Raising Venture Capital (The Wiley Finance Series)

Cover......Page 1
Contents......Page 7
Preface......Page 15
Part I The Business of Venture Capital......Page 19
1.2 Entrepreneurs and business creation......Page 21
1.3 Why entrepreneurs need external capital......Page 22
1.4 Venture capitalists......Page 24
1.5 How to read this book......Page 25
2.1 Introduction......Page 27
2.2 The fund-raising cycle......Page 28
2.4 Identity of the LPs......Page 29
2.5 Conclusions......Page 31
3.2 The primacy of a limited partnership......Page 33
3.3 Facets of a limited partnership......Page 35
3.4.1 Life......Page 37
3.4.3 GP management......Page 38
3.4.6 Transaction costs and fees......Page 39
3.5 Conclusion: The venture capital business in a nutshell......Page 40
4.2.1 Vintage years......Page 43
4.2.2 Sector and geography......Page 44
4.2.3 IRRs and cash-on-cash metrics......Page 45
4.4 Conclusions......Page 46
5.2 Fundamentals of VC risk......Page 49
5.3.1 Focus on proprietary deal flow......Page 51
5.3.3 Due diligence......Page 52
5.3.5 Syndication......Page 53
5.3.6 Internal investment process......Page 54
5.4 Exit obsession......Page 56
5.5 High reward for high risk......Page 57
5.6 Downside risk management......Page 58
5.6.2 Price protection......Page 59
5.6.3 Follow-on capability......Page 61
5.6.4 Information and veto rights......Page 62
5.7 Dynamic capital allocation......Page 63
5.8 The human element......Page 64
5.9 Conclusions......Page 66
Part II Accessing Venture Capital......Page 67
6 Introduction to Part II......Page 69
7.2 What do I want my business to become?......Page 71
7.4 How much capital does my business require?......Page 72
7.5 Do I want to control my business for a long time?......Page 73
7.7 Am I comfortable with an exit?......Page 74
8.2 Substantial long-term resources......Page 77
8.3 Long and relevant experience......Page 79
8.5.2 Portfolio community......Page 80
8.7 Personal chemistry......Page 81
9.2 Which qualified access route?......Page 83
9.2.5 Professional intermediaries......Page 84
9.3.1 Portfolio company access......Page 85
9.3.3 Personal contacts......Page 86
9.5 What is the VC firm looking for?......Page 87
9.6 Conclusion......Page 88
10.1 Introduction......Page 89
10.2.1 The kick-off meeting......Page 90
10.2.2 The initial presentation......Page 91
10.3.1 Preliminary due diligence......Page 92
10.3.2 Term sheet negotiations......Page 93
10.4.1 Final due diligence......Page 94
10.4.2 Legal documentation......Page 95
10.4.4 Special situations......Page 97
10.5 Afterwards......Page 98
11.1 Introduction......Page 99
11.3.1 Introduction to valuation......Page 100
11.3.2 Valuation bases – the entrepreneur’s perspective......Page 102
11.3.3 Valuation bases – the VC’s perspective......Page 103
11.3.4 Why value is important......Page 104
11.3.5 Conclusions for an entrepreneur......Page 105
11.5 Grooming the business......Page 106
11.5.1 Revisiting timing and value assumptions......Page 107
11.5.2 Ensuring management stability......Page 108
11.5.3 Spring cleaning......Page 109
11.6 Transaction structure......Page 110
11.7.1 Confidentiality......Page 113
11.7.2 Non-solicitation......Page 114
11.7.4 Poison pills......Page 115
11.8 Conclusion......Page 116
Part III The VC Term Sheet......Page 117
12.2 What is a term sheet?......Page 119
12.3.1 Risk management......Page 120
12.3.3 Deal syndication......Page 121
12.5 Methodology of Part III......Page 122
Pro forma term sheet......Page 124
13 Business Valuation......Page 139
14 Investment Structure......Page 141
15.1 Introduction to syndication......Page 143
15.2 Reward for syndicate leadership......Page 144
15.3 The entrepreneur’s response......Page 145
16.1.1 Milestone definitions......Page 147
16.1.2 Milestone waivers......Page 148
16.2 Attractions for the VC firm......Page 149
16.3.1 Protected committed funding......Page 150
16.3.3 Fund-raising without milestones......Page 151
16.4.1 Sizing each tranche......Page 152
16.4.3 Syndicate decision-making......Page 153
16.4.4 Enforcement teeth......Page 154
16.4.6 Earn-ins and ratchets as an alternative......Page 155
17.2.1 Composition of the board......Page 157
17.2.2 Nominations to the board......Page 158
17.3.2 Committees......Page 160
17.3.3 Board veto rights......Page 161
17.4 Shareholder information......Page 162
17.5 Shareholder veto powers......Page 163
18.2.2 Attractions of voting rights to the VC firm......Page 165
18.2.4 Voting rights – areas to watch out for......Page 167
18.3.2 Attraction of dividend rights to the VC firm......Page 168
18.3.3 The entrepreneur’s response......Page 169
18.4.1 Preference shares......Page 170
18.4.2 “Double-dipping” preferred shares......Page 172
18.4.3 “High watermark” preferred shares......Page 175
18.4.5 Application of the preference......Page 177
18.4.6 Legal considerations......Page 179
18.5.1 Attractions of a redemption feature to the VC firm......Page 180
18.5.4 The decision-making process......Page 181
18.5.6 Alternatives to redemption......Page 182
18.6.1 Voluntary conversion rights......Page 183
18.6.2 Compulsory conversion rights......Page 184
18.6.3 Adjustment to conversion rights......Page 185
19.1 Introduction to share incentives......Page 187
19.2 Sizing of incentive programmes......Page 188
19.3 Who bears the dilution?......Page 189
19.4 Ratchets......Page 190
20.2 Attractions of vesting to the VC firm......Page 193
20.3 The entrepreneur’s response......Page 194
20.4.1 Pace and level of vesting......Page 196
20.4.2 Good/bad leaver provisions......Page 198
20.4.3 Acceleration on exit events......Page 199
20.4.4 Treatment of vested shares......Page 201
20.4.5 Repurchase mechanics......Page 202
21.2 Attractions of share issue pre-emption rights to a VC firm......Page 203
21.4 Areas to watch out for......Page 204
21.4.1 What triggers pre-emption rights?......Page 205
21.4.3 Partial pre-emption?......Page 206
21.4.5 Pre-emption top-ups......Page 207
21.4.6 Administration of pre-emption rights......Page 208
22.1.1 Full ratchet anti-dilution......Page 209
22.1.3 Mechanism of action......Page 210
22.2 Attraction of anti-dilution to a VC firm......Page 211
22.3.2 Limitation of anti-dilution in practice......Page 212
22.3.3 Shareholder double advantage......Page 213
22.4.2 Determining the amount to pay......Page 214
22.4.3 Consequences of not paying . . .......Page 215
22.5.1 Carve-outs......Page 216
22.5.3 Proxies for value......Page 217
22.5.6 Differential pricing......Page 218
22.5.7 Syndicate dangers......Page 219
23.2.1 General restrictions......Page 221
23.2.2 IPO restrictions......Page 222
23.3 Transfer pre-emption rights......Page 223
23.3.2 Partial pre-emption?......Page 224
23.3.4 Pre-emption top-ups......Page 225
23.3.7 Exclusion of certain transactions......Page 226
23.4.2 Why is drag-along needed?......Page 227
23.4.3 Drag-along implementation......Page 229
23.4.4 Further issues to consider......Page 230
23.4.5 Enforcement of drag-along rights......Page 231
23.5.2 Nature of tag-along rights......Page 232
23.5.5 Different classes of shares......Page 234
23.5.6 Who gets tag-along rights?......Page 235
23.5.9 Exclusion of certain transactions......Page 236
24.2 Conditions precedent......Page 237
24.2.2 Entrepreneur’s strategy......Page 238
24.3.1 VC firm’s strategy......Page 240
24.3.2 Entrepreneur’s strategy......Page 241
24.4.1 VC firm’s strategy......Page 243
24.4.2 Entrepreneur’s strategy......Page 244
24.4.3 Financial assistance......Page 246
Index......Page 247