Financial Mastery
by Brad Feld & Jason Mendelson
What's really in a term sheet?
A term sheet runs to a few pages, and it decides who gets paid and who makes the calls for years. Brad Feld and Jason Mendelson, venture capitalists at Foundry Group, wrote Venture Deals so founders could read one as well as the investors across the table.
Feld and Mendelson say VCs really care about two things. Economics is who gets what money when the company is sold. Control is who can say yes or no to big decisions. Most clauses fall into one pile or the other, and the ones that don't rarely matter much.
Pre-money valuation is what the company is worth before the new cash goes in. VCs usually want the option pool for future staff counted inside it, so the founders pay for the pool and the new investor doesn't. The authors suggest sizing the pool from a real hiring plan.
When the company is sold, investors holding preferred shares get their money back before anyone else. That's the liquidation preference. The authors split it into two parts, the preference itself and participation. With participation, investors take their money back and then also share in what's left.
Founders' own shares usually vest over time, often four years with a one-year cliff. Many founders resent this. Feld and Mendelson point out it protects them as well, because a co-founder who walks out after six months doesn't keep their whole stake.
A VC firm raises its fund from investors called limited partners. It earns a yearly management fee plus a share of the profits, called carried interest. The authors argue that knowing where a fund is in its life tells you whether it can still back your next round.
Two things
Most of a term sheet comes down to the money and who has control.
Pre-money
Pre-money value is what the company is worth before the new cash comes in.
Option pool
Watch where the option pool is counted. If it comes out of the pre-money value, founders pay for it.
Preference
A liquidation preference decides who gets paid first, and how much, when the company is sold.
Anti-dilution
Anti-dilution terms protect investors if a later round is priced lower. Weighted average is fairer than full ratchet.
One thing to try
Take your cap table, or a made-up one, and pick a sale price. Work out what each person receives with a simple 1x preference, then again with participation. Ten minutes in a spreadsheet shows you which clause is worth fighting over before anyone sends a term sheet.
Knotd has the key ideas from 250+ non-fiction books, each in a few minutes, in plain words. Venture Deals comes with a Name That Idea round and a Your Move story to make it stick.
Get the whole book on KnotdOpen in the appWhat's really in a term sheet? A term sheet runs to a few pages, and it decides who gets paid and who makes the calls for years. Brad Feld and Jason Mendelson, venture capitalists at Foundry Group, wrote Venture Deals so founders could read one as well as the investors across the table.
Economics and control; The pool hides in the price; Who gets paid first; Founders vest too; How the VC gets paid.
Take your cap table, or a made-up one, and pick a sale price. Work out what each person receives with a simple 1x preference, then again with participation. Ten minutes in a spreadsheet shows you which clause is worth fighting over before anyone sends a term sheet.
Yes. Knotd has the key ideas from Venture Deals in a few minutes, in plain words, plus a Name That Idea round and a Your Move story to test them. It's one of 250+ non-fiction books in the app.
