Naval Ravikant of Venture Hacks & The Hit Forge was the featured speaker at the August 28 Startup2Startup. Naval gave valuable advice to the audience of over 100 entrepreneurs on raising capital and negotiating term sheets. The feedback on Naval’s presentation was wildly positive, as Naval helped both first time and serial entrepreneurs peek into the black box that is venture capital.
(fyi: Naval’s slide presentation is below, and a video interview with Naval is included at the bottom)
The 10 key things that you should know when raising venture capital, according to Naval:
1. Try to maintain control of the board for as long as possible. Naval had a few key recommendations, including the design goal of having board seats reflect ownership. Common board seats will unlikely increase, whereas new investors will often require a board seat/s as part of a financing.
2. Valuation is driven by the market; don’t take every penny off the table. Entrepreneurs often focus exclusively on valuation and don’t pay attention to other key termsheet items. Naval suggested that entreprenuers get a few termsheets before aggresively negotiating valuation with anyone. And don’t take every penny off the table. On valuation, find a fair deal for both sides — “money has karma, too.”
3. Pay attention to the real impact of the option pool on founder equity. Many entrepreneurs figure that raising $x on a $y valuation leaves them with equity of y/(x+y) . So, for example, a founder may assume that a $4MM raise on a $6MM pre-money valuation leaves founders with 60% ownership. But if the employee option pool is 25% of the post-money (as it is typically expressed), but taken out of the pre-money (again, standard), that actually leaves 35% for founders (60%-25%). This is not a “trick” by investors and is standard practice — but few first-time entrepreneurs understand the importance of taking the equity pool into consideration when understanding the real dilution a financing will have on them.
4. Vesting, even for founders, is a good idea. Naval argued that many early stage companies have early founder issues. It’s not a bad idea for FOUNDERS to support a standard vesting agreement for other founders. What if a founder doesn’t work out and walks away with more equity than the entire employee option pool?
5. Ask for “standard” liquidation and anti-dilution provisions. Allowing investors to get their money out first is very reasonable and standard in a financing. Just make sure that the terms aren’t dramatically different as things can get very complex and extremely founder unfavorable once you veer from the norm. Good investors shouldn’t ask for more, at least not in a Series A.
6. Read the small print on protective provisions. The idea here is to protect minority shareholders.
7. Expiration and non-disclosure. It’s reasonable for venture firms to request that their term-sheet not be shopped. However, if you need more time to explore your options it’s also reasonable for you to ask for more time to finish your process. Don’t allow a firm to pressure you into signing before you’re ready.
8. Counsel. Get your own advocate.
9. Watch out for non-standard terms. Naval discussed new terms that he has come across in venture termsheets — for example, one-sided binding termsheets. Your lawyer should be able to provide guidance on what is standard versus non-standard. It’s generally not worth your time fighting the industry norm on termsheets, but it’s also likely not worth your time to do business with venture firms who ask for one-sided terms that are non-standard.
10. Finally, don’t forget… your 83(b) filings so that you can get the long-term capital gains clock ticking right away.
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