cdixon - Latest Comments in Ideal first round funding terms

Re: Ideal first round funding terms

download de filmes — Thu, 26 May 2011 21:16:32 -0000

the first time the other day and wanted to say thanks for taking the
time to share your experiences and knowledge with the rest of us. We
are just starting the fund raising process and will obviously rely on
our current network to make intros where available and relevant Jogos para celular - Download filmes

Re: Ideal first round funding terms

Justin Heikkinen — Tue, 31 Aug 2010 19:01:06 -0000

Just came across your blog for the first time the other day and wanted to say thanks for taking the time to share your experiences and knowledge with the rest of us. We are just starting the fund raising process and will obviously rely on our current network to make intros where available and relevant, but would love to read your thoughts on how to stand out when 'cold mailing' firms you have no connection to - even if that advice is to just avoid those firms. Thanks!

Re: Ideal first round funding terms

Pat — Tue, 25 Aug 2009 11:31:38 -0000

"Founder salaries - these should be “subsistence” level and no more."

I agree with the idea the that founders should be getting wealthy with customer dollars not investor dollars. That being said, my time is more valuable than your money. I can never get more time in my life. I must be able to recoup all my invested time and savings. My family's financial well-being depends on this. My extended family is poor and would not be able to help if my family suffered any major financial setback ( disability or death). Any investment offer that does not recognize these fundamental realities is not worth taking.

Re: Ideal first round funding terms

Floost — Mon, 24 Aug 2009 21:50:23 -0000

Hmm... I read blogs on a similar topic, but i never visited your blog. I added it to favorites and i'll be your constant reader.

Re: Ideal first round funding terms

chris dixon — Mon, 24 Aug 2009 18:23:09 -0000

Martin - Actually these terms were written by a founder who is also an active investor and who prefers these terms as an investor as well. I certainly try to only invest in people I trust but only a few are close friends.

I'd be curious which protections you think are important and missing.

Re: Ideal first round funding terms

martin tobias — Mon, 24 Aug 2009 18:10:19 -0000

I can see this "ideal" term sheet was written by a founder with a huge chip on his shoulder. The problem is that these terms only work under "ideal" circumstances. That is friendly founder and investor (whatever kind). There are VERY few deals like that. The farther away from CLOSE FRIENDS the investor/founder are the more protections the investor will need. I have raised over half a billion dollars for various startups and invested personally over $20M of my own funds as well as funds as a partner at a VC firm. The right terms are those that get the deal done and correctly balance risk/reward at the time. The so called "un founder friendly" terms are in fact shifting the risk/reward scale over to the investor because they feel they need more reward for a higher risk. That is in many cases appropriate.

Re: Ideal first round funding terms

Dan — Mon, 24 Aug 2009 00:41:39 -0000

Isn't it better if the investors take preferred stock? This way the common and strike price of options can be set much lower than the preferred valuation. If the investors take common would it establish fair value for the options strike price, which would otherwise be higher than one could price it with the preferred and common structure?

Re: Ideal first round funding terms

chris dixon — Sat, 22 Aug 2009 13:24:54 -0000

Thanks, Davide. I strongly favor 1x non-participating liquidation preference.

Re: Ideal first round funding terms

Davide — Sat, 22 Aug 2009 12:28:39 -0000

What about Liquidation Preference ?

Is it acceptable and what should be a fair ratio ?

Priceless post Christ, thanks for sharing your experience.

Best's

Re: Ideal first round funding terms

Jerry — Thu, 20 Aug 2009 19:28:38 -0000

#39: I would hope all engineers do an expected value calculation. If they don’t believe the company is exceptional, they shouldn’t join.

One challenge is that this expected value changes every day, and you risk losing a key employee due to the natural gyrations of this number. I've lost good engineers in dark times, only to have things improve the next month. Paying more than subsistence gives you a bit of a buffer when a key engineer gets a call from a recruiter.

Re: Ideal first round funding terms

Brad Parker — Wed, 19 Aug 2009 16:44:39 -0000

Chris - Fred Wilson pointed you out to me and I must say he was right. This is all part of the best advice I have ever seen for startups...

Brad Parker
co-Founder
www.muzlink.com

Re: Ideal first round funding terms

Bubba — Wed, 19 Aug 2009 15:35:26 -0000

Matt -

I apologize for perhaps not having been clear enough in the articulation of my view.

I'm not saying that an entrepreneur being willing to eat Ramen precludes the deal being of potential value.

I'm saying that in all the deals that I've done (good, bad, and indifferent) I've never seen a correlation between the value of the investment and what the founder is eating. The compensation to the founder needs to be FAIR and appropriate, and I don't think that arbitrarily setting this at some subsistence level is going to result in a better return profile for the fund and is more likely to deselect opportunities that could represent good return potential for the fund (as would ANY arbitrary parameter).

Put another way, as someone that has participated in a number of funds as an LP, the other standard terms that were presented in this excellent outline were thoughtful, articulate, and drive value. Were a fund manager to approach me as a prospective LP and tell me that one of their standard deal terms was that they would require a subsistence compensation plan to the founders of the company in which they'd invest, I'd show them the door. This, in my mind, would be akin to screening prospective deals out of a pipeline because prior investors had received too high a return in an up-round. I've seen this happen and have asked the same types of questions when these situations arise - "where in my financial return profile does what others have made prior to my investment show up?"

To make what Chris has put together (which is already extremely good) something great - I'd simply move founder comp to the "to be negotiated" column and move on.

Re: Ideal first round funding terms

Steve Kane — Tue, 18 Aug 2009 22:51:42 -0000

Second comment -

The best way to standardize term sheets AND control legal costs would be to have VC pay their own legal bills

Its a bit unfair to view attorneys as the principal factor driving up legal costs -- having done a large nunber of delas, I can say the main reason legal costs balloon is that every VC in every deal expects to be able to have their own law firms review every word. And these law firms are under no pressure to keep it lean and mean -- they are not being paid by their clients (the VC firms) but rather by their clients opponent sitting across the table!

Imagine if VCs had to pay their own legal bills (and, um, isn't that what management fees were supposed to be for?) deals would quickly be near-standardized and attorneys would be under tremendous pressure to make it neat clean and fast (after all, a tsratup is a short term, small file client, but a VC firm can be a longterm, cash cow for a law firm.)

Even better, all that portfolio company funding money would (drum roll please) actually go to work in the portfolio company, and not to give VCs compensation raises (by freeing up management fees to pay bigger salaries.)

I know, I know. It's a crazy fantasy. But a guy's got to dream, doesn't he?

Re: Ideal first round funding terms

Steve Kane — Tue, 18 Aug 2009 22:19:38 -0000

Hi Chris. Nice post, but I do gree with the comments here about "substinence" pay. Do you believe partners and staff at VC firms should also receive substinence pay uintil/unless they get their "carried interest" (that is, until/unless they successfully "exit" their funds)? I can't really see any difference between the task of a founder and of a VC -- take venture capital dollars and turn them into venture capital returns. Yet VC partners and staff receive relatively huge (way above market) compensation simply as salary, and guaranteed for 7-10 years, no less -- guaranteed, that is, as long as their funds pay out flat, pre-negotiated, non-success-or-milestone-measured management fees.

Founders and entrepreneurs and startup staff -- and venture firm staff -- are compensated with a mix of cash and vesting equity -- why should the portfolio company human costs be viewed any differently than the funds overheads?

As I like to remind my many VC friends -- the person who is incompetent when negotiating with you for funding is likely to be incompetent negotiating with everyone else, too.

Re: Ideal first round funding terms

Matt Mihaly — Tue, 18 Aug 2009 20:53:06 -0000

Bubba: If an entrepreneur is willing to pursue it while eating Ramen that doesn't speak to the quality of what he/she is working on. It speaks to his/her dedication to build something and not profit off it until it's created value for the investors backing it.

--matt

Re: Ideal first round funding terms

Bubba — Tue, 18 Aug 2009 15:52:11 -0000

This is a great piece. I'd have to agree that setting standard boilerplate terms and conditions makes a lot of sense, reduces time and cost, etc. I'd also agree that the vast majority of wasted time and energy in non-standard deals is usually around those points that have the lowest probability of impacting long-term value in success.

The only point of disagreement that I'd have with what has been presented is on founder comp. As it looks like I'm in the significant minority here, I'll just make the quick point and move on.

It's been my experience, over the past 18 years or so of investing in deals (and bringing in investments as well), that you get what you pay for, and the management team (particularly in a start up) is critical to the success of a venture. If you cap what you're willing to pay arbitrarily, then you're either investing in the wrong company, are investing in a company whose founder isn't necessarily critical to success, or setting a criteria that could lead to you not participating in a great deal.

I've personally seen few deals that the valuation (if the company was successful) was more important than the key people driving the company.

Maybe put another way, if an entrepreneur and/or his venture is so tenuous that he's willing to pursue it while eating Ramen, then maybe it might not be the right deal.... I don't know of too many of us in the VC community eating Ramen until we've hit our return hurdle to our investors...

Just some food (hopefully not Ramen) for thought...

Re: Ideal first round funding terms

chris dixon — Tue, 18 Aug 2009 10:36:27 -0000

Andy - I would hope all engineers do an expected value calculation. If they don't believe the company is exceptional, they shouldn't join.

Re: Ideal first round funding terms

Peter — Tue, 18 Aug 2009 01:32:29 -0000

Chris- I wholeheartedly agree with what you say.
We recently had a discussion with another founder about the CEO compensation. I believe the right incentive is that the optimum is a mixture of fixed and variable. Fixed should be high enough so that they don't have to worry while the variable should be something around 20 to 30% and based upon specific goals for that period (usually one year). The variable should only come from the actual cash they were able to generate. Hence this is only reasonable when the startup is cash-flow positive. I believe success on the way should be rewarded.
Interested to hear your opinion on that.

Re: Ideal first round funding terms

William Carleton — Tue, 18 Aug 2009 00:01:15 -0000

Chris, great post; I hope you've started something that leads to further standardization at the seed and Series A stages. I have to differ, though, where you recommend that entrepreneurs go with the "standard" startup lawfirms (and this is based on a single bad experience?). Not that there is anything necessarily wrong with them for being the conventional choice; Wilson lawyers at the Seattle office in particular in my experience have always been stellar. But there are plenty of us "non-standard" lawyers at small firms and boutiques who leverage past experiences working with startups, investors, in house, etc., who are passionate about entrepreneurs and whose counsel and advice may mesh better with serial entrepreneurs in particular who don't necessarily want to tread a prior path. Just saying.

Re: Ideal first round funding terms

chris dixon — Mon, 17 Aug 2009 22:03:37 -0000

Hi Tom -
Thanks for the comments. I'd generally agree with what you say. I'd definitely agree that the particular attorney matters more than the firm just as the particular VC does more than the VC firm.
On fees I agree I'm being aggressive (on the low side) but think it's doable, especially if you agree to "standardization" as Fred Wilson suggests.
I haven't done foreign deals - I expect your are right about that.

Re: Ideal first round funding terms

Tom Klein — Mon, 17 Aug 2009 21:57:13 -0000

Nice post by Chris, but I have a few important tweaks:

1. Find a start-up lawyer, rather than a start-up law firm. Even at the firms Chris mentions, there are attorneys insensitive to start-up concerns. I practiced at Wilson Sonsini for 19.5 years before moving to Greenberg Traurig's Silicon Valley office. GT's Silicon Valley office has excellent start-up attorneys.
2. Cost. I believe that the quotes you will receive for Series A rounds will exceed Chris' estimate of $10K for both sides. However, there are ways to keep the fees modest. One way is to limit diligence and disclosures. If the company is a raw start-up, then there should not be much if any diligence. If the company has an operating history, has patents or applications, or has spun off from another company, then there may some form of diligence investigation. In life science transactions, it is typical for investors to do a "freedom to operate" analysis, which usually costs $5,000 by itself. Another way to limit costs is to make sure there is indeed an agreement at the term sheet level. Negotiating changes later in the process when the documents are largely completed adds to cost (just like change orders with a contractor; there will be additional fees).
3. Most US first through third tier venture capital funds will adhere to the basic terms Chris outlines. Foreign firms and angels usually have their own pet provisions, as do corporate investors. Expect deviations when not dealing with experienced U.S. venture funds.

Re: Ideal first round funding terms

Andy Freeman — Mon, 17 Aug 2009 21:21:22 -0000

> Hey matt - Well, first let me clarify what I mean by subsistence salaries.

Shouldn't you also clarify what you mean by "employee"?

If we're talking about someone who has a significant equity stake (including options), subsistence salary makes sense. However, if we're talking about someone who has >1%, it's insane.

Let's do the math. Most of these companies will fail. Of the ones that don't, the vast majority will go for less than $100M. If the company "goes", that's $1M to our 1%er. Over five years, that's subsistence $200k/year. However, in most cases, it's $subsistence for five years. The expected value calculation is between those two end-points, but closer to subsistence than $200k.

There's a Dilbert about a company that thinks that it can find good engineers who can't compare salaries.

How many good engineers do you run into who won't do an expected value calculation?

Re: Ideal first round funding terms

chris dixon — Mon, 17 Aug 2009 18:53:00 -0000

Hey matt - Well, first let me clarify what I mean by subsistence salaries. If someone is a single parent with 2 kids and lives in a major city and doesn't have savings, subsistence to me might be >$100K. The point is enough to not have them spend time counting pennies but little enough that they make any "real" money on the equity.

Also I'm sure it varies by stage. I am thinking particularly at the seed stage, which is what I'm most familiar with. I'd expect at your stage you hire sales people etc at market cash comp prices and I expect that's the best strategy.

Re: Ideal first round funding terms

Matt Blumberg — Mon, 17 Aug 2009 18:31:16 -0000

I'm surprised you think all startup employees should have subsistence salaries. I guess it depends what you mean by that, but doesn't that cut off a pretty big swath of talent?

Re: Ideal first round funding terms

chris dixon — Mon, 17 Aug 2009 17:21:17 -0000

John - I am not an expert on this but I think most institutional investors basically insist that you become a C-corp because their investors (LPs) require it because they don't want to be liable for taxes on profits. Most individual investors don't care and might even prefer a pass-through entity (S corp or LLC).