VC 101

Everything you wanted to know about VC

Read at your own risk. Don’t rely on anything in this presentation as financial or legal advice.

Made during my Web2 days, so nothing here is specific to Web3, tokens, or crypto VC

It’ll help you understand a lot of this lingo

[work in progress, dictionary is towards the end]

Two major types of funding: Debt & Equity

Debt: Has to be paid back. First in line during liquidation. “Non-dilutive”. Preferable terms can be had when risk is low.

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Options:

• Bank loan - Your revenue is reliable and solid! (haha)
• Invoice Factoring - Giving you money now for customers I know are going to pay
• Venture Debt - I see you have a lot of VC money…… (often done by tech-savvy banks like SVB)

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Downside: Can go into default…...

Equity: “Dilutive”. Given under riskier conditions.

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Options:

• Private Equity - Medium risk / medium reward.
• They will do whatever it takes to get returns. Fire, reorg, take on debt, etc.
• Venture Capital - High risk / high reward

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Downside: They own you

What is a Venture Capital Firm?

Practical definition: Invests other people’s money into high-risk companies

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Legal definition***

• A minimum of 80% of the fund’s committed capital has to be invested in qualifying assets
• Qualifying: Private businesses
• Non-qualifying: Crypto, public equities, non-businesses (e.g. funds)
• No redemption rights for LPs
• Debt restrictions

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**This is why A16Z is technically an RIA (Registered Investment Adviser) now… so they can invest in crypto, hold more public equities, etc.

Andreessen Horowitz Shifts Business Model From VC To RIA

VC as an asset class: “Venture Capital” = “Risky Capital”

Pros:

• Potential for massive gains. Top funds tend to outperform other asset classes.
• Bonus: Usually uncorrelated with equity markets

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Cons:

• High risk (Sharpe Ratio <1 as a category)
• Highly illiquid

VC is up here

Most VCs are not good...

Median return is ~1.7x

Why do LPs keep investing in them?

• Uncorrelated with other assets.
• Small part of portfolio
• Institutionals (e.g. endowments) allocate 5-10% to VC usually
• Like/trust manager.

But the returns are promising 🤩

In exchange, VC gets...

• 20% of the profit (“Carry”)
• 2% of committed capital every year (“management fee”)

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Standard VC Goal for a “top fund”:

• Returns above most other asset classes: 22%+ IRR before fees
• -> 4x to investors in ~7 years (3x after fee)
• Most investors that exceed this really exceed this

Who are the stakeholders?

• GP (General Partner) - “Owner” of the firm. Makes investment decisions. Usually has to put their own money into the fund (“GP Commit”)
• Hires a ton of people. Principals, associates, etc.
• LP (Limited Partner) - Investor in the firm. Usually just quiet/passive money, no governance rights like a startup.

Types of LPs

• Other fund managers: GPs, funds themselves. Want access / deal flow.
• HNWI : Rich People.
• UHNWI / Family Offices: Really rich people
• Corporates: Strategic investments
• Funds of funds - Funds that invest in funds
• “Institutional’ - Pension funds, Endowments, Sovereign Wealth Funds
• Usually allocate a small percent (2-10%) to VC. Some endowments have started to increase allocation.
• Like to write big checks ($5-10M) and back the same manager across multiple funds.
• Often don’t really come in until a Fund 3 (big fund + established track record)

How money flows: Investing

• LPs invest in the VC firm
• VC firm invests in startups

Payouts: What happen every year regardless:

• 2% management fee on committed capital paid every year
• Adds up to 20% over fund’s life
• Only 80% of the fund is “investable capital”.
• That 20% is called the “fee load”

Payouts: How do returns get distributed by funds?

Payouts: What happens when startups exit:

"Management Recycling: Funds reinvest cash to avoid fees because it is not considered committed capitol anymore"

VC Fund Math: Why they need a “100x”

VCs need to at least be able to return capital to investors. So every investment should have the potential to be a “fund returner” (can return the size of the fund).

Imagine you make 50 investments

• Each is 2% of the fund. (50 * 2% = 100)
• You’re diluted to 50% by the exit.
• Therefore… you need at least one 100x investment to “Return the fund”.

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And ownership at the beginning can make a big difference:

• Big seed fund need to turn $200M into $10B (50x)
• Microfund needs to turn turn $20M into $10B (500x)TVC = ~500x (
• Why? Ownership is often ~1% vs ~10%

Fee Recycling: A tool for early exits

Imagine I have a $50M fund.

• Over 10 years, 2% annual fee load adds up to 20% ($10M/$50M in fees).
• That means only $40M is “investable capital”.

Let’s say one of my investments quickly returns $10M. I then invest that into a new company. That $10M has no management fees.

• I’ve now deployed $50M in capital! My investors effectively paid $0 management fee.
• Investable capital went from $40M to $50M, which also makes it easier to return money as a multiple on committed capital.

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Best article on the topic: https://feld.com/archives/2018/08/the-economics-of-vcs-recycling-management-fees.html

What the structure actually looks like

You can then have multiple funds (Limited Partnership) associated with the same Management Co and GP Co

Fund timelines: usually 10-year total lifetime

• Deployment periods: Usually 4 years (can be as short as two)
• Post-deployment period: Usually another 6 years (time to let companies grow and exit)
• Extensions for another 1-6+ years.
• Long relations with LPs 😍

Other terms:�“First close” - First LP commitments�“Last close” - Last LP commitments

VC shuffle: Overlapping funds makes for a lot of fees

- VCs often have multiple overlapping funds. Lots of management fees. 🤑

- LPs don’t really know if you’re good until year 5/6/7 of Fund 1 by which point you have several funds.

That’s why Fund 1 is often focused on logos and markups.

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(VCs often can start raising another fund once the previous is ~80%+ deployed)

Capital Calls: Only get the money when you need

• Investors don’t actually give you all the money up front!
• You “call” it as needed. Usually enough to make investments without having to wait for money.
• VCs don’t always call all capital.
• The capital call starts the IRR clock. Imagine a startup exits for 2x in Jan 2024
• Call capital Jan 2021: 25% IRR
• Call capital Jan 2022: 42% IRR
• Call capital Jan 2023: 100% IRR�^^ Some VCs hack this by using a “Capital Call loan” to get capital later…..

What happens at the end of the fund lifecycle?

Hopefully all companies have exited (that’s why the deployment period is only 4 years vs all 7)

What can happen to give liquidity to LPs

• VC funds can extend the fund lifecycle! (usually will have 1-year or 3-year extensions they can trigger)
• VC fund can sell company shares in secondaries
• LPs can sell their individual stakes on secondary market
• Funds can sell the fund as a package! (Sell all their positions in a bunde, usually to a PE firm).
• Can be bad; new owner can start forcing exits.

Good vs bad investments

• Good investments
• Return a lot of capital early
• Bad investments
• Don’t return a lot of capital
• Take forever (A $1B exit could bad on an IRR basis if it takes 20 years)

This is why usually specialist VCs focus on biotech or hardware – fields that can take a long time before they exit.

Major VC/LP Terms

• TVPI (Total Value to Paid In capital multiple) -
• Value of funds holdings + distributions / LP contributions
• Includes markups and value of called capital
• DPI (Distributions to Paid in Capital).
• Aka “cash-on-cash returns” -> money actually returned to LPs
• LP distribution / LP contributions
• RVPI (Residual Value to Paid in Capital)
• TVPI excluding previous distributions
• (basically, valuation of remaining investments)

Basically: TVPI = DPI + RVPI.

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• MOIC (Multiple on Invested Capital) -
• Value of fund holdings / dollars invested
• Excludes fees from denominator and excludes called capital not yet invested.

IRR (Internal Rate of Return)

IRR helps LPs benchmark against other asset classes.

• Gross IRR: Before fees
• Net IRR: After Fees
• Realized IRR: Only including distributed capital

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LPs usually use IRR to compare against other asset classes they could invest in.

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Best VC metrics resources:

• VC Terminology
• EE_The Ultimate VC Metrics Cheat Sheet

VC Fund Math Example:

The only real things that matter in VC: Returns!

Returns = (1) ownership at Exit * (2) valuation at exit

1. Ownership at exit
1. Ownership often determined by ownership at initial investment
2. ….determined by initial check size and initial price
3. ….often determined by how early the see a company

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• Is picking good companies

The only real things that matter in VC: Returns!

Returns = (1) ownership at Exit * (2) valuation at exit

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IRR = returns / years-to-exit

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That’s why it’s not enough to be a unicorn eventually.

There’s a few different ways to get liquidity to shareholders:

Private Exit: $ – $$$

• Secondary - sell some shares privately
• Acquihire - Buy team
• Acquisition - Buy company
• Asset sale (buy only the assets)
• Stock sale

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Public Exit: $$$$

• IPO - Sell some shares to institutional and retail investors via a broker
• DPO - Sell some shares directly to the public
• SPAC - Sell all shares to a company that exists only to acquire other companies.

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Fund size influences what moves the needle

This is why VCs care about TAM…. it dictates how big your company can get.

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But they also care about bottoms-up analysis / GTM to understand how quickly you can hit these numbers.

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—- this is also why VCs go after the “sure bets”

What do LPs look for when investing in a fund?

1. Past returns (actual)
1. Cash on Cash (CoC) returns.
2. Indicators of high future returns
• Good deal flow
• Markups
• Ability to get into good, high-growth deals
3. Differentiated from other investments they make (esp. For institutionals that diversity across funds)
• Stage, geo, networks, thesis, strategy etc.

Back to investing...

Equity gives you a right to the company’s cash + a vote on running it

1. Economic rights - Rights to a company’s future cash flows
1. Back in the day: Get paid regular dividends
2. In practice: Right to cash from exit (or liquidation)
2. Governance rights - Voting rights on how a company should be run
• In practice: Right to make sure a company doesn’t screw you over. E.g. shareholders have to vote on acquisition, new stock issuance, etc.
• Can also mean being able to, say, force a company to be acquired.

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Sometimes, companies strip away (2) at the IPO when the founders want to retain control (e.g. Facebook, Palantir, etc.). Largely, public investors don’t seem to care…...

Types of investment instruments:

• Priced Round: I invest and in return I get actual preferred shares
• Expensive to do - lots of legal work (shareholders have a lot of rights to negotiate! See example rights in later slides.)
• SAFE Round (Simple Agreement for Future Equity): I give you money and I get a right to equity later based on certain trigger events. Defers legal expenses, choice about “real” valuation. Ownership is finalized at the first equity round.
• Pre-money valuation: I get diluted by future SAFEs
• Post-money valuation: I lock in my ownership at the Series A (prior to accounting for new capital).
• Convertible notes:
• A “debt” instrument. Investment amount it accrues interest and has a “term” at which it has to be paid back or extended.
• The SAFE basically took the convertible note and remove the interest + term since they were rarely enforced.

Types of investment instruments in crypto:

• SAFT (Simple Agreement for future tokens)
• A SAFT grants investors rights to future tokens once they are launched. A SAFT is usually signed with there is no associated equity investment.
• Token Warrant
• The right to purchase a certain amount of future tokens at a nominal cost. A Token Warrant is usually given as a part of an equity round.
• Token Side Letter
• While a Token Warrant is an official contract for future tokens, a token side letter is a more casual document that says that if the project launches tokens they’ll give them to the investor. Sometimes used if a project is worried that a token warrant could look too much like a contract for a security.

Side Letter

Most often, all investors will come into a round on the same terms using the same instrument (whether a SAFT or a priced round Share Purchase Agreement).

But sometimes, an investor will want some special rights (pro rata, information rights, or something else). A founder might put these into a “side letter” just between them and that investor.

QSBS

• Qualified Small Business Stock are shares purchased in a small business (that meets certain revenue and asset guidelines). QSBS shares held for 5 years incur no federal taxes (up to $10M) and potentially lower state taxes.
• QSBS starts for founders when they issue themselves shares.
• QSBS starts for investors at the first equity round, since that’s when they first receive shares. SAFEs are widely considered to not count towards the “QSBS” clock.

SAFE Terms

SAFEs are the most common instrument for early (pre-seed / seed) round these days. Popularized by YC, they give VCs a certain future ownership based on their invested amount.

They are a “convertible” instrument”. The VCs don’t actually receive shares until the next equity round into which the SAFEs “convert” into a specific amount of shares that the VCs receive.

SAFEs have a few major terms:

• Valuation cap
• Discount Rate
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Pre-money vs post money cap

Pre-Money valuation refers to a set valuation of the company that excludes the capital invested.

Post-Money valuation refers to a set valuation of the company including all new capital.

So if a VC invests “$10M at $100M post”, they are effectively valuing the company at $90M without the new capital.

The practical effect of this on SAFEs is:

• With a “post money cap”, the conversion denominator is fixed. If a VC invests $1M at a $10M post, they will receive 10% of the company at the next equity round.
• With a “pre-money cap”, the denominator is based on the amount raised on convertibles. So a VC that invests $1M at a $9M pre will receive at most 10% of the company, but they could be diluted by future SAFEs. This is why most VCs switched to using a post-money cap when founders started raising more and more SAFE rounds.

Valuation Cap

VC ownership isn’t locked in until a priced round happens. At that point the SAFE “converts” into equity. The ownership is the greater of:

1. Invested amount / post-money cap
2. Invested amount / (Priced round valuation * discount)

Example: $1M investment at $10M post-money cap with a 15% discount:

At the next equity round, the investor will receive shares equivalent to the GREATER OF either:

1. 10% of the company ($1M divided by $10M cap)
2. 10% of the next valuation minus 15%
1. If the next round is lower than an $11.5M valuation, the investor will receive more than 10% ownership.

Most people think the discount always applies. No. In this example, the discount only applies if the next valuation is $11.5M or lower.

SAFE Math: Other conversion scenarios

(Just use https://safegenie.io/…. Except seems broken for pro ratas)

• The investors in a priced round will usually want to establish an “option pool” for new employees. This option pool often dilutes converted SAFEs but does not dilute new capital invested in that round.

Calculating the pre-money can be really tricky

• Example:
• Solo founder owns 95%.
• Accelerator round: YC $150k for 7% post-money (w/ full pro rata*)
• Seed round gives up $2M @ $20M post-money (10%) w/ full pro rata

Series A: Investor invests $8M. Wants $20%. $40M post.

• Dynamics:
• SAFEs convert into equity, own 17%.
• 15% Option pool dilutes above, but not new money
• Series A Lead takes 20% ownership after the above.
• Aftermath
• Total Dilution: 14.4% (Seed) + 20% (Series A) + 15% (new equity pool)
• Founder ownership: 51.6%

Side note: Option price is based on valuation

• 409A Valuation = The valuation that determines the strike price of the options.
• It’s the valuation of “common” shares.
• Often much more conservative than the VC valuation (which is for preferred shares).

SAFE Math: I honestly ask the lawyers every time

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Common round Terms

• MFN (Most Favored Nations) - “If any other SAFE gets better terms then me, I’ll get those terms too” (valuation cap, etc). Sometimes can apply for only the next SAFE round.
• Pro Rata - “I get to invest to invest in future rounds the amount needed to maintain my percentage ownership in the company.”
• Usually only given to “major investors” - investors that invest above a certain amount.
• Can eat into later rounds

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Common round Terms

• Right of First Refusal - If anyone wants to sell stock, they have to offer it to us first.
• Co-Sale stock - If anyone is selling stock (e.g. secondary), we get to sell at the same terms.
• Right of First Offer - We get the option to invest in any future rounds first.
• Information Rights - I get to see the financials regularly.
• Transfer restrictions - You can’t just transfer the stock to anyone you want. Keeps cap table clean, avoids ROFR loopholes.
• Board seats (and board observers)
• Liquidation preference: How much money I need back at a minimum (usually 1x, can be 2x or 3x depending on how unfavorable the round is….)
• Option pool size

Common round - Board

• Board seats - The board controls the company. Hires/fires CEO. Votes on everything (even stock grants)
• Board Composition
• Usually no board at Seed. Sometimes investors will want a board seat with a priced round. In this case they might allow 2 founders + 1 VC. Or, more commonly, they’ll want 1 VC + 1 founder + 1 “independent” (either agreed upon by founder and investor, or chosen by a majority of common stock)
• At Series A, investors might push for a 2+2+1 (two founders/common, two VCs, one independent).
• Board Observer
• No voting rights, but can sway conversation. Either small fund or associate.

VC Terms common-ish in later stages

• Drag along - If a majority of voters vote a certain way, everyone else has to vote that way too.
• E.g. Prevents an individual investor from holding up an entire acquisition.
• Pay-to-play - If you don’t invest in this round, your preferred shares will convert to common.
• Warrant coverage (uncommon) - Like options, but for funds vs employees.
• No-Shop (common in later rounds) - You can’t go around asking for more term sheets.

VC Terms: Anti-dilution provisions:

• Weighted Average:
• If we invest $10M at a valuation that results in a price-per-share of $2, and someone else later invests at a $1/share price, our original price will be adjusted to somewhere in the middle.
• 💀 Full Ratchet:
• The earlier investors get the new, lower price

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💀 Investors can end up with significantly higher ownership

VC Terms: Participation Rights

Most investors have “Non-Participating” Liquidation Preference which means that at the time of liquidation they have to choose between receiving their liquidation preference or the value of their % ownership.

Example: A VC invested $1M into a company. They own 10% and have a 2x liq pref. If the company exits for $100M, they would have the choice between receiving:

1. 10% of the exit ($10M)
2. 2x liq pref on their invested capital ($2M)

Obviously they’ll choose #1! But if the exit was smaller (say, $5M acquihire), the VC would rather receive the $2M liq pref than 10% of $5M (only $500k).

Participating Preferred

Participating Preferred means that the VC can double dip: “Give me my money back at the liquidation preference (2x) and then 10% of what’s left.”

Using the previous example of a VC that invested $1M for 10% of the company w/ a 2x participating preferred liq pref:

• In a $100M acquisition they would receive $11.8M ($2M liq pref + 10% of the remaining $98M)
• In a $5M acquihire they would receive a whopping $2.3M ($2M liq pref + 10% of the remaining $3M).

Pref Stack

As companies start raising money, they accrue capital that have different liquidation preferences, participation rights, antidilution measures, etc.

The “pref stack” is the order in which investors get paid out. And if the investors don’t get all of their money back (at whatever liq pref multiples they invested at), there will be zero left for common stock (founders and employees).

Usually the priority list goes: Debt > Preferred > Common

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At left: Eventbrite raised $334M but their “pref stack” means that investors need to receive $400M back before common stock receives anything.

High liquidation pref + Full Ratchet + Participating Preferred = bad

If an investor puts in $100M at $1B valuation and the startup is acquired for $1B, how much do the investors get paid out?

• 1x participating: $100M (1x) + $99M (10%) = $199M ($810M remaining)
• 3x participating: $300M (3x) + $70M (10% remaining) = $370M -($630M remaining)
• And potentially much more if there was a down round and other investors.
• Since preferred gets paid out first, this is what can result in the situation of “nothing left for common”

Three types of term sheets:

1. Hot round - you tell us the terms
1. This is where people get wild valuations / etc
2. Decent round - let’s figure out some terms
3. Not round - These are the terms, take it or leave it

Term sheet archetypes:

• Multi-stage: “We’ll just buy more ownership later and can pay whatever now”
• Single-stage: “We want to own as much as possible right now”
• Microfund: “Just get us in the round plz”
• Ownership-oriented fund: “We want to own as much as possible”
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[WIP] Which terms are standard / negotiable? (Pre-Seed)

• Instrument
• Economic
• Cap / Discount
• Pro Rata
• Liquidation pref
• MFN
• Non-economic
• Board Seat
• Information Rights

Questions founders should ask at the first meeting:

• Do you have any ownership requirements?
• What is your follow-on strategy? Do you seek to maintain your ownership always or selectively? Do you ever “buy up” more ownership in future rounds?
• What are the most important economic and governance terms to you?

How VCs think (Diligence): Derisk derisk derisk

• Big market size - Derisk exit valuation
• Many VCs “don’t take market risk”
• “Who else is leading?” - Derisk markups / startup won’t drag on
• Team - derisk execution
• Traction/LOIs - Derisk adoption risk

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How VCs think:

• What VCs mean when they…
• “You’re too early” -> “We don’t like you right now but may like you later.”
• Reason 1: It’s gonna cost us nothing to wait until you have more traction. Your round probably isn’t gonna get done right now anyways and if you start picking up traction we can just swoop in and pick up where we left off.
• Reason 2: We’re a huge fund and we don’t mind paying up later (e.g. A16Z)
• “Let’s keep talking” -> See above
• Only one thing gets VCs to invest now: Urgency
• Price will go up, or someone else will do the deal and I won’t be able to do it anymore.
• Only one thing gets VCs to improve the terms: Competing term sheets
• Current or expected competing term sheets from investors of the same caliber.

VC motivations:

• Ok to call capital later.. In no rush to invest.
• So if they don’t have to write a check now, they’ll wait (for you to derisk the business further).
• Esp. If they can invest later for the same terms.

VC motivations - Based on fund age/performance

• Microfund: “Look at my markups, I can pick good companies! Invest in my bigger second fund plz. I’m not a money bonfire.”
• Not top funds: max(management fees)
• Top funds: max(carry) + keep the Children’s Hospital operating
• Either bigger and bigger funds (e.g. A16Z/Sequoia) or constant-sized funds (Benchmark)
• Evergreen fund: We’re in no rush to make money.
• Tiger Global: YOLO as long as we’re returning 15% (which is not that hard).

VC motivations

Based on fund size:

• Benchmark: Small fund. Need 20% ownership at Series A to make sense.
• Can’t afford to buy additional meaningful ownership.
• A16Z/Sequoia/GC: Our funds are yuge, we can always buy up later.

Based on fund lifecycle:

• Early in the fund: we chillin’
• In year 6: We really are gonna need an exit in the next 2-3 years…. May pressure to exit, etc.
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VC Strategies

• The bigger the fund….
• The bigger the checks they need to write.
• The bigger the ownership they need.

Some funds struggle crossing this threshold from not leading to leading…..

• Investments
• “Spray and pray” - works? (check out fund model)
• Own a lot of a few companies - Easier if you can do it.
• Thesis
• Reactive (e.g. Founders Fund)
• Thesis-driven (USV, FJ Labs)
• Marketing
• Under the radar (True Ventures)
• Marketing company (Turner Novak, A16Z)
• Stage
• Single-stage (Benchmark)
• Multi-stage (GC)
• Fundraising
• Sequoia - $$$$$$, Benchmark - always raise the same $425M.

Follow-ons

• Bridge = bad
• If you need money to stay alive… maybe you should just die.
• Follow-on
• Sometimes pro rata (most) or “back up the truck” (invest more! - some)
• This is why VCs keep some money in “Reserve” (often 40-50% of a VC fund).
• Sometimes lead an SPV with LPs to invest large amounts (beyond pro rata, or when pro rata gets too big)
• Sometimes try to lead everything (sequoia, GC, Accel)

🚦 Signaling risk?

• If I invest in the Seed and not the A…. other investors ask `why not? Looks bad. Reason why some folks don’t take money from multi-stage.
• Why some funds have a “barbell strategy” -> Invest in Seed, skip the A, and invest later in the B+.

How Valuations work

• Old way: DCF
• New way:
• “Is this the cheapest I’ll be able to get in?”
• “Is someone going to pay more to mark me up?”
• Growth-driven
• By stage
• Early stage: ????
• Really late stage: Comparable to public-company multiples.

How Valuations work

• Old way: DCF - value of future cash flows.
• New way:
• “Is this the cheapest I’ll be able to get in?”
• “Is someone going to pay more to mark me up?”
• Growth-driven
• By stage
• Early stage: ????
• Really late stage: Comparable to public-company multiples. Growth. Cohort analysis.

Receiving an investment 101

How valuations work:

VCs should play bridge – Welcome to Dancoland

“It’s a valuation… not a price.”

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• Price, option pool
• Price pre- and post-investment
• VC Ownership over time / across stages

VC in 2021

• Playing Different Games - by Everett Randle
• How the process works, what is a “lead”, “Term Sheet”, etc.
• Angel List
• “Party Round”
• Looser accreditation requirements
• Vs 5 years ago
• Valuations really high
• Rounds super fast
• Loooooots of capital, esp. Emerging managers
• “Founder Friendly” - no replacing CEO, etc.
• But also
• Public multiples are really high
• Easier exits (SPAC attack)
• NDR

Hot topics in VC world

• How small of a check is too small?
• I just put a $5k check into a Series D
• Party rounds - good or bad? Know what you’re getting yourselves into.
• SAFEs…. Do you really know your dilution? (Yes, have your lawyers make a sheet)
• Valuations… too high?
• Multi-stage funds… bad for seed round?
• Too much capital?
• Companies… raising too much?
• Softbank… stupid or genius?

^ Mostly incumbent VCs complaining

Hot topics in VC world

• Roll-up vehicle
• A ton of small angels take up space on a cap table. And for big things you need signatures from everyone.
• Previously, the solution was syndicate. But a syndicate needs a “lead” that’s not associated with the company.
• With an RUV, the company can sponsor their own syndicate.
• SPAC
• Quick exit at crazy multiples.
• Why? SPACs are allowed to use forward-looking projections. IPOs can’t.

How bruno thinks a cap table should look:

A good cap table has investors that add value in 4 categories:

• Operational: How to run a company
• Strategic: How to crush it in your industry
• Downstream fundraising: Making it way easier to raise future funding
• Either they have more money to throw at you, or they can dramatically increase/facilitate access to capital.
• Support / Cheerleader
• Someone you can complain to. Who will tell you it’ll be alright.

Factors I consider in an investor:

• Are they approachable/accessible?
• Do they hustle?
• How many companies do they work with?

How to build a brand in 2021:

• Twitter (Turner Novak, Logan Bartlett, Hustle Fund)
• Tik Tok (Redpoint guy)
• Youtube (Gary Tan, Hustle Fund)
• Clubhouse (Andrew Lee)

Resources

• Venture Deals
• Secrets of Sand Hill Road
• VC content: NFX, AngelList, A16Z, First Round Review
• Twitter
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Revisiting: The exit will never** be worse for VCs than it is for founders. Some rare exceptions.

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Toptal: SAFEs never converted…. Hahaha only founder owns stock.

Gumroad: Bought out investors for like $1, and then built a huge company…. Kept it all to himself!

VC Glossary

Term Sheet

A “term sheet” is a summary of the terms of an investment. Since priced round documents are often very complex, investors will have a company sign a “term sheet” prior to drafting the final docs. The term sheet includes an overview of the major terms.

It also often includes a “no shop” clause that says that the company will not solicit other investors for 30-90 days while the deal is finalized. This is mainly targeted towards companies talking to other leads, and investors often will carve out discussions for angels, smaller checks, or co-investors already in conversation.

Since SAFEs are so simple… more often than not the investor will just send a SAFE, or communicate the terms verbally or over email. Founders will often say they “received a term sheet” to colloquially mean that they received firm interest from a VC to invest at specific terms.

Lead Investor

• In a priced round, the “lead investor” is often the one to set the terms that other investors will also sign onto. A lead investor is usually a majority of the dollar value of the round. But if no investor has most of the round, the “lead” could still be used to refer to the largest check or checks in the round.
• In smaller rounds or SAFE rounds, founders will often set the terms of the round and then seek investors at those terms (or close to them).
• Most round documents will give specific rights to “Major Investors” that meet a specific dollar threshold. This is usually done to reserve specific rights like pro rata to only a handful of investors vs everyone on the cap table.

83(b)

• Vesting Shares granted to founders, advisors, and team members are taxable at the time of vesting.
• An 83(b) election with the IRS lets you recognize the taxes at the time of grant. This is usually done early on when shares are worth very little and the tax would be negligible.
• 83(b) only applies to shares that have a “significant risk of forfeiture (i.e. vesting). It doesn’t apply to unvested or fully vested shares, nor does it apply to options that have not yet been exercised.

Data Room

Investors often ask for a “data room”. There are two major types of data rooms:

1. Legal Data Room - Usually includes all of a companies important corporate documents and contracts (incorporation, bylaws, employment contracts, NDAs, CCIAs, etc.). Often needed before a priced round closes as a part of diligence.
2. Business Data Room - Things like financial projections, cohort analyses, revenue numbers, etc. This is usually used in later rounds (A+) for investors to look at when they’re still deciding whether to invest.

TAM / SAM / SOM

• TAM refers to the total potential revenue that a company can generate from its product or service, considering all customers, regardless of accessibility.
• Social network TAM: Every human on earth
• SAM is the portion of the TAM that a company can realistically target and serve given its resources, capabilities, and market penetration.
• Social network SAM: Every human with a smartphone and friends that meets your criteria.
• SOM is the portion of the SAM that a company can realistically capture, considering its competition and other factors that affect its ability to win business.
• Social network SOM: Your SAM limited to specific geographies and users you might be able to target with advertising/marketing.

In practice, people usually only talk about “TAM”, and more often than not in a context that resembles somewhere between the SOM and the SAM. But I can’t remember the last time I heard SAM/SOM or saw them on a slide.

Questions?

Appendix

Equity 101:

• Start Company - Not worth very much
• Build company - Valuation grows over time [illiquid]
• VCs hop on the roller coaster at some point of this journey

End of the Startup Lifecycle: Sell or just keep running indefinitely

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• Start Company - Valuation $100 [illiquid]
• Build company - Valuation grows over time [illiquid]
• Exit Liquidity
• Non-VC Path
• Keep it private! Distribute profits, do whatever you want!
• Sell whenever (to another company, PE, IPO)
• VC Path: Investors need liquidity from a sale
• Exit or bust
• Though small/early investors may be able to cash out in larger growth rounds.

Not every startup “exits”, or even raise VC to begin with

So why do startups raise?

• Want to grow quickly, capture the market (“fuel on the fire”)
• Need $$ to get off the ground at all (deep tech, etc.)
• Want more runway / wiggle room to succeed.

But not every venture-backed startup makes it

*The faustian bargain

Most startups fail. The odds are against you!

https://www.cbinsights.com/research/venture-capital-funnel-2/

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https://techcrunch.com/2017/05/17/heres-how-likely-your-startup-is-to-get-acquired-at-any-stage/

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But if you raise enough money, you usually become too big to just shut down

*The faustian bargain

https://techcrunch.com/2017/05/17/heres-how-likely-your-startup-is-to-get-acquired-at-any-stage/

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But not all exits are made equal...

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An exit will almost never be worse for VCs than it is for founders

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E.g.

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• Mattermark: Sold for scraps (~$1M)�
• Fanduel: $600M, founders got nothing�
• Juicero: 0 :(

… because not all stock is made equal

Investors: Preferred Stock

• First in line to get paid out, after debt.
• Often has economic leverage associated with it (we’ll discuss later)
• Usually worth more than common stock (Usually the “headline valuation”)

Employees: Common Stock

• Last in line to get paid out
• Usually has the least “leverage” in any scenario.
• Usually worth less than preferred stock (This is the “409A” valuation, which converges as you get closer to an IPO)

Founders: Common Stock

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Appendix 0: Tips on a great pitch

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A pitch should both give “yes” reasons and

eliminate “no” reasons

• Don’t give them “easy outs”
• Small market
• No traction (often proxy for lack of validation or unproven founders).
• Unvalidated willingness to pay on customer side.
• Unclear go-to-market
• Unclear path to the Series A.
• A VC’s default is no

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Appendix 1: Misc Topics

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Funds 101

• Funds by Geography
• West Coast - fast and loose. Cutting edge.
• East Coast - Conservative. Lower valuations. Look at financials more closely.
• Europe - “What is a SAFE?”

How VCs think - Risk

• Market Risk - Do people want this? If it works, will anyone care?
• Lot of VCs don’t take market risk. Market has to be huge.
• Execution Risk - Can the team execute? Do they have the skills to ship what needs to be shipped?
• Technology Risk - Will the tech work?
• Team Risk - Is the team committed?

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When you’re pitching, different investors might be comfortable with different types of risk.

Appendix

Cohort analysis

Metrics that VCs they look for

• Revenue:
• B2B: ARR, MRR, Run Rate, Bookings
• Marketplace: GMV, AOV
• Consumer: MAU/DAU, ARPU, cohort retension
• All: LTV/CAC
• Growth
• YoY/MoM Growth (users or money)
• NDR - Growth within accounts
• Churn - “Logo Churn”, Revenue churn, etc.

Websites:

• https://www.klipfolio.com/metrics/category/saas
• https://saasoptics.com/saaspedia/arr/
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How VCs add value

• Most don’t
• Some do
• Recruiting team in-house - (SignalFire, A16Z)
• Press
• Platform Team
• “Strategy” / “Thought Partner”

What is a SPAC?

• I raise $300M for a public company, Bruno SPAC, to go find a company to buy.
• I then find a company.
• We merge at an agreed-upon valuation. They get to keep the $300M.
• I get 20%.
• Other investors put more money in (via a PIPE - Private Investment in Public Equity)

Fund notes:

• 506(c) fund: Allows “general solicitation”
• All/most rolling funds are 506(c) funds.
• Why not do it? More strict accreditation verification.
• Most funds need an “ERA”
• Exempt Reporting advisor. Makes sure fund isn’t investing in fraud.

Equity ownership: Very similar to employees!

Investors: Equity given for capital. Investors often set the terms.

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• I own a share (Equity investment)
• I get a share later (SAFE, Convertible Note)
• I can buy a share later (warrant)

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Employees: Equity often given out to attract better talent or be able to afford talent. Companies set the terms.

• I own a share (RSA )
• I own a share but I get later under certain conditions (RSU)
• I can buy a share later (options)

Founders start owning 100% of the company and then slowly give it out to others.

VC Fund Tooling

• Fund Formation - Creating LLC, LPA, etc.
• Lawyers
• Services biz: Assure
• Tech biz: AngelList / Carta / Allocations
• Fund Admin - Ongoing management of the fund
• Same as above

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Diligence: https://www.notion.so/bfaviero/Fund-Info-9889c1fda6b642b8bf4235defcde6e02

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