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Venture Capital Handbook: An Entrepreneur’s Guide to Raising Venture Capital

Book Description

In Venture Capital Handbook: Revised and Updated Edition, leading venture capitalist David Gladstone and Laura Gladstone walk you step-by-step through the entire VC funding process, showing exactly how to get funded fast -- without the trauma. This end-to-end update of the classic VC guide covers the latest techniques, tax rules -- and, above all, marketplace realities.

Table of Contents

  1. Copyright
  2. Introduction
  3. Acknowledgments
  4. 1. Anyone Can Raise Venture Capital
    1. I'll Back You
    2. What Is Venture Capital?
    3. When Did Venture Capital Begin?
    4. Types of Venture Capital
      1. Private Limited Partnerships
      2. Publicly Traded Funds
      3. Corporate Venture Capital
      4. Angel Investors
    5. Where Can You Find Venture Capital?
    6. How Do Venture Capital Companies Invest in Businesses?
    7. What Types of Business Do VCs Back?
      1. Start-Up Stage or First-Round Financings
      2. Development Stage or Second-Round Financings
      3. Expansion Stage or Third-Round Financings
      4. Growth Stage or Fourth-Round Financings
      5. Leveraged Buy-Out Financings
      6. Turnaround Situations
      7. Public Offerings
    8. Which Industries Do Venture Capitalists Prefer?
    9. What Types of Products or Services Do Venture Capitalists Prefer?
    10. How Much Venture Capital Is Available?
    11. Opportunities Available for Entrepreneurs
    12. Can You Raise Venture Capital?
    13. How Much Money Should You Seek?
    14. What Type of Funds Are You Seeking?
      1. Common Stock
      2. Preferred Stock
      3. Convertible Debenture
      4. Loan with Warrants
    15. How Will the Venture Capitalist Be Involved?
    16. How to Select a Venture Capital Company
    17. Should You Phone the Venture Firm?
    18. Other Questions for the Venture Capitalist
    19. How Long Does It Take to Get the Money?
    20. Myths About Venture Capital
      1. Myth 1
      2. Myth 2
      3. Myth 3
      4. Myth 4
      5. Myth 5
      6. Myth 6
      7. Myth 7
    21. Objective
  5. 2. Summary Presentation
    1. What Does a Summary Look Like?
    2. Why Is the Venture Capitalist Interested?
    3. How to Complete a Summary
      1. Company
      2. Contact
    4. Type of Business
      1. Business Summary
      2. Management
      3. Product/Service and Competition
      4. Funds Requested
      5. Collateral
      6. Use of Proceeds
      7. Financial History
      8. Financial Projections
      9. Exit
      10. Structure
    5. What Kind of Cover Letter Is Needed?
    6. Strategic Use of Summary
    7. Another Kind of Venture Capital
      1. What Makes It Exciting?
    8. Perspective for Your Summary
    9. What Do Venture Capitalists Think About Summaries?
    10. Confidentiality of Your Great Idea
    11. Objective
  6. 3. The Proposal
    1. Should You Use a Broker or Consultant?
    2. Most Important Quality of a Business Proposal
      1. PART 1. SUMMARY
      2. PART 2. BUSINESS AND ITS FUTURE
        1. 2.01. General.
        2. 2.02. Nature of the Business.
        3. 2.03. Business History.
        4. 2.04. Business of the Future.
        5. 2.05. Uniqueness.
        6. 2.06. Product or Service.
        7. 2.07. Customers or Purchasers of the Product.
        8. 2.08. Industry or Market.
        9. 2.09. Competition.
        10. 2.10. Marketing.
        11. 2.11. Production.
        12. 2.12. Production Characteristics.
        13. 2.13. Labor Force and Employees.
        14. 2.14. Suppliers.
        15. 2.15. Subcontractors.
        16. 2.16. Equipment.
        17. 2.17. Property and Facilities.
        18. 2.18. Patents and Trademarks.
        19. 2.19. Research and Development.
        20. 2.20. Litigation.
        21. 2.21. Government Regulations.
        22. 2.22. Conflicts of Interest.
        23. 2.23. Backlog.
        24. 2.24. Insurance.
        25. 2.25. Taxes.
        26. 2.26. Corporate Structure.
        27. 2.27. Publications and Associations.
      3. Part 3. The Management
        1. 3.01. Directors and Officers.
        2. 3.02. Key Employees.
        3. 3.03. Management Fidelity.
        4. 3.04. Remuneration.
        5. 3.05. Stock Options.
        6. 3.06. Stock Option Plan.
        7. 3.07. Principal Shareholders.
        8. 3.08. Employment Agreements.
        9. 3.09. Conflict of Interest.
        10. 3.10. Consultants, Accountants, Lawyers, Bankers, and Others.
      4. Part 4. Description of The Financing
        1. 4.01. Proposed Financing.
        2. 4.02. Capital Structure.
        3. 4.03. Collateral for the Financing.
        4. 4.04. Guarantees.
        5. 4.05. Conditions.
        6. 4.06. Reporting.
        7. 4.07. Use of Proceeds.
        8. 4.08. Ownership.
        9. 4.09. Dilution.
        10. 4.10. Fees Paid.
        11. 4.11. Investor Involvement.
      5. Part 5. Risk Factors
        1. 5.01. Limited Operating History.
        2. 5.02. Limited Resources.
        3. 5.03. Limited Management Experience.
        4. 5.04. Market Uncertainties.
        5. 5.05. Production Uncertainties.
        6. 5.06. Liquidation.
        7. 5.07. Dependence on Key Management.
        8. 5.08. What Could Go Wrong?
        9. 5.09. Other Items.
      6. Part 6. Return on Investment and Exit
        1. 6.01. Public Offering.
        2. 6.02. Sale to Another Company.
        3. 6.03. Buyback.
        4. 6.04. Return on Investment.
      7. Part 7. Analysis of Operations and Projections
        1. 7.01. General.
        2. 7.02. Ratio Analysis.
        3. 7.03. Results of Operation.
        4. 7.04. Financial Conditions.
        5. 7.05. Contingent Liabilities.
      8. Part 8. Attachment: Financial Statements
      9. Part 9. Attachment: Financial Projections
      10. Part 10. Product Literature, Brochures, Articles, and Pictures
    3. Do You Really Need All of This?
    4. What Is the Venture Capitalist Really Looking For?
      1. Uniqueness
      2. Management
      3. Projections
      4. Exit
    5. How to Package Your Proposal
      1. Copies
      2. Style of Type
      3. Graphs and Pictures
      4. Copying Articles
      5. Cover
      6. Binding
    6. How Many Venture Capitalists Should Be Contacted?
    7. Syndications
    8. Objective
  7. 4. A Thousand Questions
    1. What Are the Major Questions?
      1. Uniqueness
      2. Management Team
      3. Projections and Return on Investment
      4. Exit
    2. Business Proposal Questions
      1. Part 1. Summary
      2. Part 2. Business and Its Future
        1. 2.01. General.
        2. 2.02. Nature of the Business.
        3. 2.03. Business History.
        4. 2.04. Business of the Future.
        5. 2.05. Uniqueness and Compelling Story.
        6. 2.06. Product or Service.
        7. 2.07. Customers or Purchasers of the Product.
        8. 2.08. Backlog.
        9. 2.09. Industry or Market.
        10. 2.10. Competition.
        11. 2.11. Marketing.
        12. 2.12. Production.
        13. 2.13. Production Characteristics.
        14. 2.14. Labor Force and Employees.
        15. 2.15. Suppliers.
        16. 2.16. Subcontractors.
        17. 2.17. Equipment.
        18. 2.18. Property and Facilities.
        19. 2.19. Patents and Trademarks.
        20. 2.20. Research and Development.
        21. 2.21. Litigation.
        22. 2.22. Government Regulations.
        23. 2.23. Conflicts of Interest.
        24. 2.24. Insurance.
        25. 2.25. Taxes.
        26. 2.26. Corporate Structure.
        27. 2.27. Publications and Associations.
      3. Part 3. Management
        1. 3.01. Directors and Officers.
        2. 3.02. Key Employees.
        3. 3.03. Management Fidelity.
        4. 3.04. Remuneration.
        5. 3.05. Stock Options.
        6. 3.06. Stock Option Plan.
        7. 3.07. Principal Shareholders.
        8. 3.08. Employment Agreements.
        9. 3.09. Conflicts of Interest.
        10. 3.10. Consultants, Accountants, Lawyers, Bankers, and Others.
      4. Part 4. Description of the Financing
        1. 4.01. Proposed Financing.
        2. 4.02. Capital Structure.
        3. 4.03. Collateral for the Financing.
        4. 4.04. Guarantees.
        5. 4.05. Conditions.
        6. 4.06. Reporting.
        7. 4.07. Use of Proceeds.
        8. 4.08. Ownership.
        9. 4.09. Dilution.
        10. 4.10. Fees Paid.
        11. 4.11. Investor Involvement.
      5. Part 5. Risk Factors
        1. 5.01. Limited Operating History.
        2. 5.02. Limited Resources.
        3. 5.03. Limited Management Experience.
        4. 5.04. Market Uncertainties.
        5. 5.05. Production Uncertainties.
        6. 5.06. Liquidation.
        7. 5.07. Dependence on Key Management.
        8. 5.08. What Could Go Wrong?
        9. 5.09. Other Items.
      6. Part 6. Return on Investment and Exit
        1. 6.01. Public Offering.
        2. 6.02. Sale.
        3. 6.03. Buyback.
        4. 6.04. Return on Investment.
      7. Part 7. Analysis of Operations and Projections
        1. 7.01. General.
        2. 7.02. Ratio Analysis.
        3. 7.03. Results of Operation.
        4. 7.04. Financial Conditions.
        5. 7.05. Contingent Liabilities.
      8. Part 8. Financial Statements
      9. Part 9. Financial Projections
      10. Part 10. Product Literature, Brochures, Articles, and Pictures
    3. Other Information the Venture Capitalist Will Need
      1. References on the Business
      2. References on Key Employees
      3. Bankers, Lawyers, Accountants, and Consultants
      4. Largest Suppliers
      5. Largest Purchasers
      6. Backlog
      7. Aging of Accounts Receivable
      8. Aging of Accounts Payable
      9. Debts and Terms Summarized
      10. Leases
      11. Tax Returns
      12. Other Government Data
      13. Union Contract
      14. Personal Financial Statements
      15. Long Resume
    4. Will the Venture Capitalist Ask All These Questions?
    5. Objective
  8. 5. Meetings and Negotiations
    1. The Office of the Venture Capitalist
    2. What Do Venture Capitalists Look Like?
    3. How Long Will the Meeting Last?
    4. What Is the Object of the Meeting?
    5. What Happens in a Typical Meeting With a Venture Capitalist?
    6. What Type of Presentation Should Be Made?
    7. What is The Primary Characteristic The Venture Capitalist is Seeking in an Entrepreneur?
    8. What Are the Other Characteristics of the Entrepreneur?
      1. Honesty
      2. Desire to Win
      3. Energy
      4. Intelligence
      5. Knowledge
      6. Leadership
      7. Creativity
    9. Know Your Stuff
    10. Things You Do Not Say to the Venture Capitalist
      1. Big Plans
      2. Make Money
      3. Honesty
    11. Things Not to Do in the Meeting
      1. Do Not Avoid Answering Questions and Do Not Give Vague Answers
      2. Do Not Hide Significant Problems
      3. Do Not Bring Your Lawyer to the Negotiations
      4. Do Not Press for an Immediate Decision
      5. Do Not Be Rigid in Pricing
    12. How to Negotiate in the First or Subsequent Meetings
    13. How to Cut the Deal
    14. Ownership by the Venture Capitalist
    15. How Do Venture Capitalists Price Investments?
      1. Entrepreneur's Investment
      2. Upside Potential
    16. Downside Risk
      1. Additional Funds
      2. Public Offering or Exit
    17. After the Negotiations
    18. Objective
  9. 6. The Commitment Letter
    1. Commitment Letters
    2. What Is In the Commitment Letter?
      1. Section 1: Terms of the Investment
      2. Section 2: Collateral and Security
      3. Section 3: Conditions of the Investment
      4. Section 4: Representations
      5. Section 5: Conditions of Commitment
    3. Comments on the Commitment Letter
    4. What Is An Investment Memorandum or Term Sheet?
      1. Section 1: Term of the Investment
      2. Section 2: Collateral and Security
      3. Section 3: Conditions of the Investment
      4. Section 4: Representations
      5. Section 5: Conditions of the Commitment
    5. Consulting Agreement
      1. Voting Trust
    6. Nonlegal Commitment Ltetter
    7. Arguing Over Minor Points
    8. Items You Should Not Sign in the Commitment Letter
    9. Objective
  10. 7. Due Diligence
    1. What to Expect From a Visit to Your Business
    2. How to Give a Good Cook’s Tour
      1. Additional Questions About the Proposal
      2. Additional Questions About the Business
      3. Additional Questions About Management
    3. Investigating the Individuals
    4. Investigating the Individuals
    5. Other Aspects of the Background Check
    6. Do They Have a Test for Entrepreneurs?
    7. Experience Is the Watchword
    8. Investigating the Entrepreneur and the Team
    9. Questions for Other People in the Organization
    10. Investigating the Business, the Product, and the Industry
      1. Industry Study
      2. Uniqueness of the Product
      3. Questions for Business References
    11. When the Venture Firm Finds Something Wrong
    12. Questions for the Venture Capitalist
      1. Question One—Money to Invest
      2. Question Two—Review of Proposal
      3. Question Three—Available Time
      4. Question Four—Interest in the Industry
      5. Question Five—Other Venture Firms To Contact
    13. Background Information on the Venture Capital Company
    14. Timing Questions for the Venture Capitalist
    15. Objective
  11. 8. The Closing
    1. First Closing: Legal Documents For Loans With Options
      1. Document One: The Loan Agreement
      2. Document Two in the First Closing: The Note
      3. Document Three in the First Closing: The Stock Purchase Option
      4. Other Documents: Exhibits
    2. Simple Is Good
    3. Unethical Venture Capitalist
    4. Second Closing: Legal Documents for the Purchase of Preferred Stock
      1. Stock Purchase Agreement
      2. Stock Certificate
    5. Lawyers as Businesspeople
    6. Experienced Lawyers Are Best
    7. Legal Fees Keep Going Up
    8. How Lawyers Run Up Your Legal Bill
      1. Disagree on Legal Points
      2. Rewrite Sections
      3. Research Points of Law
      4. Legal Style
      5. Arguments
      6. Questionable Legal Practices
    9. Syndications and Lawyers
    10. The Closing: A Moment of Truth
    11. Closing Fees That You Pay
    12. Closing Fees That You Pay
    13. Objective
  12. 9. Working Together
    1. Major Policy Decisions Should Be Joint Ones
    2. Monthly Financials
      1. Weekly Cash Flow Uses and Forecast of Uses
      2. A Monthly Report Is Mandatory
    3. Hold Board or Investor Meetings at Least Monthly
    4. Other Discussion Items for the Venture Capitalist
    5. You Are Building Confidence
    6. Warning Signals to the Venture Capitalist
      1. Late Payments
      2. Losses
      3. Late Financial Reports
      4. Poor Financial Reports
      5. Large Changes in Your Balance Sheet
      6. Unavailable Entrepreneur
      7. Large Thefts or Unexplainable Disasters
      8. Major Adjustments in Figures
    7. Why Entrepreneurs Have Financial Problems
      1. The Financial Control Problem
      2. The Undercapitalization Problem
    8. Why Entrepreneurs Have People Problems
      1. Poor Job Definition
      2. Poor Selection Process
      3. Poor Incentives to Management
      4. Poor Review Program
      5. Poor Development Program
    9. The Protean Entrepreneur
      1. Problem Solvers
      2. Able to Grow Personally
      3. Set Internal Goals
      4. Understand Downside Risk
      5. Rehearse Coming Actions
    10. When You Have Problems
    11. Analysis of the Situation
    12. What the Venture Capitalist Will Do
      1. 1. Fix the Problem
      2. 2. Sell the Business
      3. 3. Foreclosure
      4. 4. Bankruptcy
      5. 5. Liquidate
    13. Ten Things Not to Say
    14. Secret of a Successful Relationship
    15. Venture Capitalist as Board Member
    16. Degree of Involvement by the Venture Capitalist
      1. Amount Invested
      2. Need for Assistance
      3. Management's Willingness to Accept Advice
      4. Experience in Certain Areas
      5. Lead Investor
      6. Distress of Company
      7. Relationship with Entrepreneur
      8. Time Availability
      9. Venture Capitalist’s Objectives
    17. Objective
  13. 10. The Exit
    1. It's All a Matter of Price
    2. First Method: Going Public
      1. When to Go Public
      2. Why You Should Have a Public Offering
      3. Why You Should Not Have a Public Offering
      4. Underwriter's Fees and the Public Offering
      5. Selection of a Brokerage House for the Public Offering
    3. Second Method: Purchase by the Company or Entrepreneur
    4. Purchase by Employee's Stock Ownership Trust
    5. Exit by Puts and Calls
      1. 1. Price/Earnings Ratio
      2. 2. Book Value
      3. 3. Percentage of Sales
      4. 4. Multiple of Cash Flow
      5. 5. Multiple of Sales
      6. 6. Appraised Value
      7. 7. Prearranged Cash Amount
    6. Third Method: Sale of the Company to Another Company
      1. Selling Stock for Cash
      2. Selling Stock for Notes
      3. Selling Stock for Stock
      4. Selling Assets for Cash
      5. Selling Assets for Notes
      6. Selling Assets for Stock
      7. Other Forms of Payment
      8. Negotiating the Sale of Your Company
      9. Buy –Sell Arrangement
    7. Fourth Method: Finding a New Investor
      1. Corporate Partners
      2. New Venture Capital Partner
    8. Fifth Method: Liquidation of the Company
    9. Negotiating with the Venture Capitalist
    10. Objective
  14. 11. Using Brokers
    1. Accountants: How to Use Them
    2. Investment Bankers: What They Can Do
    3. Lawyers: Are They O.K. as Financial Brokers?
    4. Independent Financial Brokers: What Do They Want?
    5. Qualities to Look for in a Broker
      1. Experience
      2. Professional
      3. Credentials
      4. Operator of a Small Business
      5. Special Knowledge
    6. Agreement with the Broker
      1. Define the Service
      2. Time Frame
      3. Termination Clause
      4. Amount of the Fee
      5. Reports on Progress
      6. Ownership of Work Completed
      7. Nondisclosure Clause
      8. Indemnification
      9. Complete Agreement
    7. Some Tips on Dealing with Brokers
    8. Amount and Type of Fees
    9. Who Should Present the Plan to the Venture Capitalist?
    10. Objective
  15. 12. Advice From Us to You
    1. Keeping Up With Venture Capitalists
    2. Selecting a Venture Firm
    3. Venture Capital Process
    4. Venture Capitalists as Human Beings
    5. Problem Companies Looking for Financing
    6. Financing for Your Job or Your Ego
    7. Too Much Information
    8. Do You Understand Credibility?
    9. Ten Commandments for an Entrepreneur
      1. Thou Shalt Be Truthful to Thyself
      2. Thou Shalt Recognize Reality
      3. Thou Shalt Maintain Credibility
      4. Thou Shalt Be Loyal to Those Who Have Helped You
      5. Thou Shalt Be Prepared
      6. Thou Shalt Be Positive
      7. Thou Shalt Never Give Up
      8. Thou Shalt Be Straight
      9. Thou Shalt Be Lucky
      10. Thou Shalt Pray a Lot
    10. Parting Shot
  16. Glossary
  17. Actual Documents
    1. Commitment Letter
    2. Legal Document 1
      1. Loan Agreement
        1. I. Parties
        2. II. Loan
        3. III. Use of Proceeds
        4. IV. Collateral
        5. V. Representations and Warranties
        6. VI. Affirmative Covenants
        7. VII. Negative Covenants
        8. VIII. Investment Covenant
        9. IX. Fees, Expenses, and Indemnification
        10. X. Unlocking
        11. XI. “Put” Rights
        12. XII. Default
        13. XIII. Notice
        14. XIV. Entire Agreement
        15. XV. Controlling Law
        16. XVI. Headings
    3. Legal Document 2
      1. Promissory Note
      2. Default and Acceleration:
    4. Legal Document 3
      1. Stock Purchase Warrants
        1. I. Grant
        2. II. Expiration
        3. III. Exercise Price
        4. IV. Effect of Redemption
        5. V. Exercise Procedure
        6. VI. Sale or Exchange of Company or Assets
        7. VII. Sale of Warrant or Shares
        8. VIII. Transfer
        9. IX. Replacement of Warrant
        10. X. Loan Agreement
        11. XI. Unlocking
        12. XII. “Put” Rights
        13. XIII. Registration
        14. XIV. Covenants of the Company
        15. XV. Investment Covenant
        16. XVI. Laws Governing
    5. Legal Document 4
    6. Legal Document 5
      1. Schedule A: Exhibits To Stock Purchase Agreement