One Book Every Entrepreneur and VC Should Own

Posted on Jul 25, 2011 | 28 comments


This article originally ran on TechCrunch.

tl;dr version:
If you’re an entrepreneur or VC or will be working in this industry - buy this. read it. live it.

When I first started as a startup CEO in 1999 there were no guides on raising venture capital. There were no explanations for all of the confusing details outlined in a term sheet.

Drag along rights? Um, OK. That sounds fine to me. I barely understood it. I asked my lawyer for an explanation. He gave me the human explanation for what the term meant. It sounded logical enough, so I moved on to the next point. Only later did I learn how it could be used to screw me.

Redemption rights? Sounds harmless enough. But know that every term in your term sheet is there as a result of some dispute of the past between shareholders or between shareholders & management.  Founders don’t often think about “primary” stock vs, “fully diluted” stock in terms of voting rights. I never did. VCs always know the voting thresholds and no number in your term sheet is there by accident.

To this day I’m still surprised how few CEOs really understand the differences between 2x liquidation preference and a liquidation preference with a 2x cap. Or what “participating preferred” stock is and how it can screw you. Or what “flat spots” on a cap table are.

If you want to see a quick summary of some terms & a video that walks you through how VCs view a cap table my colleague Kelly Hwang & I produced a quick tutorial here:

In fact, some of the biggest surprises I learned about term sheets were:

1) how the language never says anything remotely like “blocking rights” for terms that VCs want to use to block certain actions of your company. Liquidation preferences never say things like “participating preferred” although we all talk about it. It’s hidden in legal language. Blocking rights and liquidation preferences exist for rational reasons and when used properly are fair. Used egregiously and you’ll have problems later. You need to understand them.
2) how seldom lawyers walk you through the “how can this term be used against you” scenarios or the “pragmatic guide to VC terms” overview. They are helpful, certainly, but often if you don’t know the right questions to ask you’ll be left unawares.
3) VCs are anal about things like voting thresholds, seniority of their stock, protective provisions, etc. – entrepreneurs never seem to focus on anything other than ownership percentage.

It’s no surprise that I got a bit fawked on my first company. There was no guide. No book. VCs were negotiating with asymmetric information. Brad & Jason’s, Venture Deals, aims to change this.

I was significantly wiser by 2005 when I started my second company. Even so, I found myself reading Feld.com every day. I think that’s around the time when Brad & Jason did their famous “term sheet series,” which was the authoritative guide I never had the first time. I read every post several times.

This series inspired me to start my blog as a VC. I also decided never to spend much time on term sheets on my blog because they had already covered it far better than I thought I ever could (Jason was a lawyer with Cooley Godward, one of the top VC law firms, after all).

From there VentureHacks was then launched which gave entrepreneur advice on fund raising from your point of view. It is also a must read.

Now Brad & Jason have raised the bar. They’ve written this comprehensive book called Venture Deals that should be read by anybody dealing with funding of startups – whether you’re a startup CEO, CFO or other founder or whether you work in the ecosystem (lawyer, debt provider, banker, VC). It goes far beyond any other book I’ve seen on the topic in helping you understand the key terms, plan the negotiation and understand the motives of the various actors at the table.

It’s a gem. I think the industry works better when all sides are informed. The fact that Brad so routinely puts out information like this is what earned him the number one spot on this list of VCs that entrepreneurs most respect. And while Jason is less high profile as the ever-present Brad Feld, I think even Brad would acknowledge that when it comes to the knowledge supplied in a book like this, Jason is the man with the deep knowledge.

Let’s get rid of the information asymmetry problem. Every startup needs the knowledge in this book.

  • http://www.clubvision.tv Doug Wulff

    I just ordered mine + one day delivery  

  • Lee Fallon

    Thanks again Mark for another very useful blog. I am now away to order my copy of the book which will hopefully put me in a good position with some upcoming VC negotiations.

  • http://RogerEllman.com Roger Ellman

    Excellent hep and delivery of wisdom. Just the sort of intel we need.

    Thanks so much.
    Roger

  • http://www.ryanborn.net ryanborn

    priceless use of the urban dictionary!

  • http://dissertationtoday.com/ dissertations

    thanks a ot for the pos! very cool)

  • http://byJess.net Jess Bachman

    Brads other book was the most practical wisdom for the buck i’ve ever read. I suspect the ratio is high with this one as well.

  • http://www.competitionhunter.com Iain

    Ah yes, seen this being shared a lot recently :)

  • Scott Kriz

    Ordered thanks! Isn’t it annoying that you cannot get Amazon Associate revenue from this post now that Californian’s are not allowed to participate? Mark, any thoughts on that decision and do you think that it is temporary? 

  • http://twitter.com/entrepreneurdan Daniel A. Bernal

    In the  mail.. Thanks for the recommendation. 

  • New4u

    Brad’s a great assest to the VC community. I’m sure the book will be a success.

    http://innovativethinking.posterous.com/

  • http://twitter.com/BusinessPartnrs Business Partners

    It’s extremely vital that every entrepreneur educate themselves before taking the plunge. Thanks for recommending this book. Another helpful tome.

  • http://twitter.com/thejayemiller Jaye Miller

    Great post Mark. Both of Brad’s books have been invaluable to us as we are seek our first round of funding.

  • Anonymous

    Hi Mark,

    New to the site and blown away by all the useful information and shared knowledge. Will definitely get the book, and looking forward to the future entries and other resources.

  • http://blog.chargebee.com Krish

    Thanks so much for sharing a great list of resources Mark. Very helpful. 

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  • http://www.kineplay.com/ben Ben Milstead

    Great writeup, Mark. I’m about 30% through on iPad and it’s really fantastic. Tons of information, well written and easy to read.

  • http://www.demeterinteractive.com Jesse Bouman

    Thanks for the recommendation Mark.  I understand the CEO should be well informed, but shouldn’t your lawyer advise you what’s best for you rather than just explain the language in layman’s terms?  Is this where a startup law firm like Fenwick and West is advantageous to have rather than just any lawyer?  

  • Michael John Slavin

    Thank you for the suggestion, a necessary read for any entrepreneur!  An area it would be nice if the book got into in more detail is in the case of convertible debt and the pros and cons of a discount versus warrants.  If you wouldn’t mind me asking, what is your stance on this Mark?

  • http://www.smallbusinessbible.org Small Business

    Looks like an excellent book to me. Can’t wait to read it.

  • http://twitter.com/SwiitApps Locally, iPhone App

    Thanks. I just ordered my copy. 

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    Thanks so much for your continuing efforts on this.

  • http://twitter.com/AndySack Andy Sack

    Looks like a great book to learn from and I can’t wait to read it! 

  • Mike M

    When is Mark Suster’s book coming?

  • Scott Heller

    Fabulous book.  Required reading for all those in the startup ecosystem.

  • http://trabajox5.com Trabajos Medio Tiempo

    Man, just reading the first paragraph made me think I should order it right now! Seems pretty useful, not to say “VC for dummies”… Thanks 

  • Wesley Wise

    Interesting book. I might as well order one for future references. i’m sure it will be of great help. thanks for sharing. :)

  • http://www.aboutventurecapital.com Nate

    I just ordered mine on Amazon.  Woot! Woot!