F|R Crib Sheet: The Term Sheet Glossary

I work as an attorney to a lot of company founders, and I know from experience that when the time comes to negotiate a round of funding, entrepreneurs often find themselves at a disadvantage. Much of it has to do with language. There is an array of terms and issues that investors and lawyers work with regularly and understand, but that entrepreneurs deal with only once in a while. It would take many posts to cover all of them, but here is a Crib Sheet of 10 Key Terms that clients most often ask me to explain when they receive term sheets from prospective investors.

Let’s start with the basics of valuation. The three biggest questions I get are: How much is my company is worth? How much of my company will I have to give up? How is that calculated? Three valuation terms you need to know are: Read More about F|R Crib Sheet: The Term Sheet Glossary

Found|LINKS: Mar. 29 – April 5

This week’s short list of stories, posts and other founder-resources you shouldn’t miss.

1.) missionaries.png From VC John Doerr, check out this slide outlining the difference between mercenaries and missionaries of entrepreneurship.

Missionaries are good (passion). Mercenaries are not (paranoia). The slide is from a presentation Doerr gave at Stanford on April 2, 2002 (!). We got it courtesy of our friends at VentureHacks, who do a great job of finding needles in haystacks.

Also watch the video of Doerr’s talk:

2.) Valuation: Bad economy? Yeah. Selling opportunity? Maybe. Check out Inc. magazine’s flagship company valuation guide, The Most Valuable Companies in America : “Investors are loaded with cash. Boomers are looking to buy. Foreign firms are eager to invest. What does that add up to? A seller’s market for your business.” It describes the main buyers (serial entrepreneurs is one to pay attention to!) and has slides on cheap vs. expensive shops. We note that besides software, the hottest businesses are “anything aimed at the aging U.S. population.” (F|R has written about this previously.)

3) Understanding Venture Capital. It’s a hard nut to crack. But this paper form Havard Working Knowledge attempts to decode the often seemingly arbitrary valuations of vc-backed startups by “explor[ing] mechanisms for limiting the asymmetric information that potentially plagues the acquisition of young venture capital-backed companies.” As you seek funding for your own company, this ought to help you understand how startups are VC-funded and why; how they’re bought and sold, and why. One of our key takeaways: it is strictly because the notion of value is relative/subjective that relationships are so important in this business; for deals to work well it is critical that perceptions of value between two parties are compatible, which usually (but not always) means interests must be aligned. Hence Harvard’s emphasis on the “bridge-building alternative [because] the personal relationship between the two firms is critical to conveying value-relevant information about both the target and the acquiring firm.” Just ask Jerry Yang at Yahoo!.

Question of the Day: Wanna go Dutch?

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NetSuite went public Thursday in a Dutch auction, meaning its shares were priced through an auction of would-be buyers, not by a handful of investment bankers, as is the process in a traditional IPOs. (NYSE: N)

Bankers tend to under price IPOs by a few bucks to guarantee their clients a quick pop in value on the day the shares debut. Trouble is, the “clients” best-served by old-school IPOs are the institutional investors and wealthy brokerage customers with friends on the bank’s syndicate desk — NOT the hardworking founders of the company, who are made to sell their equity at a discount to give others that instant upside.

Using open bidding, Dutch auctions aim to price equity “fairly.” The idea, first notably used by Google, was actually hatched by veteran Silicon Valley banker, William Hambrecht, of WR Hambrecht & Co. (We’ll interview Mr. Hambrecht on Found|WATCH in January, so stay tuned for more from this thought leader.)

Dutch auctions haven’t gained much momentum yet, but given NetSuite’s performance, they might finally catch on.

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Priced at $26, shares soared 77% in their first two days, closing Friday near $39. But this, then, begs our…

Question of the Day:
Despite the Dutch auction, could the post IPO run-up mean NetSuite founder, Evan Goldberg, left money on the table anyway?

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