Venture capitalists already don’t much like TheFunded, a site that launched last March that lets entrepreneurs post stories about how they’ve been treated during the fund raising process.
But now they’re really going to be angry – the site is encouraging users to upload term sheets so that people can compare and contrast individual terms from each VC.
Venture capitalists have a lot of leverage negotiating terms that help them increase ROI simply because they have a firm grasp of the market. Things like liquidity preference (how much money they get out before the founders in a sale), veto rights and other preferred stock privileges can affect the long term economics of a deal substantially.
Entrepreneurs generally rely on their attorney and contacts to help them understand the current trends in terms. Now, though, TheFunded will help them by supplying even more information. Entrepreneurs will love this. VCs, not so much.
One catch, though. Entrepreneurs must upload their own term sheets before they can view others. The goal is to encourage participation, not just data downloads.
TheFunded was run anonymously until Adeo Ressi announced that he was behind it in November.
keep in mind the VC’s are going to start to look at this to see which entpreneurs are violating confidentialities….
not to smart on the entreprenuers… if they want a chance of getting funding from another vc or in the future
How does this work for first-time entrepreneurs who have no term sheet to upload? It sounds like they could not view any of the uploaded term sheets, and they are exactly the ones who would benefit from them and need them the most. I wonder what percentage of TC readers never actually saw a term sheet. Survey?
This is great
the world is getting more fair
The precept here is that VCs are trying to screw their portfolio companies. The problem is, it’s generally not true.
What is true is that VCs don’t like to take risks they don’t have to. So they’ll try to lock in some degree of downside protection via liquidation (not “liquidity”) preferences.
Working in the entrepreneur’s favor is the fact that subsequent rounds will demand terms at *least* as favorable for themselves, and they get taken care of first. That means that in an unhappy outcome the earlier investors get screwed right along side the entrepreneur. So there is a built-in reason for VCs not to get out of control.
The single most important thing an entrepreneur can do to protect her/himself and the other common shareholders is to have an experienced law firm representing the company. Those lawyers see a lot of term sheets, and they know where “market” is at the moment (note: it changes). This has two benefits: they can tell you whether what you’re being offered is good/bad/great in light of the *current* market conditions; and the venture firms know this to be the case and therefore tend to stay within the bounds of good taste.
Ultimately, the key to company-favorable terms is competition: make sure you have at least two term sheets. Like all other investors (and the rest of humanity), they live on the boundary between fear and greed.
Very nice. There was a very nice article on him at BusinessWeek Magazine couple of weeks back.( Was very nice to read ) and inspiring.
I felt he is really a nice guy like Mike.( And strong too )
Cheers, Nag
No sweat.. Valley VCs been losing lustre for years, ever since the bust (except those on that Gooooooooooogle jet maybe)
Apart from GOOOOOG, not a single spectacular IPO this time around and fewer M&As. VG was flushed down the toilet and won’t make it. Last time around, the line was endless … Netscape, Yahoo, amazon, Excite, Exodus, Ebay, Priceline, Inktomi, Akami, amid countless other deals. TC, phee-cee, gigom etc wont get to IPO ever
So there: head East young man, head East. HOT year-round in Shanghai and Mumbai (no kidding :0))
Oh wait, there’s VMware and few more in select niches….. but still , just quite not like then
I read this article and liked that it was useful. I then guessed that it was prob an Arrington article, scrolled up and wasn’t surprised.
thanks….
VC will be funding seattle startup weekend’s project soon..
http://mogulus.com/mndoci
http://flickr.c...weekend+seattle
It’s only the crappy VC’s that have term sheets. The best funds like the founders and First Round use standard term sheets anyway.
There’s a perception that TheFunded is anti-vc. But it’s not. It’s a review site, and some guys get bad reviews (some get great reviews). It’d be like calling Yelp anti-restaurant for having a bad review Gary Danko.
And as a resource, the term sheet database is just fantastic. (and anonymized wouldn’t violate any confidentiality agreements.)
I can just imagine all kinds of possibilities with it. I’d love to track the terms over time. Remember in 2003 when liquidation prefs skyrocketed to 3-5x?! With sufficient participation, this database could provide a real-time view of the investment climate. As it is right now, you have to wait till January for PWC to publish their report.
Kudos to Rossi for a kickass site.
Ya think this will last? Not hardly. VC’s have the money, which is the power to stop disclosure of their term sheet. Anonymity be damned. I give this maybe a year..then dead pool.
The fact is that if you’re an entrepreneur and you have an attorney who deals in these matters all the time, your attorney will have a pretty good idea of what is market and will advise you that the VC is pushing the envelope in certain areas.
VC’s don’t give entrepreneurs NDA’s so why should they have the benefit of an NDA on all their deals.
If they send a term sheet and it has a confidentiality agreement in it and you don’t sign the NDA, you are free to distribute it in my opinion unless there is a previous written agreement precluding you from distributing or sharing.
This is great and all, until you try and get a meeting and have to sign a “will not post any review on this shitty website” or else they wont see you.
Enjoy the 15 minutes of fame.
Venture lawyers often give bad advice. Case in point: they still advise companies that a 3x liquidation preference is not outside the boundaries of reality…?
VCs can not with good conscience insist that a CEO not fill out an anonymous survey.
TheFunded is just a site with information. None of this would be a big deal unless people have stuff to hide. Seems that there is a lot to hide given the controversy.
long over due,taking away some of the black magic VC’s hold over applicants.
@16: couldn’t agree more
If some VCs are scared of transparency, it probably says something about how they will treat you if you do business with them. In fact, I’d look on this list and cast a wary eye on people trying to scare you away from TheFunded or otherwise put it down or the people who use it. That is a warning sign.
Of course, people need to use TheFunded responsibly, and not post negative reviews just because someone decided not to invest or was a good negotiator or something. And, yes, TheFunded needs a good system to address “trasher” concerns and/or “shills” or “fluffers.” I am guessing that the system will improve over time and it will become increasingly valuable to both investors and companies.
The best VCs — the ones with nothing to hide — will encourage increased transparency and encourage deal prospects to check sites like TheFunded. They will benefit.
The sketchy VC will discourage prospects from using sites like that. They may even try to scare people away from using it or refuse to do business with people who do. That would be like the home contractor pitching you on his services not wanting you look him up on the BBB website or refusing to do business with you if you do or if you express an opinion about your business dealings with him. It just makes no sense.
The best VCs will like the increased transparency. They sketchy ones, not so much. That’s the way it should be. That’s the direction we want to take things. That would be good for everyone (except the few rotten apples in the community). I say that as an entrepreneur, an investor, and a former venture debt and equity professional who has invested hundreds of millions of dollars.
Due Diligence
A good due diligence item for any entrepreneur is to check TheFunded (and similar sites). Same as checking out a seller’s reputation on eBay. Yes, sometimes there will be a person who trashes a seller for a minor thing, but it’s usually obvious that it’s an outlier. But if you see many negative reviews, it’s usually a good indication to stay away.
Another DD question might be “What do you think of sites like TheFunded?” No matter what response you get, it will be a “tell” about the prospective investor. And if they use your asking a legitimate DD question like that as a reason not to do business, then that probably confirms that you are dealing with someone who has something to hide. And if that is the case, it would probably be good information to share on sites like TheFunded.
Cheers,
chriso
#5: “The single most important thing an entrepreneur can do to protect her/himself and the other common shareholders is to have an experienced law firm representing the company.”
People need to remember that the law firm make their money from doing deals. The way they get to do that is by having good relationships with VCs. Part of that means, not screwing up their deals. So it should be obvious that there is a conflict of interest here. It doesn’t mean that good lawyers can’t and don’t balance that out, but that doesn’t change the fact that there are incentives at work that could run counter to the interests of the “company” side of the VC/company spectrum.
I am wondering why that was not mentioned.
Cheers again!
PS: See this link for the following info, which may be of interest (just bear in mind the source): http://www.nvca...model_docs.html
The model venture capital financing documents consist of:
* Term Sheet
* Stock Purchase Agreement
* Certificate of Incorporation
* Investor Rights Agreement
* Voting Agreement
* Right of First Refusal and Co-Sale Agreement
* Management Rights Letter
* Indemnification Agreement
Excellent addition to ‘TheFunded.com’ – and about time too. This should really level the playing field.
There’s a strong reason to drop the “post to view” policy, which requires that you can’t view any of this ‘term sheet’ information until you post one yourself. I’m a bootstrapping entrepreneur who has not raised VC money yet, even though I’ve been a founder previously. Also, I founded a group called “Agile Entrepreneurs”, where founders of startups who are primarily bootstrapping gather to share advice and information to help each other. Our entire group of about 50 entrepreneurs would benefit immensely from seeing the term sheet information. But with the “Post to view” condition, those who most need the information – the vast majority of our bootstrapping, first-time entrepreneurs – will be denied access to it.
The Funded.com needs to reconsider drop “Post to View” policy immediately.
Forget sending your termsheet to The Funded. Just send it to Arrington he will publish it for you.
confidentiality issues aside here, more transparency is good for the market.
whether or not VCs are “fair” about terms & liquidation preferences, there is a substantial amount of transaction asymmetry between entrepreneurs & VCs.
more education & transparency will help increase overall health of market in the long-term, and likely contribute to expansion.
A free market requires (more) perfect information. The VCs can use this fact to their advantage by prohibiting disclosure.
good information
Great – I for one encourage perfect information. Of course this means that we need another site that uploads confidential financial and IP information from startups.