trados case, 222–226, 228
“control” investments, 16–17
conversion/auto-conversion to common shares, 160–165, 177, 235, 280
convertible debt/notes, 142–147, 148, 233
corporate pension funds, 55
corporate structure for startups, 92–94
corporate veil, protecting against piercing, 206–207
co-sale agreements, 181
creditors, 245, 246
Credit Suisse First Boston, 12, 13
crowdfunding, 36, 273, 274
customer acquisition, 135–136
D&O (directors & officers) insurance, 183, 284
debt
equity vs., 26–29
and winding down the company, 246
Decimalization and Regulation NMS (National Market System), 107
deflationary hedges, 59, 63
Delaware, 174
difficult financings, 232–246
and Bloodhound case, 236–239
and bridge financing, 233
and fiduciary duty questions, 232, 236, 237
reducing/eliminating liquidation preferences, 234–236
and reverse splits of stock holdings, 235–236
success following, 239–242
and winding down the company, 243–246
See also down-round financing; recapitalizations
dilution of equity
about, 120
and antidilution provisions in term sheet, 165–167, 193–196, 280–281
balancing incenting against, 146–147
and down rounds, 165–166, 167, 237
and employee option pools, 240
and pro rata investments, 178–180
and reverse splits of stock holdings, 235–236
Dimon, Jamie, 133
discounted cash flow analyses, 150–153
discount rates, 150–151
distribution of returns for venture capital, 30–32, 31, 35, 38, 40
diversification, 36
dividends, 154–155, 279
Dixon, Chris, 48
“DLOM” (discount for lack of marketability), 77–78
Doerr, John, 43, 112
domestic equities, 61–62
Dorsey, Jack, 133
dot.com boom/bust
and buyout investors, 16–17
general outlook during, 9–11
initial public offerings during, 9–10, 15
and LoudCloud, 12–18
and Nasdaq index, 10–11, 15
pace of VC investment during, 10
and public markets, 10–11
and Yale University endowment, 64–65
double-trigger acceleration, 186–187, 250–251
down-round financing
and Bloodhound case, 237
defined, 165
and dilution of equity, 165–166, 167, 237
and fiduciary duty questions, 232, 236, 237
and management incentive plans, 241–242
purpose of, 234
success following, 234, 239–242
and winding down the company, 234
drag-along provisions in term sheets, 182–183, 252, 284
dual-class stock, 160, 168–169
dual fiduciaries, 201–202, 212
duty of candor, 215
duty of care, 211–212, 215, 217
duty of confidentiality, 212–215
duty of loyalty, 212, 215, 218
early-stage financing/investors (angels or seed investors)
and convertible notes, 28, 144
emergence of, 271
of Horowitz and Andreessen, 19
and Silicon Valley community (2007), 19
as source of referrals for VCs, 125
and valuation of startups, 153
economic impact of venture-backed companies, 3–4, 41
Edison, Thomas, 53–54
Edison General Electric, 53–54
egomania in founders, 47–48
Electronic Data Systems (EDS), 18
emerging growth companies (EGCs), 261–263
employee option pools, 103–106
board’s role in managing, 205
and capitalization tables, 190–191
fol
lowing difficult financings, 240–241
size of, 154, 177, 205
employees
cash-equity tradeoff of, 184, 185
and common stock, 93
compensation of, 244
and employment offers in acquisitions, 251, 256
and non-disclosure agreements, 187, 285
rights to technologies created by, 187, 285
and vacation policies, 244–245
and valuation, 121–122
and vesting, 183
and WARN statutes, 243–244
and winding down the company, 243–245
endorsement of a company, venture capital as, 43–44
endowments, 54–55
entire fairness rule, 218–220, 222, 226–229, 237
entrepreneurs
and declining capital requirements for startups, 20, 270–271
equity held by, 145
goals/objectives of, 5
and information asymmetry, 5, 140, 275
power balance with VCs, 20–21
role of, in venture capital, 29
See also founders
E.piphany, 12
equity financing, 26–29
equity partners agreement, 88–89
escrow accounts, 252–253
evaluation of early-stage companies, 42–52
and company vs. product-first companies, 44–45
and good ideas that look like bad ideas, 48
and idea maze of founders, 49, 135
and limited/imperfect data, 34, 42
and market size, 50–52
people/team considerations in, 43–48
and products, 48–50
evolution of venture capital industry, 270–273
exclusivity periods, 253
exiting options of venture-backed companies, 2. See also acquisitions; initial public offerings (IPOs)
Facebook
Accel Partners’ investment in, 39–40, 86–87
initial public offering of, 264, 272–273
and Instagram, 130
product-market fit of, 45
unprecedented success of, 272
VC funding behind, 25, 41
failed VC investments, 3, 37–38, 51
failures, discussing, 131
Federal Reserve, U.S., 11
fiduciary duties
and Bloodhound case, 236–239
to debt holders, 246
in difficult financing scenarios, 232, 236, 237