Looking to raise money? Read this first…

If you are a first time entrepreneur and raising money, it is always difficult to differentiate between the terms offered by different investors. But this is the sort of thing that could make a HUGE difference 5 years down the line.

Eduardo Saverin (co-founder of Facebook), had his shares diluted to 0.03% of the company after Zuckerburg raised a round without his knowledge. So structuring a decent term sheet is definitely something you will want to do as an entrepreneur, mainly to ensure you still own the company if more investors enter the fray in the future!

A friend of mine is currently in the process of talking to VCs for his first ever funding round {I think I’m more excited than he is}. While he is excellent at what he does (tech), he is not very familiar with the nuances of term sheets and the rest. I did some research and sent him a list of some links for self-study.

So here are some excellent resources for those who want to familiarize themselves with how VC funding works, and what you need to look out for as an entrepreneur when talking to VCs or other investors. I think this might even be useful for early stage employees at companies which might be looking at funding rounds in the future.

1. Brad Feld’s Guide to Term Sheets — Brad Feld started investing in startups in the 1990s. I don’t think they were even called startups back then. But he has written what is possibly the most comprehensive guide to term sheets there is, and it is written in a way in which anyone can understand. He also explains some of the ‘tricks’ VCs use, which are often to their advantage and to the disadvantage of entrepreneurs and later stage investors.
2. How Venture Capital Works — This is a great article by the Harvard Business Review. It is an excellent overview of what VCs look for, and clearly explains the ‘economics’ of VC financing. One thing which will become very apparent to you after reading this article is how expensive VC funding is.
3. Term Sheet Hacks — This article starts with the statement ‘VCs take advantage of entrepreneurs who haven’t been through this before…’. So it is written with a first time entrepreneur in mind. It has lots of links to great material, which you should read if you are looking to raise any time soon.
4. How to Negotiate with VCs — Another good article from HBR which proves that you need to look beyond just the money when taking on an investor. Most VCs offer a lot more than just money, so you need to carefully weigh up the advantages of different VCs and what they bring to the table.
5. The Secret of Raising Money — A blog written by two very accomplished entrepreneurs (Seth Goldstein and Michael Simpson) who have raised a lot of money in the past and had successful exits. They also have a book which has lots of examples about their experiences. Lots of interesting tactics in here too.

Having read these articles in detail, you will have learnt a lot about the art of negotiating with VCs, and how to avoid deals which end up screwing you over in the future. The thing with financial instruments is that they look OK on the surface, but you need to look far into the future, and at all possible scenarios to determine whether they’re worth getting into.

The important thing to remember is that VCs have been doing this far longer than you have, and so they have a number of tricks up their sleeves, and you need to keep your eyes open. Of course, this isn’t implying that VCs are out to screw you, but when there is money involved, everyone is looking out chiefly for themselves, so you gotta watch your own back!

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