Venture Deals 3.0
Like a great software product that keeps getting better and better as it ages, the classic book by Brad Feld and Jason Mendelson, Venture Deals, is now on its third version.
Here is the forward I wrote for the first version of the book and that continues to provide the opening context for it:
I remember the first week of my career as a VC. I was 25 years old, it was 1986, and I had just landed a summer job in a venture capital firm. I was working for three experienced venture capitalists in a small firm called Euclid Partners, where I ended up spending the first 10 years of my VC career. One of those three partners, Bliss McCrum, peeked his head into my office (I had an office in Rockefeller Center at age 25) and said to me, “Can you model out a financing for XYZ Company at a $9 million pre-money, raising $3 million, with an unissued option pool of 10%?” and then went back to the big office in the rear he shared with the other founding partner, Milton Pappas.
I sat at my desk and started thinking about the request. I understood the “raising $3 million” bit. I thought I could figure out the “unissued option pool of 10%” bit. But what the hell was “pre-money”? I had never heard that term. This was almost a decade before Netscape and Internet search so searching online for it wasn’t an option. After spending ten minutes getting up the courage, I walked back to that big office, peeked my head in, and said to Bliss, “Can you explain pre-money to me?”
Thus began my 31-year education in venture capital that is still going on as I write this.
The venture capital business was a cottage industry back in 1985, with club deals and a language all of its own. A cynic would say it was designed that way to be opaque to everyone other than the VCs so that they would have all the leverage in negotiations with entrepreneurs. I don’t entirely buy that narrative. I think the VC business grew up in a few small of offices in Boston, New York, and San Francisco, and the dozens—maybe as many as a hundred—of main participants, along with their lawyers, came up with structures that made sense to them. They then developed a shorthand so that they could communicate among themselves.
But whatever the origin story was, the language of venture deals is foreign to many and remains opaque and confusing to this day. This works to the advantage of industry insiders and to the disadvantage of those who are new to startups and venture capital.
In the early 2000s, after I wound down my first venture capital firm, Flatiron Partners, and before we started USV, I started blogging. One of my goals with my AVC blog (at www.avc.com) was to bring transparency to this opaque world that I had been inhabiting for almost 20 years. I was joined in this blogging thing by Brad Feld, a friend and frequent coinvestor. Club investing has not gone away and that’s a good thing. By reading AVC and Feld Thoughts regularly, an entrepreneur could get up to speed on startups and venture capital. Brad and I received a tremendous amount of positive feed- back on our efforts to bring transparency to the venture capital business so we kept doing it, and now if you search for something like “participating preferred” you will find posts written by both me and Brad on that first search results page.
Brad and his partner Jason Mendelson (a recovering startup lawyer turned VC) took things a step further and wrote a book called Venture Deals back in 2011. It has turned into a classic and is now on its Third Edition. If Venture Deals had been around in 1985, I would not have had to admit to Bliss that I had no idea what pre-money meant.
If there is a guidebook to navigating the mysterious and confusing language of venture capital and venture capital financing structures, it is Venture Deals. Anyone interested in startups, entrepreneurship, and angel and venture capital financings should do themselves a favor and read it.
Thanks for sharing. Being able to tell someone, especially a superior, that you don’t know something, and need help learning it, is a critical lesson. Being able to Google answers does not replace this. The person you ask will be able to provide context that will make your search more productive.
Agreed. The early version of this book plus your blog Fred we’re a huge help to me as I learned the VC business. after 12+ years now, I’m trying to give back in a small way. I co-author a weekly column on BetaKit.com called AskAnInvestor. Thanks and happy holidays!
The marketing on this book make it seem directed more at people on the entrep side of the table, your comment seems to point at the other side too.What are the top 3-5 must-read books on getting into or advancing in VC and Angel investing, for us holiday reading shoppers? Is this on that list?
We aimed it at everyone – entrepreneurs, VCs, angels, and lawyers.The Amazon best seller list has a good set of choices.https://www.amazon.com/gp/b…
For fun, I took the online class. It’s excellent and many points are eye-openers.
So did I. Great MOOC, great book (I read versions 2.0). I was part of a european peer group for the online course. Three of us (one english, one polish, one french) even met in a Paris café. Web to store applied to Venture Deals ! Thanks to Brad, Jason and Fred for their generosity.
Like textbooks, the price of this seems to increase with the new editions. I am reading Whiplash, on your recommendation, and added this to my anti-library.
The price has been the same since the first edition was released (hardcover $50). Wiley set the price – they decided it was between a business book and a textbook and chose a price that reflected that. Jason and I argued for a $26 price, but they told us it would end there on Amazon with the discounts, which is about where it ends up… Book pricing is a total mystery to me …
Interesting. On Amazon there is a older edition discount for the hard cover, which is the version I purchased. Amazon might get a preferred price because of its purchasing power.
Yeah – there is still some inventory of the 2nd edition but I expect that will be gone soon…
Indeed, the understanding of the basics of ventures is dificult for many persons, and there should be something helpful in such cases. Sometimes even higher education does not help. Moreover, the search of the proper sources is much more difficult, os there is almost nothing to orient for, like in case with the best essay writing services review or any feedback about the product.
As the book sub-title implies, it does make the entrepreneur smarter in dealing with their VCs and lawyers. Thing to remember than a new entrepreneur will be on their first or second deal, whereas VCs are on their hundredth. The book at least educates the entrepreneur and make them more knowledgeable in navigating the legal intricacies of raising money.
True but the true value for the young entrepreneur without real world experience is to develop a language to work with their attorneys and advisors so they can ask the right questions.No one does this alone.
Our goal with the book is to help the entrepreneur understand the language. Interestingly, many lawyers and VCs have told us that it’s also been helpful to them to have the same language to talk with entrepreneurs about the terms.
It is certainly helpful to explain concepts, and more importantly strategy. Venture finance isn’t just about getting the highest number you can.
Common language is everything in business–and in life actually.Thanks for putting this together Brad!
I did the Kauffman related-course for Venture Deals, and I highly recommend it, even for people outside the industry, such as myself. Speaking of books, I’m done with Whiplash — good fodder for thoughts, I thought.
Nice post – I have downloaded the e-book. Any heads up on the key areas where US Venture Deals might have significant structural or legal differences vs. UK Venture Deals? I’m based in London and looking to move from mid-market PE advisory into early stage VC.
There are some differences, but the fundamentals are the same. Jon Bradford (https://www.linkedin.com/in… has been talking about doing a UK addendum.
Nice one, thanks. I’ll see if I can get hold of him on LinkedIN and see how he’s getting on. Maybe if he’s not quite put pen to paper I can lend him my scribing services
The key phrase I remember hearing was: full-ratchet anti-dilution protection. What the hell was that? It was 1999 and I was running my first startup with 2 partners. We were educated quickly by our attorneys, but it would have been great to have had something like this book and AVC back then.
Would be fun to play a game with coinvestors to see who can get the most egregious legal terms into a signed term sheet. Full ratchet 4x participating preferred. Because a small piece of a big pie is better than a big piece of a small pie, and I add value.
The best advice is implicitly communicated in your foreword: if you don’t understand something, ask somebody, do research but don’t just assume it is harmless. Ask & think and rework until you understand every financing concept in a way that works for you.If its in the deal, there’s a scenario where it will apply.This foreword is why AVC exists, too.
I look forward to the day when majority of startups will go the Microsoft way rather than Apple way1. Bootstrap to IPO-The world so badly needs what you make that you can sell with good profit2. Founders retain complete control of their baby.3. Founders are answerable only to customers and not to investors which often creates conflicting priorities.With growing bubble it seems ulikely this day will come soon
i wonder if coming to understand the language of the venture capital industry too well might be a little corrupting of the spirit and ‘innocence’ of the creative entrepreneur? one should perhaps never know something too well. Plato and his cave.
Brilliant book that made me feel smarter and more knowledgable about stuff that seemed like Greek prior to reading it.One thing I wish for that would exist: A simulator that can take a term sheet or stock purchase agreement, parametrize the terms, and generate a liquidity waterfall for various scenarios for all stakeholders. It is one thing to understand what participating preferred is in theory, and another to see what happens when your company is sold for $1M, $10M or $100M, and who makes what. It is good to know the meaning of a full ratchet anti dilution clause, but it gets very real when you can see the implications on your cap table if the next round is at a discount.None of these things are as complex as they sound and it is harder for anyone to get away with an onerous or lopsided term, if all parties really understand what it means and how it exactly impacts their pocketbook for multiple future scenarios.Given the lifecycle of a typical startup, with its ups and downs, the leverage points shift across founders and varied investor classes over time. The instruments are really just a way to manage risk and reward for a stakeholder, and should reflect this dynamics. Books like Brad’s bring everyone to a level playing field on what something is, so that the focus shifts to the negotiation and the true risk /reward trade-off without anyone having an undue advantage.
The simulator you speak of is just a spreadsheet. Your VP finance should be able to help you build it. But you are right that there ought to be a customizable version in the public domain for those without finance backgrounds…
Yes, that’s how it is typically done. But most Startups don’t have a VP of Finance until Series B/C or later.I just think something that a)masks the complexity for the founders and b) gives a single tool for all stakeholders to understand the range of possible outcomes – constrained by the terms of all the stock purchase and debt agreements – is valuable. May not really be that hard to do it. I know eShares helps to manage the cap table and something like this fits into that naturally.
Yes – all good points
I would love to see this as a gaming simulation – think Lemonade Stand for start-up funding…. I’ve used some cool marketing simulation programs for teaching, and when students compete, they learn a ton more.
I have kindle version, do I get 3rd edition automatically or do I need to re-buy it?
I think it’s a rebuy as I don’t think Wiley does updates to previous editions, even on Kindle. But I’m not sure – can you check your Kindle and see if you got an update and post it here?
Same here (Kindle on iPad). It’s still the 2nd edition. Sad, but quite logical !
Brad – has anyone used this as a text book for a college curriculum?
Yes. Hundreds of courses now use it.
Awesome – just ordered a copy. Have been thinking about an MBA level course that would take an idea through lean start-up, then through a proposed Series A and B round, then an acquisition by a publicly traded company, Students would have to not only do the start-up work, but answer the why’s and how’s of VC investment and corporate acquisition strategy.
So lovely to read about your beginnings at Euclid Partners and to remember that that was when we originally met. Sweet memories of a long time ago . . . .
Venture Deals is one of the best books on the market for the novice entrepreneur. Along with Simon Sinek’s “Start With Why”, this one is a must read for each startup founder that I mentor. Brad and Jason did a GREAT job breaking down complex constructs and terms into simple to understand concepts.
Love the timing of this post; I just finished the book two weeks ago. One of the things that I really appreciated about the book (in addition to the common language it fostered) was how self-aware it seemed. It gives an honest and lighthearted look into the world of Venture Capital, which at times can be hard to come by.