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Confounded by convertible notes? Vexed by venture capitalists? Guess what…you’re not alone.
The world of venture financing is a confusing compendium of abstruse legal language and tediously technical terms that are meant to serve the needs and interests of everyone involved, but often work to make the whole thing confusing and inaccessible.
The reality is, if and when you get into the nitty-gritty of actually having to raise capital, you have many choices. Before you decide which path to take, it is incredibly important to understand some of the things that will impact not only this round of funding; but, also, any subsequent round of funding that you may take.
What type of legal entity should you form? What is an angel investor vs. a venture capitalist (VC)? How do you decide which firm to approach? What is this thing called a Term Sheet? Or, a no-cap, no-discount convertible note?
Before you hire a wildly-expensive attorney or try to talk your Aunt Larissa into lending you $25,000, there are some basic things that you need to know. We’ve created the following list to get you started.
Fair warning! This list assumes that you are heading down the venture capital route. In the future, we will detail other ways of funding your business (grants! crowdfunding! bootstrapping! bank loans!); venture capital is right for only a small portion of companies and there are lots of ways to build big, successful companies without it. If you are wondering if your company is right for VC, we encourage you to read Chris Dixon’s very straightforward blog post on that topic.
Love it or hate it, VC is hot right now and we want you to be informed.
Yes, he has a propensity to drop the F-bomb and create some seriously ugly slideshows, but there is lots to love about Dave McClure–including his recent challenge to get more women involved in angel investing. In spite of his convention-be-damned attitude, his blog contains some great advice on running a startup and fundraising. We love his light-hearted attitude, but, most of all, we love that he is one of the leading champions of female-led companies and that he puts his money where his mouth is.
The guys from Venture Hacks have also created one of the most popular new sites for gathering information when you are seeking angel investment–AngelList. Prior to launching AngelList, they created Venture Hacks to provide early stage startups with advice to help them get off the ground. In addition to detailed posts on the nuances of financing, you can find a sample cap table (an Excel spreadsheet that shows who owns what in your business) that you can download and play around with for $9.
General Assembly, a NYC-based technology and education campus, has launched a series of online tutorials that are free and provide the fundamentals of how to launch a web-based business. Their “Raising Your First Million” class provides an overview on how to develop your fundraising strategy.
This is the companion site to the book, “Venture Deals” (see below). The site includes a lot of great–and, free–information compiled by two well-respected venture investors, Brad Feld and Jason Mendelson.
Fred Wilson is a VC (venture capitalist) with Union Square Ventures. He also has a highly-engaging blog that covers a range of topics relevant to entrepreneurs–including financing decisions. We encourage you to not only review his posts; but, also check out the comments. He has one of the most engaged and informed audiences on the web.
The Q & A site Quora is great for general questions around financing, as well as more specific questions like, “who are the top 5 angel investors in the education space right now.”
By Brad Feld and Jason Mendelson
By far the best introduction to the pro’s and con’s of seeking angel and venture dollars. This is an honest account of the fundraising process told by both VC’s and entrepreneurs. The book goes into great detail around certain need-to-know terms and provides some critical insight into the myriad factors that influence VC’s investment strategies.
By Mahendra Ramsinghani
If you’re looking for a bit of deeper dive on some of the specific terms that you might encounter in a term sheet; the underlying motivations that drive venture capital investing; or a broader discussion of the structure of VC funds, this is a great place to start.