« Controlling | Home | Diagonale 2004 »

28.02.04

Venture Capital

interessanter Artikel von Tim Bray (durch Thomas H., danke!). Auszüge daraus:

Terms
If you haven’t been through this process, you might think that the deal would be simple. You agree with the VC that the company’s worth say ten million, and they’re going to give you three million for 30% of the company. It’s not like that. Among other things, most deals are bigger than this, and there’s the issue of ’pre-money’ vs. ’post-money’ valuation, but what’s really material is the Terms that the VCs ask for; these are many and various and worth going into.

Preferred Shares
This is the Term from which all the others follow. You, the founders of the company, own common shares. The VCs, in exchange for their investment, get Preferred Shares which have a bunch of extra rights attached.

Board Seats
The investor group (and it’s nearly always a group, not just a single VC) get one or more seats on the Board. Typically, they don’t want or ask for a majority position. You don’t hear too many gripes about this one; the VCs are often in a position to help out with introductions and they’re likely to have seen a lot of the problems you’re going to have, so VCs on the board isn’t an onerous term, especially if you get one of their senior people.

Reporting
The deal will include a bunch of requirements for you to give your investors regular reports on how the company’s doing. If one of your investors is ’institutional’ (say a bank or a pension fund) you will regularly get requests down the road for more and more detailed and frequent reports as the institutional management tightens the screws on their internal people, but you don’t really have to do anything more than the Investment Agreement calls for.

Ratchet
This is one of the ugly ones. Suppose the VCs have put in their three million. Suppose you don’t do very well and you’re running out of money and you go out to raise some more and the new investors think the company’s only worth five million. A ratchet says that the dollar value of the VCs shares isn’t allowed to decrease. So if the company is now deemed to be worth $5M, their $3M investment is now worth 60% of the company, and youre required to issue them enough new shares to get them there. Of course, this can lead to ridiculous situations when the valuation of the company drops down near or even below the original investment (happened to a lot of companies post-bubble) and the investors end up owning more than 100% of the company.

Liquidation Preference
Let’s go back to the three million dollar investment. The VCs will ask for at least a ’1x’ liquidation preference; that means that if the company is sold or goes public or something, i.e. the shares actually are worth something, then they are guaranteed to get their money back first. That is to say, if you were doing badly and sold it for $5M, they’d get their $3M and the rest of the shareholders split up the remaining $2M. This is innocuous enough; but in recent times some VCs have been demanding ’2x’ or higher liquidation preferences, I’ve direct knowledge of at least one ’4x’ and heard horror stories of even higher numbers.

Tranches
Suppose, once again, you do that $3M deal. The idea of tranches is that instead of giving you all the money up front you get $750K today, then in six months if you’ve hit certain milestones (usually revenue-related) you get another $750K, and then the remaining $1.5M after another six months, once again depending on you meeting your revenue targets. Entrepreneurs hate tranches with a passion, because they know that most successful companies have had changes in direction, which tend to make former milestones irrelevant, and if you miss a target you’ve probably been spending money to get there, so if the tranche ain’t there your back is to the wall and you’re going to have to re-cut the deal to keep the doors open, probably at a lower valuation; and then the ratchet gets you.

Nickels and Dimes
When a VC invests in you, they spend some real money on getting all the contracts and other legal work drawn up and drafted. They don’t pay for this, you do, out of the money they give you. While this doesn’t have the potentially lethal consequences that ratchets and liquidation preferences do, every entrepreneur I’ve ever talked to finds it violently irritating; I thought the idea was that we were supposed to use the money to build a business and succeed, not to pay legal bills.

Terms in Recent History
What happened was, there was a fairly standard set of terms stretching over the years, but then in the late Nineties the entrepreneurs and the VCs both had a case of bad bubble craziness (me too). The VCs and entrepreneurs co-operated in enthusiastically throwing a lot of other people’s money away on stupid ideas. The other people the banks, pension funds, and other flavors of money that fund the VCs got seriously irritated and beat up those VCs that didn’t just shut down."

You may wish to leave a from your own site.