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The Holloway Guide to Raising Venture Capital

A current and comprehensive resource for entrepreneurs, with technical detail, practical knowledge, real-world scenarios, and pitfalls to avoid.
310 pages and 822 links


Updated September 15, 2023
Original Author
Andy Sparks
Contributing Authors
Rachel Jepsen
Contribution and Review
José Ancer (Egan Nelson LLP)
Michael Brown (Fenwick & West)
Brad Feld (Foundry Group)
Chris Field (Clerky)
Eric Friedman (Building the Machine)
Alexander Graebe (HyperTrack)
Chris Harvey (Harvey Esquire)
Lindsay Knight (Chicago Ventures)
Craig Montuori (Global EIR)
Danielle Morrill (GitLab)
Leo Polovets (Susa Ventures)
Camille Ricketts (First Round, Notion)
Joe Sadusky (The Wordsmith)
Santosh Sankar (Dynamo Venture Capital)
Aaron Schwartz (Passport Shipping)
Tess Townsend (Journalists in Classrooms)
Tyler Tringas (Earnest Capital)
Joe Wallin (Carney Bradley Spellman)
Eugene Wan (The Engine)
Darby Wong (Clerky)
Haley AndersonResearch and Definitions
Hope HackettSwiss Army knife
Nathaniel HemmingerProduction
Rachel JepsenEditor
Joshua LevyEditor and Production
Sakhi MacMillanCopyeditor
Courtney NashEditor
Dmitriy KharchenkoGraphics
Leigh TaylorGraphics
And 28 more


Persistence is essential because knowledge is rarely imparted on the first attempt.Bill Walsh, American football coach*

When it comes to starting a business, few individuals have the financial cushion to wrestle with a problem for the time it takes to understand and eventually solve it. Capital gives founders time to experiment with strategies, navigate the idea maze of business and product decisions, and learn from their failures in order to grow, eventually bringing in revenue from customers. Founders often take on immense personal risk by turning to friends, family, savings accounts, and credit cards to finance their businesses. When the time comes to grow that business, venture capital offers a path toward making a founder’s vision a reality where few other paths seem to exist.

The trouble is, raising venture capital can often seem like something only possible for those with deep connections to investors or other founders who can tell them where to begin. No one should be prevented from learning how to finance their business because they haven’t yet broken into the networks where dealmaking starts and “insider” secrets are revealed. When you’re trying to finance your dream, you should not have to have a friend of a friend who happens to be a venture capitalist or successful founder just to get started.

Four Things to Remember About Venture Capital5 minutes, 2 links

As you begin (or return to) your fundraising journey, remember four things.

1. Venture capital is not the only way to fund a business.

We hope to help you avoid mistakes that could cost you years of your life or truckloads of money. This guide will show you the ins and outs of raising venture capital, the benefits and dangers it presents, to help you make informed decisions from the very start. To that end, we’ve included the section Assessing Whether to Raise. Even if you’re dead set on raising venture capital for your business, we advise you to read through this section, which will prepare you for some of the pitfalls you might encounter along the way. We believe you’ll be best suited for success when you see venture capital in context with all the other tools available to you when you’re looking for the cash to build your company.

2. There is no one definitive way to raise venture capital.

This guide will highlight all the decisions, large and small, that can make venture capital work for you. We present differing opinions and showcase controversy, because raising money is no one-size-fits-all formula, and there are a lot of opinions out there on what a good process looks like.

Founders often fall into the trap of reading a blog post by another founder or an investor and taking it as gospel, without analyzing how the advice can or should be implemented to meet the needs of their specific business. On top of this, advice on how to raise venture capital is easily misapplied and often rife with conflicts of interest. Investors may suggest founders take paths that largely benefit the investor’s interests. While this is inevitable and in many cases well-intentioned, it is always important to understand the incentives of people offering advice, and to remember that you have options.

Ultimately, you have to determine what path most aligns the interests of your business, your life, your team, and your investors. The company you’re building is yours, and this guide will give you the knowledge to evaluate the quality and pertinence of what you read and encounter throughout your fundraising journey, to make your own decisions. It’s up to you to determine what applies to your business, where you see potential for compromise, and what you might need to change.

The only good generic startup advice is that there is no good generic startup advice.Elad Gil, startup investor and entrepreneur*

3. Venture capital is powerful, imperfect, and evolving.

The industry rightly lauded for fueling technological innovation is itself due for innovation. It is mysterious, confusing, and plagued by an investment imbalance that often favors the familiar.

Many investors, firms, and founders today are working to figure out how the industry can find and support ideas that have not been heard yet, from people who haven’t yet been heard out. They are experimenting with different funding models, deal sizes, and terms, and expanding what a venture-backed business with high returns can look like. It’s becoming more feasible to build companies—and venture firms—in smaller cities throughout the U.S., and a growing number of firms are choosing to focus on specific regions that have not received much investment attention in the past.

Any founder taking venture funding today is part of this evolution. By selecting an investor, you not only affect the fate of your own company; the firms and investors you choose to work with are the ones who will shape the industry’s future.

4. Venture capital is a tool, not a trophy.

Given the amount of money at stake, a first-time founder may never have experienced anything like the stress or the excitement of raising venture capital. It’s a complicated journey that includes exchanging partial ownership in your company for a substantial amount of money. This exchange is only the beginning of a relationship you will have with your investors that could last ten years or more.

Our purpose for this guide is to give all founders the power to choose how they fund their companies. If you opt in to raising venture capital, this guide will help you do so in a way that optimizes success as your company defines it. Crucially, we hope you will understand venture funding as a means, and not an end,* on your way to building something that lasts.

Scope1 link

This guide covers the process of raising early-stage venture capital for for-profit startup companies in the United States.

The material primarily applies to founders raising pre-seed and seed funding, as well as angel and Series A investment; the guide covers topics related to raising from angel investors, accelerators, and venture capital firms.

This guide does not yet cover Series B fundraising and beyond.

This guide does not apply to many kinds of businesses raising funds, such as small businesses needing to secure loans from banks, the government, or friends and family. It is not written for businesses primarily relying on grants from private or public institutions.

This guide does not directly address issues related to raising or operating a venture capital fund. We recommend that anyone interested in this subject read bookThe Business of Venture Capital.

The Holloway Reader

The Holloway Reader you’re using now is designed to help you find and navigate the material you need. Use the search box. It will reveal definitions, section-by-section results, and content contained in the hundreds of resources we’ve linked to throughout the guide. Think of it as a mini library of the best content on the subject of raising venture capital. We also provide mouseover (or short tap on mobile) for definitions of terms, related section suggestions, and external links while you read.

Part I: The Landscape

Understanding Venture Capitalan hour, 104 links

When it comes to raising venture capital for a startup, many founders find themselves grasping at all the terms and language that get thrown around. What actually is a startup? Heck, what’s a founder? How is venture capital different from other kinds of investment? Who are venture capitalists? How do they make money? If you’ve ever nodded along to a conversation, hoping to get from context a definition of a term you think you should already know, this section is for you. Experienced entrepreneurs may wish to skip it.

What Is Venture Capital?

Venture capital is a kind of investment raised by startups—typically by startup founders—to fund growth. Now let’s break that down.

A startup is an emerging company, typically private, that aspires to grow quickly and substantially in size and revenue.* Once a company is established in the market and has been successful for a while, it usually stops being called a startup.

confusion The term startup does not have legal significance, and in fact, there is no formal, consistent definition for what a startup is.

Startups are not the same as small businesses. Small businesses, like coffee shops or plumbing businesses, typically intend to grow slowly and organically, while relying much less on investment capital and equity compensation. Distinguished startup investor Paul Graham has emphasized that it’s best to think of a startup as any early-stage company intending to grow quickly.* Similarly, The Kauffman Foundation, devoted to encouraging entrepreneurship, categorizes startups as “innovation-driven enterprises” that require innovation in “product, process, or business model,” whereas small and medium-sized enterprises (SMEs) “tend to be individual or family owned with little outside investment.”*

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VC Firms and Funds

Definition A venture capital firm (VC firm or venture firm) is a collection of legal entities formed for the purpose of generating substantial returns for its investors by investing in high-risk companies that have yet to prove that their business models work and are sustainable in the marketplace.

Definition A venture capital fund (or venture fund) is a legal entity, created by—but separate from—a VC firm, that pools money from outside investors and directs investments to companies seeking capital. Venture capital funds are typically structured as partnerships.*

It is helpful to understand venture firms as institutional investors to differentiate them from other kinds of startup investors, such as angels, and when contrasting institutional venture rounds from angel rounds.

confusion Venture capital firms and venture capital funds are not the same thing. A venture firm is the perpetual legal entity under which many individual venture funds can be raised and closed over time. For example, Hunter Walk and Satya Patel run Homebrew, their venture firm. In a post on the Homebrew blog, Hunter and Satya announce that they’ve raised $50M for “Homebrew Fund II,” the second venture fund raised and managed by Homebrew.

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Exits and Returns

When founders and investors disagree about scale or speed of growth, it often comes down to what VCs expect in returns (and need to deliver to their LPs), and how they chase them. In this section, we’ll explain how VCs generate returns through exits. To learn how VCs measure returns before and after a company’s stock has become liquid, visit Appendix B.

Definition In finance, a return is the profit an investor receives from an investment. Returns can be expressed as absolute sums (“the fund returned $30M to investors”), multiples of the original investment (“the investment returned 3X”), or as percentages (“the fund boasts a 300% return”).

Limited partners expect venture capital firms to generate net IRR (internal rate of return) in the neighborhood of 20% annually—no small task when you’re talking about tens or hundreds of millions or even billions of dollars. Venture capital funds aspire to generate 3X net IRR. Most firms end up in the 2X category, 5X is the breakpoint for a top-tier fund, and 10X is exceptional (and rarely repeats in the next fund).

So how do venture capital firms generate these kinds of numbers? Through liquidity events.

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Angel Investors and Micro VC Firms

Definition Angel investors (angels or individual investors) are wealthy individuals who invest their own money directly into companies. Angels are almost exclusively active at the pre-seed and seed stages. The most comprehensive list of angel investors can be found on AngelList. Super angels are angel investors with a proven track record of successful investments as angels, but there is no agreed threshold distinguishing them from other angels.

controversy A lot of people don’t consider angel investors to be venture capitalists. In principle, angel investors are a kind of venture capitalist—they’re hoping to make money through returns on their investments into risky, early-stage businesses. But angels and VCs who work for firms with other investors’ money do have a different set of practices and priorities that set them apart from angel investors, including when they invest and how much. In practice, founders and investors generally do not refer to angels as venture capitalists.

Angel investing offers individuals an alternative model to institutional investment, in which they provide money to an entity, which in turn invests in companies. While some angel investors create business entities out of which they invest their money, the term institutional investor is rarely used to refer to them.

Definition Accredited investors are individuals, banks, corporations, or other institutions that hold unique investor status, because their accreditation is regulated by the Securities and Exchange Commission (SEC) and they meet net worth and income thresholds. Their status is based on asset thresholds (typically an individual net worth of more than $1 million or annual income more than $200,000 or $300,000 with spouse, for each of the last two years; or an entity with assets exceeding $5 million). Accreditation is meant to prevent unregulated investors from losing a meaningful percentage of their money on a risky investment.

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Accelerators and Incubators

Many founders don’t start companies with pre-existing networks of venture capitalists and a wealth of knowledge on how to hire a team, build a product, get customers, and raise capital. Accelerators and incubators aim to fill this gap in network, knowledge, and skills. Accelerators and incubators have nuanced differences. Some invest small sums of money in exchange for equity, while others are just physical spaces that offer discounted or free space for founders to work while in the early stages of their businesses. If you’re a first-time founder, accelerators and incubators are worth considering.

caution When considering an accelerator or incubator, be wary. Most accelerators ask for 2–10% of your company in exchange for capital and connections. Make sure the connections will actually be worth 2–10% of your company! The amount of equity you sign over to an accelerator or incubator is literally a price you are paying for a service. Treat it as such.


Definition An accelerator is an institution that offers typically fixed-term, cohort-based programs for early-stage, growth-driven companies, investing capital in and offering services to these companies in exchange for an ownership stake.* Common services include offering access to investor networks, mentorship, office space, and an opportunity to pitch directly to investors at the end of the program. Accelerators differ from traditional venture capital firms in that they focus on investing in very early-stage teams.* Paul Graham and Jessica Livingston pioneered the accelerator model with Y Combinator.*

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There are many steps that founders and investors have to go through to find each other and partner up in an investment. Throughout your company’s lifetime, you will continue to develop your network and deepen the self-awareness and market research required to draw up a convincing pitch. Each time you seek funding, you will be tasked with researching potential investors, getting meetings with investors, making the case for your company, and finally negotiating and signing a term sheet.

Definition Each separate instance of a company raising money—by selling equity, a convertible note, or convertible equity like a safe—is referred to as a venture round (or round).

Definition A priced round (or priced equity) is a direct transaction where an investor purchases a fixed portion of ownership in a company, in the form of shares, in exchange for a fixed amount of capital. This results in a transparent price per share for the company and the investor and giving the term “priced round” its name.

In the context of raising venture capital, founders typically raise a priced round to finance the company for 12–24 months, to achieve a set of clear milestones.

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Assessing Whether to Raise34 minutes, 74 links

Venture capital can look dramatic. Bubbles, crashes, giant IPOs, $7B acquisitions, lecherous investors, and out-there founders with millions of devoted followers make starting a business seem like making the Kessel Run in less than 12 parsecs. This has led to a strange amnesia about how most startup business strategy actually works: selling a product to customers for a profit. This antiquated notion even has its own fancy new term: “fundraising from customers.” Contrary to the way it sounds, this does not refer to customers investing in the company. Rather, it’s encouragement for founders to consider selling their products to customers, rather than selling part of their company to an investor.

From the outside (and even from the inside, if you live in Silicon Valley), it can seem like venture funding is ubiquitous in the world of startups. The truth is, in 2013, .05% of startups received VC funding, while 57% were bootstrapped (these data from Fundable are compiled in a nice visual by Entrepreneur). In 2018, though individual investments were growing in size stateside, the U.S. held 50% of the global startup investment pool, down from 95% in the 1990s. (These data are summarized in Inc.; the full report was conducted by the Center for American Entrepreneurship.)

In the U.S., roughly 43% of public companies founded between 1979 and 2013 have been backed by venture capital firms.* But the majority of companies do not go public, and raising venture capital does not guarantee a company’s success. CB Insights even put together a list of more than 150 companies that raised venture capital and “failed,” some having raised more than $100M.* Venture capital is not the only form of financing for an early-stage company. There are several other sources of capital for startups, including revenue, debt, and revenue-based loans. In addition, a hybrid of VC funding, debt, and revenue is possible and likely.

Consider the highly competitive direct-to-consumer mattress market, which is largely dominated by startup Casper, founded in 2014. (Casper co-founder Neil Parikh made an angel investment in Holloway.) Casper’s dominance is due in no small part to the fact that they spend $80M annually in advertising, having barrelled their way into the market with over $200M in venture funding.* Contrast Casper’s rapid rise with Tuft & Needle, a startup that bootstrapped in 2012 with a $500K loan, became profitable in 2017 on $170M in revenue, and merged with mattress brand leader Serta in a deal rumored to have a value north of $400M.* At the far end lie the earliest entrants to the mattress milieu, Saatva and Amerisleep, both of which bootstrapped their new businesses in 2010, pouring the profits back into the companies and growing slowly. Until recently, neither had taken any form of external funding. (Saatva reportedly just took an undisclosed investment from private equity firm TZP Group.)

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Does Your Company Need Venture Funding?

From a founder’s perspective, there are two main considerations when thinking about whether venture capital is the right form of fundraising for their business: money and time. Venture capital can be a good option if your company needs a lot of money up front before it can bring in revenue—that is, if it’s capital intensive—and if the company needs to grow rapidly to beat other companies to market.

Capital intensive businesses often involve a J-curve, where the business needs to invest a lot of money in research and development before it can turn a profit. Today, biotechnology companies are still highly capital-intensive, as the period needed for experimentation and clinical trials—all before any revenue—can be years or decades. Software companies, on the other hand, generally require less capital than they used to—today, they can turn to cloud-based providers like Amazon Web Services and Google Cloud Platform instead of spending millions on their own servers.

But that isn’t to say software companies can’t be capital intensive. In some cases, companies need to lure particularly specialized—and therefore expensive—employees. Self-driving car startups, for example, need to hire PhDs and also need to purchase expensive hardware before they can even begin much experimentation at all. In other cases, a team will be close to finding a solution for a market, but they need time to iterate, test, and repeat cycles of exploration before finding something that works. If your company faces any of these challenges, raising venture capital may be the right fit.

Companies often raise venture capital to finance growth once a company has found a business model that works. The idea here is that once you’ve figured out how to sell a product successfully and repeatedly, you may want to go hire a larger team to improve and sell your product to the market before someone else beats you to the punch.

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What Does Success Mean to You?

Venture capitalists are motivated—at least in part—by the prospect of huge returns on investments that will make them and their investors rich.

The fact that VCs need to return large sums of capital to their investors creates some incentives that may not align with a founder’s goals. To meet their investors’ expectations, venture capitalists seek to invest in companies they believe can be the biggest, most successful companies in their market.

Some firms out there are happy with smaller returns and smaller exits, and some investors work closely with founders to make sure no decisions are made that the founders are not comfortable with. Other investors are motivated by, in addition to high returns and big exits, the impact their portfolio companies might have on the world. (You’ll learn how to research and discover firms aligned with your interests in Creating a Target List of Investors.) But the VC business model is predicated on growth—there are countless stories out there about companies that were pushed by their investors to move too fast toward becoming a $1B+ outlier. What’s the downside of that?

caution Capturing enormous market share is not in the best interest of many kinds of companies, particularly startups motivated by impact in smaller communities and in smaller sectors. Moving too quickly to grow may result in a company that lacks real understanding of its customers’ needs, and thus lacks staying power. Businesses with sky-high valuations have sometimes not reached profitability, making the future of those companies post-IPO uncertain.

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How VCs Can Control Your Company

The goals of founders and their investors don’t always align. VCs aspire to return 3X their fund for their LPs, but what founders want is less straightforward and can change over time. When these goals get out of line—and they do—things can get ugly fast. Investors can remove founders, block the sale of the company, or hold the threat of these things over founders’ heads in order to strongarm the founders into certain decisions.

How does this happen? Despite the belief of many founders that the best defense to VC control is maintaining greater than a 50% ownership in their company, VCs can control a company via two other powerful mechanisms:

  1. Privileges granted to preferred stockholders in protective provisions that are agreed upon in the investment term sheet.

  2. Seats on the company’s board.

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Alternatives to Traditional Venture Capital

importantRaising traditional venture capital, where you raise a pre-seed or seed round followed by a Series A, Series B, and so on, is far from the only path to building and growing a company. You can finance growth with savings and debt (by taking out loans or lines of credit), bootstrap, or crowdfund. Additionally, many alternative fundraising models have emerged in the last two or three years.

Where venture funding dictates that a company “move fast and break things,” choosing to bootstrap, crowdfund, or raise money via alternative investors can give you more control over your growth rate, which can often work in a company’s favor. Patagonia, for example, reported revenue of $800M in 2016, despite having never taken any venture capital funding.* That said, Patagonia took over forty years to grow to that size, and VC dollars work better for companies interested in high compound annual growth rate (CAGR), which translates to achieving high market caps and margins within five to ten years. Stories of other companies that chose to grow slowly can be found in the book Small Giants.

Other recent examples of successful alternative fundraising strategies include Buffer, Wistia, and SparkToro. After raising a total of $3.95M in angel and venture capital investment, Buffer announced in 2018 that they were buying out their investors through profits generated by their business.* Wistia did something similar, raising $17M in debt to buy out existing investors.* Also in 2018, Rand Fishkin, who previously raised $29M in venture capital for his company, Moz, announced that his new company had raised $1.2M on an alternative fundraising structure focused on profit sharing, citing, “There’s no opportunity for a ‘mid-range’ success in venture capital.”*

Alternative Investors

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Determining When to Raise13 minutes, 21 links

The best entrepreneurs are always raising money, yet never raising money.Unknown

This sentiment has been repeated by Mark Suster, Kleiner Perkins partner Eric Feng, and others, and there’s a reason for its ubiquity. Every minute a founder spends meeting with an investor, whether on Sand Hill Road, in Cincinnati, or in SoHo, is a minute they aren’t meeting with customers and building their team and product. The best entrepreneurs are always raising money, not because their calendars are packed with investor meetings but because they focus their time on building their business, setting themselves up for fundraising success. Nothing gets an investor excited like revenue, customers, and a big market with room to grow into.

If you’ve already assessed whether raising venture capital is right for your company and have chosen to move forward, how do you know if you’re ready to start raising? There are a few things to consider: the time you want to allocate internally, the state your company is in, and the macro calendar of venture capital. We’ll also discuss how to use your raising schedule to give you leverage.

Allocating Time

Except in rare cases (like if you’ve gained a ton of traction by bootstrapping and investors are now selling themselves to you), preparing and running the actual process of fundraising is time-consuming, regardless of whether you’re a first-time or repeat founder.* Raising venture capital almost always takes longer than you think and will distract you and your team from building your company. A founder’s job, especially in the early days, will be hiring the team, sales and business development, building the initial product, and raising capital.

controversy Prominent investors disagree on how much time founders should allocate to fundraising. Paul Graham, founder of startup accelerator Y Combinator, advises startups to constrain fundraising to a limited time period,* while Upfront Ventures partner Mark Suster says startups should allocate a few hours every week to the meetings and activities related to fundraising, citing, among other reasons, that good relationships take time to build, and can’t develop if they’re relegated to specific times of year. Graham suggests startups with multiple founders assign only one founder to fundraising, so that the other founder or founders are not distracted from company operations.

Figuring out whether you can allocate the time to fundraise depends on how long the process will take, right? This is impossible to generalize, but everyone wants to know. So we’ll go ahead and answer this for you, but please take it with a grain of salt, because every fundraising process is different: From the moment you decide to raise venture capital through to signing a term sheet, the process takes an average of three months. If you’ve founded four companies already and your newest one is really hot, it could take two weeks and you won’t have to lift a finger; investors might flock to your door. If you’re just starting out building your network from scratch, it might take closer to six months.

What to Wait For

Startup coach Dave Bailey is adamant that founders wait to raise venture capital. In a blog post, “The Dangers of Raising Venture Capital Too Early,” Bailey provides valuable insights into how venture capital can strap founders into a plan that will keep them from iterating and improving. When your company is still working out the details of its big idea, venture funding can be a mistake because it pressures founders to build a team and a business model before they fully understand their product and customers. If it’s possible to bootstrap your way to some amount of customer revenue, do it.*

Skills are your leverage at the early stage, not money.Dave Bailey, CEO coach*

Most investors agree it’s far easier to have confidence in an individual or team if you can see a trajectory of progress. But at the same time, many founders wait too long before meeting investors. If you feel like you aren’t ready to ask investors for money, it can still be a great time to meet them to begin building a relationship—you are, after all, signing up for a multi-year journey that potentially involves millions of dollars. “You ask for money, you get advice; you ask for advice, you get money” is another quip heard frequently in the startup ecosystem.*

danger Don’t fundraise right after a major failure.*

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The Macro VC Calendar

Figure: Lack of Seasonality in VC Funding

Loading chart…

Source: Crunchbase*

Scarcity and Parallel Fundraising

important Having more interest in your company than you can possibly accommodate is a highly valuable situation for any founder. Generating more demand for your round than you have room for—that is, creating a sense of scarcity—helps you gain leverage by increasing the urgency with which investors approach your company. When you decide to raise a round is crucial, and the way you schedule meetings within that round can greatly affect whether investment in your company is seen as scarce—something investors will fight to be part of.

FOMO may be an obnoxious acronym, but it’s a very real thing. The fear of missing out influences how investors think about opportunities. When an investor hears about a company that got funded in a space they’re interested in, but didn’t know the company existed before hearing about the deal, it’s immensely frustrating. Given the power laws of venture capital, investors really need to make sure they don’t miss out on a good investment. When they miss a deal, it can make the investor question their skills. This desire to see all relevant deals, even if only to pass on most of them, comes partly from FOMO. For this reason, investors are said to have a herd mentality. While FOMO isn’t a good reason for an investor to invest in a company, it influences investors when a highly competitive deal—one in which many investors are interested in investing—comes along.

Investors’ not-so-well-kept secret is that it’s really hard to pick the winners early on, which leads to significant fear of missing out. Venture capital depends completely on outliers with very high returns. This means good deals in venture capital are scarce. The realities of FOMO should help motivate you to reach out to any and all investors who could realistically invest in your company (and who you would be excited to work with). Your goal is to convince investors that your company is one of these scarce good deals.

Parallel fundraising is the strategy of setting up meetings with investors at different firms within the same time period. Parallel fundraising is designed to tilt the fundraising process in favor of founders by creating a sense of scarcity and forcing investors to make decisions without input from or collaboration with other investors. By contrast, serial fundraising, in which founders set up meetings with different firms during different periods, gives the advantage to investors by allowing them to set the schedule and enabling them to talk to each other about whether a company will make a good investment. Aaron Harris of Y Combinator coined the term in his 2018 post about process and leverage.

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Bias and Discrimination in Fundraising28 minutes, 89 links

This section was written by Rachel Jepsen.*

Systemic bias as well as implicit or unconscious bias—which can be coupled with outright discrimination and harassment—keeps underrepresented founders from receiving equitable treatment in the venture capital ecosystem. Prejudice makes it difficult or impossible for some founders to participate in the networks that help others connect with VCs, and secure funding.

Anyone seeking venture funding or considering whether venture capital is right for them needs to be aware of the massive discrepancies in funding, as well as the efforts by some VCs, founders, and organizations to right the balance. The more you know about the biases, discrimination, and harassment that many founders continue to face when trying to raise venture capital, the better equipped you will be to stay safe in your own fundraising journey, and to work with investors who will be your allies and reflect well on your company.

This section focuses on discrimination based on race and gender in Silicon Valley. There is much more research to be done into systemic bias against founders and venture capital investors alike on the bases of age, disability, immigration status, gender identity, sexual orientation, and socioeconomic background. We also hope to include more information on discrimination, diversity, and inclusion in startups and venture capital outside of Silicon Valley; it is elsewhere in the U.S. where much of the work is being done to fight against the bias and discrimination that have run rampant in the industry for decades.

The Numbers

The demographics of founders who receive venture funding correspond closely with the demographics of active venture capitalists—investors overwhelmingly invest in companies run by people who look like them.

In 2018, men accounted for 82% of venture capital employees, while white people made up 70% of firms.* At the time of the linked study, July 2018, the industry employed eight Black women and two Latinas. VC firms employ less than 3% Black and Latinx venture capitalists.* 1% of VC funding goes to Black-owned companies. 0.2% of VC funding goes to companies led by Black women.* In 2017, less than 2% of venture capital dollars invested went to companies founded by all-women teams.* 10% went to companies with a male and female founder. Companies with only men on their founding teams received 79% of venture funding.

TechCrunch’s study on women in venture capital reported in 2016 that women represented 7% of the “top 100” venture firms, and 8% of the top 2,300.* Then in 2018, they released global numbers that show that while investment in companies founded by women rose 6% that year, this was due almost entirely to a single outsize Series C investment of $14B into the Chinese company Ant Financial.* Funding to women-led startups in the U.S. is stagnant; the percentage of women employed by VC firms follows a similar pattern.**

Paradoxically, these numbers of women founders and founders of color receiving venture funding are at once dismally low and record highs.*

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Pattern Matching

Despite the widely available data that diverse founders make better investments, venture capital has been slow to change any of its common investment patterns. In addition to investing in founders who look like them, venture capitalists also favor founders who look like those who have started successful companies in the past—of course this reinforces a homogeneous environment, given who has been the majority recipient of venture funding for decades. If you’ve only invested in companies founded by white men, then those investments that did well will be your only models of what success looks like.

This bias, often called “pattern matching” or “pattern recognition,” results in what Richard Kerby calls a “mirrortocracy.” In a Times article on his storied accelerator Y Combinator, Paul Graham made this quip about choosing who to give his money to: “I can be tricked by anyone who looks like Mark Zuckerberg.* There was a guy once who we funded who was terrible. I said: ’How could he be bad? He looks like Zuckerberg!’“ (Graham has responded to criticism of this quote, saying it was “a joke,”* though the very real phenomenon of pushing minority founders out of investments in favor of pattern matching is no laughing matter.)

Refinery29 interviewed eight Black female founders in their report, “What It’s Like to Raise VC Funding as a Black Woman in 2018.” Introducing the interviews, Shauntel (Poulson) Garvey, co-founder and GP at Reach Capital, describes pattern recognition as a serious impediment to diversifying funding: “You’ve probably seen a lot of white males be successful. So applying that lens, especially when you see an entrepreneur who looks different and comes from a different background, means it’s harder to make the case of ‘Oh, I’ve seen this before, and I know that they can be successful.’”

As Daniel Applewhite put it in 2018, “Pattern recognition has enabled VCs to mitigate risk but has also limited their profit potential and created an inherent funding bias. This bias stems from barriers to early-stage capital, a lack of representation in the investing space and is perpetuated by systems of racism that destroy opportunity within communities of color.”*

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Privilege and Access

People with the true innovations that will build a better world very rarely have control of the resources to make those innovations possible.Ross Baird, co-founder, Village Capital*

Because Silicon Valley is extraordinarily expensive and remains the center of the venture capital ecosystem, the barrier to entry is a lot harder for founders who come from challenging socioeconomic backgrounds. Some founders and investors are taking heart that this barrier may be diminished as more companies and venture capital firms move to more livable cities across America—often closer to new communities the companies are aiming to serve.

But the problem is bigger than location alone. A lot of people talk about an “entrepreneurial gene,” some penchant for risk-taking that separates entrepreneurs from the rest of the population. Certainly there are some characteristics that make great founders—risk-taking, passion, tenacity. But the number one predictive factor of entrepreneurs today is having grown up with money. It costs $30K to start a business. 80% of that typically comes from savings, friends, and family. Citing multiple studies, Quartz determined that “the most common shared trait among entrepreneurs is access to financial capital”—they are often people who come from money or have access to a moneyed network.**

This expectation amounts to a biased barrier to access. In an article on the cost of bias and racism in the venture funding ecosystem, Daniel Applewhite writes, “Although entrepreneurs are expected to raise friends and family rounds, this expectation is born of bias. African-Americans have an average net worth of $11K compared to $144K for white Americans.* With this lack of access to early capital and generational wealth, most family members and friends can not invest, regardless of how great the idea is.” Early-stage funding is decreasing at a significant rate, meaning founders have to rely even more on moneyed connections to get their businesses off the ground.* It’s important to understand that being underfunded in an early round makes it harder to raise what you need in later rounds, even if you do eventually meet with investors who understand the impact and needs of your idea.

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Harassment based on race or gender is inextricable from pay inequity, funding discrimination, and lack of diversity. According to a 2018 survey conducted by Inc. and Fast Company, 53% of 279 women founders surveyed “experienced harassment or discrimination in their capacity as founder”; 58% reported the “worst harassers” to be bankers and investors.*

2018 saw needed attention paid to women founders and founders of color, due in part to the #MeToo movement calling for increased transparency and action from VC firms.** November’s #GoogleWalkout involved 20K employees taking action worldwide to protest harassment and discrimination at the company against women, minorities, and contracted workers.* (The walkout comes in the wake of controversial lawsuits against Google,* a company that has, at best, fumbled with diversity issues, is infamous for pay inequity, and is often used as a touchstone for trends and failures in the technology industry.)

Sexual and gender-based violence in companies and firms is an “documentemerging investment risk,” according to studies conducted by Cornerstone Capital. Some firms are #movingforward in response.

The problem of harassment in Silicon Valley is structural and historic and it will take sustained action to make headway on any one of these problems. Though change is happening, underrepresented founders continue to face significant hurdles that are built into the structure of raising venture capital, not the least of which is the reliance on networking.* While some thrive in a networked environment, an emphasis on personal relationships and “being in the room” does not serve everyone and can be easily abused. A lot of the networking in the startup community is informal and casual: “Let’s grab a drink and discuss it.” Whether it’s drinks at a bar, a launch party at a founders’ house, or whatever other event, it’s important to recognize that some investors abuse this informality and use it as an opportunity to make unwanted inappropriate romantic, physical, or sexual advances. In Silicon Valley, stories of pitch meetings with women founders that men tried to turn into dates are a staple. Accounts of men abusing their positions of power to mislead, sexually harass, and assault women in the community have led to numerous individuals’ resignations, but far more are likely to have yet to answer for their impropriety or their crimes.* An ecosystem that depends on close relationships and networking can be particularly dangerous to vulnerable and underrepresented people.

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What Founders Can Do

Founders cannot and should not be expected to solve all of these problems. But change can begin within your company. Look closely at your behavior and your company policies, and listen closely to those you work with—and to those not yet on your team. Sexism and racism are pervasive social systems that affect beliefs and cultural norms, not just a matter of “a few bad apples.” You’ll need to commit to having open, honest conversations with people at your company in an ongoing manner. In addition to helpful statistics and demographic data, DreamHost’s “The State of Women in Tech” provides guidance for founders and investors who want to make their companies or firms equitable, inclusive, and able to sustain diversity. In 2016, TechCrunch drew up a template sexual harassment policy for investors and founders, which can help you start a conversation with your investors and understand where potential risks lie.

danger Do not call lack of diversity at your startup a “pipeline problem.” This theory, which posits that there simply aren’t enough interested and/or qualified members of underrepresented groups available to hire, is not accurate. More commonly, people from these groups leave tech at a higher rate due to discrimination, harassment, and an unwelcoming environment.

Many community networks are using social media to grow their ranks and support women founders and founders of color in starting their businesses and raising money. Organizations like Latino Startup Alliance, Latinas in STEM, Black Founders, and many more exist to help connect and advance minority founders, and Twitter hashtags like #LatinaGeeks and #BlackTechTwitter can be a great way to connect and learn. The Case Foundation provides an excellent list of organizations promoting diversity in startups to follow on Twitter. You can follow them all with just one click.

Silicon Valley lawyer Bärí A. Williams reminds company leaders that diversity on their teams can help prevent missteps in funding, in which an investor’s priorities do not match up with your company’s mission—“All money ain’t good money,” she wisely writes. Beautycon CEO Moj Mahdara has a similar message, and recommends interviewing other founders before making a deal with investors they worked with, to avoid what we might call “bad capital.” If you are a founder underrepresented in the startup and venture community, you can visit Creating a Target List of Investors for a list of resources to help you find VCs who invest in underrepresented founders and/or those who build for underserved communities. Founders who want to help change the system for the better should raise their expectations as well as money. Founders and investors must work together to innovate the business of venture capital and create a more equitable environment for all.

Part II: Financing

Determining How Much to Raisean hour, 75 links

It is part of the founder’s job to make sure there is “enough cash in the bank.”* Capital is a tool used to accomplish specific company goals. How much you decide to raise needs to be directly tied to assumptions you’ve made regarding what you believe you’ll need to spend in order to accomplish those goals. This section will cover setting those goals and measuring their cost along with the costs of operations, as well as how the amount of money you raise is tied to the ownership you will retain—or lose—of your company over time.

important No matter what, you need to be ready to present investors with a realistic, believable plan for how you will use what is raised in one round to get to the next funding round or milestone.

A Primer on Ownership

“Raising money” does not mean getting money for nothing. Raising venture capital really means selling part of your company in exchange for money you plan to use to grow your business. To determine how much money to raise, founders need to understand how that amount is related to the ownership they already have and expect to have in the future. We’ll start with how ownership is measured, move on to the relationship between price, valuation, and dilution, and then discuss how to use that information to come up with an amount to raise from investors that you can live with.

Keep in mind that understanding how partial ownership is transferred is also essential to learning how to offer equity-based compensation to employees, sell your company, and more. You can visit our Holloway Guide to Equity Compensation for a lot more detail on this topic; we’ll cover the basics here.

The Basics of Equity

What does it mean when people say they own part of a company? Most companies, even when they are founded, are owned by more than one person. Ownership in a company is divided up between multiple people through stock.

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Deal Size and Valuation

No one knows exactly how much money they need to build their company, but once you’ve gotten your head wrapped around the interplay between dilution, price, and valuation, there are several best practices for backing into a target amount of money to raise.

First, you’re raising money because there’s something you want to accomplish. If you’re going to raise money, investors will want to see how accomplishing that goal will translate to increasing the value of your company.

Second, you need to estimate what it will cost to accomplish that goal.

Third, you need to determine whether you can raise enough money to more than cover your costs in achieving your goal—and do so on a valuation that doesn’t over dilute you or make it impossible to raise again.

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A Moment for Product-Market Fit

Product-market fit means being in a good market with a product that can satisfy that market.Marc Andreessen, co-founder and General Partner, Andreessen Horowitz*

Understanding where you are on the product-market fit continuum is an extremely helpful way to think about how much money you really need to raise. Early-stage companies likely won’t have reached product-market fit, but the earlier you start thinking about how you plan to reach it, the more confidence investors will have that you’re the right founder to invest in.* When you pitch investors in your seed round, your task will be to show them that the amount you raise will help you reach or progress significantly toward product-market fit. Understanding product-market fit and its components—products and markets—can be the difference between working for eight years only to discover no one wanted what you were building and creating a company that produces immense value for the world, your employees, your investors, and you.

What Is Product-Market Fit?

Product-market fit is a relatively new, yet essential concept that startup founders at any stage need to understand. This section synthesizes the best resources out there on what it is and how it works, from business professors, venture capitalists, growth experts, and entrepreneurs. Product-market fit can mean different things to different founders. Here’s our definition of the concept:

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Choosing a Financing Structurean hour, 56 links

If you have chosen to seek venture capital to fund your business, there are important choices to make regarding what type of investment structure suits your company’s needs. Venture capital investments, all of which provide capital to private companies in exchange for equity, can fall into one of three possible financing structures: priced equity (commonly referred to as “priced rounds”), convertible notes (also referred to as “convertible debt”), and convertible equity. Together, convertible debt and convertible equity are sometimes referred to as convertible instruments or convertible securities.

Until the mid-2000s, nearly every venture capital deal was done as a priced round. In 2010, Paul Graham of Y Combinator shared that every investment in the current batch of Y Combinator had been done on a convertible note.* Over the next three years, the convertible note became widely adopted beyond Y Combinator, until 2013, when Graham announced a new vehicle that would be favored, a type of convertible equity called the safe.* While the safe has overtaken the note in popularity in Silicon Valley, notes still remain popular across the rest of the United States.*

There are drawbacks and benefits to each of these financing strategies—not to mention strong opinions on all sides—and they’re not always easy to anticipate or understand. So before you make any decisions, spend some time here understanding the differences between convertible notes and convertible equity, and their terms (which may be negotiated during a financing deal). At the end, you’ll find some template documents available for both.

We’ll also break down how funder and founder interests align and compete depending on the vehicle of investment, and share advice on how to negotiate an investment structure that serves founders and investors equally. Finally, we cover some of the legal terms of financing agreements, but not all of them. For a deeper dive into the nitty gritty of legal terms, check out the section on term sheets.

Priced Rounds vs. Convertible Instruments

In a priced round, investors purchase newly issued stock in a company at an agreed-upon price per share. A priced round is more a type of financing structure than a type of round, though it can be helpful to refer to raising a priced round as different from having raised through other types of financing structures.

A founder may say, “We raised a priced round,” meaning they sold equity in their company in exchange for investment. Alternatively, a founder may raise on a convertible instrument, of which there are two types: convertible notes and convertible equity.

Convertible instruments are used frequently in early-stage venture capital deals. While priced rounds are still the preferred mode of investment by venture capital firms, they don’t always make sense when companies are at the pre-seed or seed stages. That’s because priced rounds are most beneficial when investors and founders—buyers and sellers—can agree on the value of the company.

Definition A convertible note (or convertible debt) is a short-term loan that is designed to be repaid, plus interest if applicable, with equity in a company. A subsequent financing round or liquidity event triggers conversion, typically into preferred stock. Convertible notes may include two options for determining the number of shares for which they will be exchanged: a discount and a valuation cap, which incentivize early investors to take risks on unproven companies. If a convertible note is not repaid with equity by the time the loan is due, it must be repaid in cash like a normal loan.

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Elements of Convertible Instruments

The elements of convertible debt and convertible equity that we list here, including amount and interest, most favored nation clause, the valuation cap, and discount, are all terms that will come up in your term sheet if your company uses one of these financing structures. As with any financing structure, you will also negotiate legal fees as part of the term sheet.


If you choose to make a deal on a convertible note, you’ll be negotiating an interest percentage on the loan, which will accrue between the time the loan is issued by the investor and the time it converts.

Definition Interest is a type of fee that a borrower must pay their lender on top of repaying the loan itself, and it is calculated on a regular basis as a percentage of a loan. Interest motivates lenders to lend their money rather than use it in some other way and protects them from the risk that their loan may not be paid back under the agreed terms. Interest is often casually referred to as the “cost of borrowing money,”* although technically the cost of borrowing also includes any applicable fees.*

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Downstream Consequences: Exits

danger Many founders, at the time of a liquidity event, are shocked to learn that they can sell their company for millions of dollars without a penny making it into their personal bank account.

To fully understand the implications of your early-stage financing choices on valuation and dilution, it helps to play this all the way through to a liquidity event. To do so, you need to understand a few more key concepts: preference, conversion of preferred stock to common stock, and participation. We’ll lay out the most common scenario here (1X non-participating preference), and you can get the rest of the gory details in the section on term sheets.


Definition A liquidation preference (or preference) is a contractual clause that sets the order and, in some cases, the amount of payout for a company’s creditors and holders of preferred stock in case of a liquidity event. Preferred stock usually has a liquidation preference and, when this is the case, holders of preferred stock get their investment back before holders of common stock are paid.

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Template Documents for Convertibles

controversy Various sets of templates for early-stage financing documents are available online. Templates save you time so you can close the round fast, but—despite popular belief to the contrary—even template documents may contain unfavorable terms. You will inevitably hear the phrase “standard documents” or “standard docs.” This is a reference to template documents, but it’s misleading. There is no such thing as a “standard set of documents.” Every law firm has their own set and everything is redlined in a negotiation. In any case, be sure to understand the terms you agree to, and consult a lawyer before you sign anything.

You can execute a convertible instrument agreement by working with a lawyer and drafting your own documents. Alternatively, you can use standardized convertible instrument paperwork from accelerators and other startup programs and institutions.

controversy These tools try to simplify the convertible instrument process, and are known for controversial approaches to eliminating downsides for investors.

Here are three well-known sets of these standardized agreements. The law firm Rubicon provides a thorough side-by-side comparison of safe and KISS.

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Part III: Sourcing and Pitching

Creating a Target List of Investors44 minutes, 68 links

Ask a random sample of founders who have raised venture capital, and we guarantee every one of them will have a story about how they raised money from someone they wish they hadn’t, another on the time they pitched their consumer web startup to a healthcare VC, and the pivotal cup of coffee where someone took the time to mentor them on how to be deliberate about targeting investors who had the best odds of adding value to their specific company. This section will walk you through the ins and outs of how repeat founders create, research, filter, and manage a list of target investors.

The tension between a message like, “You’re about to spend years of your life building a company with this person, so you should really tread carefully when choosing who to take money from” and “beggars can’t be choosers” is very real. When founders are new to raising money, they often fall in the trap of believing money will make all of the problems disappear. After all, when you’re paying your co-founder out of your own bank account, a $50K check from just about anyone starts to look pretty attractive. The thing is, whether it’s three months or three years after you take someone’s money, you’re going to find yourself sitting across from each of your investors to say, “I fucked up.” When that moment comes, there’s only one thing you want to hear: “It’s okay. We’ll figure this out together.” The more carefully you choose who to go into business with, the more confident you can be that those people will have your back when things get tough.

On top of committing to a critical long-term business relationship, not all investors invest in the kind of business you’re building. Some investors only do late-stage deals, some only do healthcare, some only do SaaS, and some are terrific coaches for first-time founders.

Lists of top investors can be a helpful place to start (Forbes’ “The Midas List” and CB Insights’ “100 Top Venture Capitalists” are two good ones), but you should treat them like an actor might treat a list of top directors and producers. If you’re going to be in the industry, it can’t hurt to know their names, but that doesn’t mean you’re going to want to work with them.

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Relationship Management for Fundraising

You might have a target shortlist—the people you really, really want to make a deal with—of about 15–20 investors (who could be angel investors or individual investors at a firm, depending on your stage). But you’ll have a longer target list, too, of investors you’re interested in speaking with and learning more about. Having a longlist is especially important for early- and seed-stage companies; not all of your targets will turn into meetings, and not all your meetings will turn into deals.

important It’s not uncommon for founders to speak with more than 50 or even over 100 investors before closing a single round of funding. In 2017, First Round Capital reported that one out of four early-stage founders pitched more than 20 investors during their last fundraising round.* Startup advisor Brendan Baker analyzed one company’s seed round where the founders met with 173 separate people,* and even Jeff Bezos took 60 meetings to get 20 investors for his first $1M.* In 2018 in the U.S. alone, there were 1,047 active venture firms, managing 1,884 funds.* It takes a lot of research and filtering to generate a list of realistic targets. Relationship management strategies are the smartest way to keep track of all your research and data as you develop your list, and ultimately track these relationships from first stages of research, to qualifying investors, to meetings, and on through to deals.

Definition Relationship management (or customer relationship management (CRM)) is a business strategy and supporting software that concentrates on maintaining relationships with key partners, including customers, by organizing contact, communication, and usage data into an actionable format. Companies typically license a pre-built CRM platform, which may be customizable to companies’ specific needs.

Relationship management matters because of Dunbar’s number, the popular theory that most humans can only maintain relationships with 100–250 people at a time. If you work in an industry that demands a wide network, you’re likely to forget to follow up, lose someone’s name, and fail to meet the right people. CRM helps us make up for this natural deficiency with external systems we can build and improve upon to meet our needs.

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The Funnel

A funnel is a diagram that represents the process of qualification, in which you start with a wide pool of potential investors and narrow it down to those worth reaching out to.

Some people prefer to characterize the levels of the funnel as “stages.” Others refer to the funnel as a “pipeline.” No matter what word you use, the whole idea is about moving a contact through a process toward a close—not everyone you start with will come out the other side as an investor, new hire, or customer.

Remember that all the data you collect is meant to help you save time and focus your efforts. If you’re raising $500K and you find an investor whose average check size is $3M, then you know you don’t have to meet with that investor (at least for this round). This is how you begin to narrow your prospects into leads. The purpose of initial data collection and then the process of qualifying investors is to move a smaller number of investors through your funnel to end up with a shortlist you’ll contact first.


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Data Sources for Researching Investors

Numerous websites exist to assist founders in their search for the right investors. Even so, no single website or tool is comprehensive, complete, or entirely reliable on its own. Private companies and individual investors are not required to disclose investments, so data is limited to those who have deliberately opted for transparency.

One thing you’ll inevitably run into is how poor online data is for classifying what companies actually do—information you’ll need when you’re trying to find investors who invest in your space. People with pocket protectors call this classification “industry taxonomy.” Government agencies use a rigid structure of organizing and labeling business called the North American Industry Classification System (NAICS). But startups and venture capitalists tend to use more informal language when describing their companies, like “B2B” (business-to-business) and “media.”

The problem with this kind of linguistic elasticity is that a company selling software to nuclear power plants and a company selling CRM software can both be classified as B2B. Terms like “enterprise software” are used in different ways by different people.

Given the ambiguity, you would be wise to look skeptically at industry classifications of startups and investors’ areas of investment.

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Tools for Storing Your Data

You’re going to have to collect a significant amount of data on at least 50 people at the top of the funnel. If you’re collecting 5–10 data points per person, that’s 250–500 data points you need to keep track of. A paper record is not your best option for storing all of these data; that’s a lot to risk spilling coffee on. This is where the tools of relationship management can be really helpful.

Most CRM software is built for big organizations to help teams collaborate on deals or communicate sales numbers. The dominant CRM company, Salesforce, employs 30K people to build and sell its software.

For founders sourcing investors for an early-stage company, a tool like Salesforce would be overkill. To run a good fundraising process with relationship management, there are hundreds of possible tools you can use, and many are flexible—it’s just important that you have one. Whichever tool you use, you’ll want to add a column for “stage,” which should refer to your funnel. We recommend keeping your stages simple, like “getting introduced,” “holding meetings,” “negotiations,” and “deal won” or “deal lost.” If you have more stages than that, you’re likely to end up not using them because of how tedious it is to update the records all the time.

Here are a few tools we recommend. (Holloway does not have deals with any of these companies.) All of these tools are recommended because you can create tables to put data and sort it depending on different variables.

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Designing Your Pitchan hour, 34 links

Definition Nearly every round of financing will rely on a pitch deck, which is a succinct overview, in slide format, of the company seeking investment. It is usually built using digital presentation software like Keynote or Powerpoint, or a free version like Google Slides. Founders use pitch decks in two primary ways: to generate investor interest via email and as visual storytelling aids for in-person pitch meetings.

The pitch deck presents a company’s potential to investors. It is a vehicle for your company story, through which you convey all the thought, research, and insights you have about your business, product, and target market. The pitch deck answers three primary questions: what are you doing, why does it matter, and why are you uniquely positioned to do it better than anyone else? Like all stories, the pitch deck is a tool of persuasion.

It is also an opportunity for you to align your founding team internally on your company’s mission and path. The research necessary to build a compelling deck will bring you new insights into your market and product. While the purpose of a pitch deck is to “pitch” your company as a great investment to potential investors, creating the deck is good for you and your team, by compelling you to present a clear and concise message that resonates emotionally and logically: in short, it is heart and data.

important Before you begin reaching out to your target list of investors to get a meeting, be prepared with your pitch deck. An investor you’re chatting with might ask at any point to see what you’ve got. And if an investor wants to set a partner meeting fast, you don’t want to scramble to get your pitch deck done in time.

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Pitch Deck Guidelines

As you begin preparing your slides, keep these general guidelines in mind.

Keep it short. You don’t have much time, and your audience typically doesn’t have much attention span.

Analysts typically recommend 10–12 slides, cautioning that a solid, longer deck is better than an incomplete shorter one, and you never want to cram too much text on any one slide. Seed-stage investor Leo Polovets recommends keeping a deck under 500 words. If in doubt, you can’t go wrong with 12 slides.

Your deck may also include an appendix with several more slides, and you might decide to create a longer, more text-heavy version of the deck that you can email (you probably wouldn’t send both). The purpose of the appendix or longer version is to provide more detail and deeper coverage on anything in your main slides you think your audience might ask about. You can’t depend on these additions, but it can be very helpful if the extra material corresponds to questions you’ve anticipated being asked. “Do you have any justification for those projections?” “Oh, of course, here’s our research.”

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Elements of the Pitch Deck

By now, pitch decks have a fairly standard format of 10–12 slides that investors expect founders to roughly adhere to: thesis, vision, problem, solution, traction, team, timing, market, competition, financing, and risks and challenges.

The slides in your deck may or may not correspond directly to each of these elements, but each of them should be covered. Some founders will choose to follow this sequence slide-by-slide (one slide for thesis, the next for vision, and so on). You are unlikely to garner criticism for following that structure, but when it comes to putting the elements together, you have options. You might let your company story lead the way, weaving these elements into a narrative. Or you can consider the pitch deck modularly, where each of the elements falls into a different category that you can then work through with more flexibility. We will cover each of these strategies here, and we hope you’ll read through both of them, as they will give you different insights into what you want to convey. You should ultimately design the deck that best demonstrates your company’s mission, optimizes the flow of your story, and fits your presentation style.

It’ll also be helpful to refer to decks created and used by founders who have successfully raised venture capital, to see how they have treated these elements—don’t miss our list of great pitch decks in Appendix C.


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Telling Your Company Story

Stories constitute the single most powerful weapon in a leader’s arsenal.Dr. Howard Gardner, Professor, Harvard Graduate School of Education*

Building an emotionally captivating story for your company is essential in getting investors’ attention—and ultimately in getting them to open their wallets. Founders who concentrate solely on the mechanical details or functions of their product and ignore the story of what it will do and why it matters do so at their own peril. How you frame your company and anticipate the motivations of your investors is the difference between a successful pitch and a disappointed walk home. Storytelling lets your audience make inferences and come to conclusions without being told how to think or feel about your offering.

important Let’s say that again: if you can’t get an investor emotionally interested in what you’re building, they will not invest in your company. An investor’s emotional response will dictate how the pitch goes. If they aren’t excited in the first few minutes, they’re going to be looking for evidence to justify their lack of excitement. If they are excited, they will be looking for confirmatory evidence. The best investors recognize emotional bias, but many will not. This is an unconscious behavior, and if you underestimate the impact of emotions on decision-making, you’re actively selling yourself short and reducing your chances of getting someone to invest in you. And remember, figuring out how to get people emotionally invested in your problem and solution will serve you not just in securing investment, but in recruiting and hiring employees and in reaching customers. Investors know that.

Indeed, storytelling isn’t just about giving your deck some flair. Especially for early-stage companies, investors are assessing a founder’s ability to tell their company story. They want to see that you can succinctly share your vision and the opportunity the company presents to those involved, both monetarily and with regard to mission. They want to see how well you understand your customers and how you have managed to bring together the right team of people to make the company a success. If you can’t do these things, early investors will assume that you won’t be able to impress or convince investors down the line, and that you’ll have trouble reaching customers to buy what you’re selling and talent to join your team.

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The Modular Approach

Now that you understand the elements needed in the pitch deck and how you can express them through your company story, you’re probably wondering how you can structure the deck narratively. Thinking of the elements of the deck thematically is a great way to build a deck that makes sense for your story, and it can also give you more flexibility when presenting. If you rely too much on an elemental, slide-by-slide approach from beginning to end, you risk rigidity in your presentation, which can make it really hard to respond to investor questions, and can make adding in a story on top of those elements seem forced. We suggest splitting up your outline into four themes, or modules, which you can jump between when you’re interrupted. So long as each module covers the elements described below, those elements can appear in the order that makes the most sense for your story.

Module 1: Pain Point and Solution

Your introductory module should be about five minutes long. It includes:

  1. a concrete description of your customer

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Practicing Your Presentation

There’s no two ways about it: if you want to successfully raise venture capital, you have to devote a significant amount of time to practicing your pitch. You could send an email today and get a call tomorrow that an investor wants to meet. Do not go in unprepared.

A big part of the purpose of rehearsing is that it gives you flexibility. You will be interrupted in a pitch meeting. Hear us: you won’t make it to all of your slides! But if you know the material frontward and backward, you can move around within that material depending on the reactions in the room and the questions you get asked. Improv classes won’t help here. There is nothing more valuable you can take with you into a pitch meeting than preparation.

Getting Started

  • Build an outline. Starting with an outline, make sure the beats of your story are right. Digressions and extra detail can be tempting when speaking, and the outline—which should be a little more detailed than the talking points on the slides—will help you move swiftly through the presentation. As we said above, we suggest splitting up the outline into four modules, which can also help with flexibility: pain point and solution, founder and team, data, and getting to market.

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Product Demos

It’s one thing to tell investors what your product does. “It has this benefit and that benefit and does this thing that’s never been done before!” But telling investors about what you’re offering means relying a lot—maybe too much—on their subjective imaginations. Showing them the product is where you get to bring them into the world you imagine.

Just as pitching verbally is a skill you’ll need outside of convincing investors to invest, you will demo your product to other people as well—potential hires, customers, reporters, the general public. Nailing your product demo is time well spent.

What Is a Product Demo?

The key to creating and presenting a good product demonstration is understanding what a demo is and isn’t:

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Getting the Meetingan hour, 28 links

You have the idea. You understand the risks of venture capital and get why the incentives behind venture capital matter. You know how much money you need to operate your company for the next 12–24 months. You’ve mastered the differences between priced rounds, safes, and convertible notes. You’ve done your research and created a list of investors who you think would be interested in investing and whom you’re interested in working with. And you’ve designed your pitch deck.

important The material we lay out here isn’t just about getting meetings with investors. This is about getting meetings in a manner that sets you up to succeed. The tools and knowledge we share will also be useful far beyond reaching out to investors, as they are the same tools and knowledge you will use to find great talent to join your team and customers to buy—and love—what you’re selling.

There is a lot to think about during this stage of outreach, like, how do you get introduced to VCs? What kinds of emails are appropriate to send? Once you’ve connected to an investor on your target list, should you email your pitch? How do you get invited to pitch in person? Is that how it works? How do you schedule meetings? When should you schedule them for? And that needling question that will follow you no matter how far you get: What if no one says yes? In this section, we’ll cover all of these questions and more.

Getting Connected

Once you’ve assembled your target list of investors and created a concise, compelling pitch deck, you’re ready to start connecting with investors in order to get a meeting. But what if you don’t have direct inroads to anyone on your target list? The early stages of your outreach may be focused on connecting with people—usually investors or other founders—who can introduce you to an investor on your target list.

While it is possible for founders to cold email investors—and some investors are beginning to embrace the cold email as a way to level the playing field for first-time founders, which we will discuss in a little bit—the vast majority of deals are still made through connections. If someone an investor trusts trusts you, it can help you stand out from the crowd. Just don’t pay for an intro.*

Outreach comes easy to some people. For many, growing your VC network—maybe from seed—is going to feel scary. You’re going to resent feeling on the outside. You’re going to wish you’d got started a bit earlier. You’re probably going to doubt yourself, and you might feel like you’re on a tiny island and everyone else is having a venture capital party you weren’t invited to. Navigating networks of people to get the meetings that’ll get your company money is the game you’re playing, and if it feels like you’re playing on hard mode, that’s OK. That’s how a lot of first-time founders feel. It will get easier, but you’re going to have to practice.

It may not seem like it, but many successful entrepreneurs did not have pre-existing networks when they moved to Silicon Valley or started their first companies. Building your network will take research, hard work, occasional discomfort, and a lot of meetings, but everyone has to start somewhere. Many people in the startup and venture capital industry are willing to go out of their way to be helpful to newcomers, so don’t be afraid to ask.

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Cold Emails

Love it or hate it, much of the venture capital industry depends on so-called warm introductions—that is, connecting with an investor via a third party who knows both of you. Many investors view a founder’s ability to wrangle up a set of warm introductions as an indication of how successful they will be at connecting with future hires and customers. The purpose of a warm introduction is to show an investor that someone out there is willing to put their own reputation on the line by introducing you. They’re vouching for you, and they’re taking the time to help you out.

controversy A warm intro from a close friend or colleague never hurts.* But not everyone agrees you need to be close with the person making the intro. So long as the introduction is credible, it can be a good start, even if it’s not necessarily an endorsement.*

But others, like Homebrew investor Hunter Walk, say that an introduction from someone who doesn’t really know you does not work in your favor. Better, Walk says, is a powerful cold email.* Yes, a well-worded and personalized cold email to an investor can yield success when you’re trying to raise a seed round.* Venture capitalist Arlan Hamilton has also spoken about the power in reading cold emails from founders—some VCs see it as a way to open the playing field to first-time founders who are underrepresented in venture capital networks. From her own experience, Hamilton offers advice on crafting the perfect cold email to investors.

Here’s a brief excerpt from a Recode interview by Eric Johnson with Freada Kapor Klein, of Kapor Capital, who explains why the cold email can benefit investors and founders alike:

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Sending a Confident Message

As you begin reaching out to investors, how confident they perceive you to be is directly correlated to how successful you are at getting these crucial first meetings and ultimately delivering a pitch that investors can’t walk away from. Remember, at the early stages, investors are investing in you and your team more than in your idea or company. When it comes to pitching, whether it’s in an email trying to get a meeting, or over coffee, or in a conference room at a firm, investors need to believe you’ll move heaven and earth to turn your vision into reality.

While we can’t anticipate what the recipients of your emails or the rooms you walk into will be like, there are a few strategies for projecting confidence that can actually help you build real confidence in yourself, your company, and your ability to capture investor interest. Strategies for projecting the right amount of confidence are not a one-size-fits-all formula. But a few pieces of guidance to consider will help you figure out—along with a good amount of trial and error—what works best for you.

  • Nail your story. Getting a grip on the story you’re telling investors is one of the ways you can actually build your confidence—if you believe in the story, someone out there will too. Storytelling and confidence are a double helix of skills that, if mastered, can be used to emotionally hook investors on wanting to be a part of the future you’re creating. We help you build your company story in Designing Your Pitch.

  • It’s how you say it. While the “7%” rule (the idea, based on a somewhat dubious academic study from 1971 stating that those being pitched to only assign 7% of a pitch’s value to the actual words being said) is likely exaggerated, it’s still essential that founders be very careful in how they express themselves. Here are a couple of tips:

    • Be specific. “We are raising $3M on a $9M pre” is a lot better than “We’re raising somewhere between $3M and $5M on a $9M-ish pre.”

    • Ask for what you need. “We are booking first meetings for the week of October 22, second meetings the following week, partner meetings for the week after that, and we hope to have a term sheet before Thanksgiving. We prefer to take all meetings in the Chicago area in order to make the best use of our time by minimizing commutes.” This approach not only evokes a sense that your time is scarce, giving you leverage, but is a lot more effective than putting all responsibility on the investor by saying something like, “We’re planning to start fundraising in the next few weeks. When are you open for coffee?”

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Writing a Great Email

In this section, we’ll explore strategies for structuring a compelling email, and important pitfalls to avoid. We’ll also cover a question a lot of founders struggle to answer and around which there’s a lot of disagreement: whether you should send your pitch deck in an introductory email. Finally, we’ll cover how to schedule meetings easily.

Everything we lay out here will make your emails or DMs stand out when emailing investors. And of course, the same strategies can be used when building connections to get introduced to investors and when communicating with potential team members and customers.

Structuring Your Email

Most founders just want someone to tell them exactly what their first email should look like, and we sympathize. We do suggest taking a look at some email templates like these from entrepreneur Alejandro Cremades to get a sense of ideal length and structure, but if you copy and paste email templates from around the web, your messages are going to look like everyone else’s. Here we provide a few guidelines for building a great email, but remember to be concise, sincere, personal, and use your real voice to make your email stand out. Most importantly, focus on your audience. Think of all the information you collect when creating a target list of investors as a tool to increase the chances of an investor seeing you as a trustworthy individual who is working on something compelling.

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Investor Meetingsan hour, 31 links

For startup founders, the whole point of a first pitch meeting with venture capitalists is to secure a second one.Beck Bamberger, investor, Backstage Capital; founder, BAM Communications*

If you’re raising Series A or later, the process of meeting with investors and negotiating the terms of a deal are pretty well standardized. But for early-stage companies, it can be hard to know what to expect. A casual meeting with an investor might turn into a pitch meeting. You could meet with investors at one firm two or three times before making a formal pitch to the partners who guard the checkbook.

Once you’ve begun reaching out to investors with the goal of getting a meeting, things can move pretty quickly. Every founder–investor relationship is different, and early-stage investors can have wildly different approaches and practices when it comes to meeting with founders. This section is a general overview of what you can expect from your first few meetings with investors.

Seeing things from the VC side, too, can help you understand what it means to investors when you progress from first meetings to second and third meetings with partners at a firm. Sean Jacobsohn, now a partner at Norwest Venture Partners, wrote in 2014 that of 1,200 leads per year, his firm met with 500 founders.* Of those 500, Jacobsohn says that a mid-size firm will progress with 50 companies by performing due diligence. Out of that number, a mid-size firm will make about 10 investments. According to a Stanford study, VC firms on average consider 100 or more startups per single closed deal.* They meet with management of 28 (34 at early stage, 46 in California), conduct due diligence on 4–5, and offer a term sheet to 1 or 2.

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The First Meeting

What’s the Purpose?

You may already have a relationship with the first VCs you meet with, but chances are you’ve never met. The purpose of this meeting is to get to know each other. The investor goes into this meeting wanting the answers to these questions: Who are you? What are you working on? Is this interesting enough for me to meet with you again or introduce you to more people at my firm? The founder will go into this meeting for the chance to introduce themselves and their company, and to get to know the investor and learn what they’re interested in working on.

The first time you sit down with an investor can be intimidating! Especially if this is the first round of funding you’ve tried to secure. But don’t be worried. Think of this meeting as an opportunity for you to evaluate the investor as well. You both want to be able to walk away excited by the prospect of working with each other.

Where Will It Be?

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Follow-up Meetings

Second and Third Meetings

The second meeting you have with an investor can have a few goals. This second meeting could be casual, or it could be around a conference table, where you’re repeating what you said in your first meeting to more people. An investor might be thinking, “I just want to know more so that if I do say no, I know I’ve done my research.” Or they might tell you, “I want you to come in and pitch this to four other people.” In the latter case, hopefully, the VC you’ve already met with becomes a kind of sponsor for you at the firm. The investor who’s sponsoring you will tell you what to expect. She might tell you a few things about the other people you’ll be meeting, like, “John’s enthusiastic, Ella is skeptical.” They will tell you to come in and pitch your deck or just to repeat what you said in the first meeting, and they’ll tell you how long the meeting will be.

If the investors want a third meeting, things are getting pretty serious. If you haven’t met with partners at the firm yet, you will now (these would be “partner meetings”). They’re thinking, “Alright, we’re really interested, we think we want to make a deal. We’ve done our research, and now we want some answers to a few questions we can’t answer on our own. Like, “How are you thinking about X company as a competitor? This is the issue that’s kind of outstanding for us.” Your job is to convince them you’ve thought of everything. If you’re coming in to the firm for a third meeting, your sponsoring investor will tell you what to expect. If you haven’t delivered a formal pitch yet, you will now.

At later stages, the nature of these meetings evolves. For a company raising Series B, the VCs are going to ask deeper questions focused on numbers, your business model, and economics. “We did some diligence on this and we want to dig into your financials and see how you’re calculating X.” But at earlier stages, VCs are just trying to figure out how you think problems through.

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Making Your Pitch

So you made it into the room. The room where decisions happen. Where financing is secured. Careers are made. Legacies begin. Wait, this is that room, right?

Not quite.

By the second or third meeting with investors from a firm, you’re going to a conference room, where a few people are going to sit around a table and welcome you to speak to them for a few minutes of your life. Your job is to show them that your company has a great story and the substance to back that story up.

Getting your pitch deck and pitching skills in great shape takes a lot of time, a lot of effort, and a lot of free beer or pizza for the friends who were kind enough to listen to you practice and give you feedback. We discussed designing your pitch deck and practicing your presentation earlier; this section will cover what you need to know about delivering the pitch in a meeting with investors, including some details about what to expect in the room, how to respond to investor questions, and some pitfalls and red flags to avoid.

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Do We Have a Deal?

When a firm is ready to make a deal, the next steps can range. In the second or third meeting, you delivered your formal pitch. You’ve asked questions, and so have they. You’ve told them what you’re expecting on a good deal and what you want for a valuation. You could get an email summarizing these numbers, with a few bullet points and a simple message, “If you guys are in, let’s add lawyers.” Usually, though, you’ll get a call. If things have been going really well, it could be 30 minutes after the partner meeting. “Hey, it’s us, we’ve decided we want to invest. We’re going to send you a term sheet. We think we’ll do $3M on a $12M pre. Once your lawyers check out what we send, let’s schedule a time to go through it.”

If you’ve been performing strongly and have received a few term sheets or have had serious meetings with a few competitive firms, you’ll want to say something like, “I’m expecting to hear back from Greylock in the next few days, so when I get word I’ll be ready to go through everything.” When you get a term sheet from a competitive investor, you can go back to other firms you met with, whether or not they have offered you a term sheet yet, and start to generate some leverage for negotiations through FOMO: “Greylock just sent me a term sheet.” Now the investors are going to be clamoring to make you a good offer.

Handling Rejection

“No” is something you’re going to hear a lot. Investors can lack imagination, operate with bias, and be flat-out wrong (just read the emails from investors who passed on Airbnb). But try to consider every rejection as an opportunity for improvement. It’s possible that your pitching style, demeanor, attitude, or research strategy needs work. It’s possible you’re pitching the wrong people and need to revisit your target list. Whatever your situation, stagnant founders who blame a series of “nos” on anyone and everyone around them are not likely getting closer to a “yes.”

Trust the No but Not the Reason

Rejection is general feedback—investors rarely share the exact reason they passed. It’s commonly seen as more work than it’s worth to provide detailed feedback to every founder that walks out the door. (Enough founders made a habit of rebutting investors’ feedback point-by-point despite investors’ mind having been made up.) On the other hand, some investors don’t know why they’re passing beyond having a bad feeling about a company. Know that investors probably aren’t trying to be malicious or deceitful when withholding a firm reason, they’re just people trying to do their jobs without creating more work for themselves.


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Part IV: Term Sheets

Understanding Term Sheets15 minutes, 10 links

So, you got the call. Or an email. Or you were chased down the street. A firm wants to invest in your company, and they’ve drawn up some stuff they need you to look at. “Talk to your lawyer and get back to us ASAP.” What you have is called a term sheet, one of the most exhilarating components of raising venture capital, and one of the most intimidating.

Definition A term sheet is a written summary of the proposed key terms of an investment. The terms must be negotiated and agreed upon by both the investing party and the company seeking investment. After agreement on the terms has been reached and formalized in a signed term sheet, legal documents (commonly called “long-form docs” or “final docs”) are prepared, reviewed, and executed to finalize the investment. In itself, a term sheet is not a legally binding document, but its conditions of exclusivity and confidentiality are legally binding.

Many of the important terms you’ll see in your term sheet have already been discussed in detail in this guide. We link to the relevant sections so you can easily access all the information you need.

To see what your term sheet might look like, the toolTerm Sheet Generator by Wilson Sonsini Goodrich & Rosati (WSGR) will build one for you based on a set of questions you can answer.

Founders should consider two things with regard to corporate counsel when negotiating a term sheet: (1) leveraging their experience doing deals with many different investors to put yourself in the strongest negotiating position and (2) managing the process with diligence, as the legal bill for the paperwork related to a priced round—from term sheets to final docs—can often approach or even exceed $100K if you don’t.

Even if this is your third time raising money, the investors you’re negotiating a term sheet with have probably done this 20+ times. This puts you on the ugly end of a drastic information asymmetry. Great attorneys who know venture capital terms will have many years of experience across hundreds of deals done with many investors. Choosing the right lawyer can be as important as choosing the right investor. You want someone who understands how to support startups and work with venture capital investors. Even if someone is from a nationally ranked firm and an expert in real estate, public finance, or bankruptcy, that does not mean they will be a great startup lawyer. Great startup lawyers aren’t just good with deal terms, they also can help read the dynamics between negotiators, have a strong sense of what’s market for a deal, and give solid practical advice appropriate for the stage your company is at. Aside from being helpful when creating a target list of investors, your lawyer can help to even the playing field when you’re negotiating with seasoned investors.

When you receive a term sheet, you should share it with your counsel. Then walk through each term line by line with them. Many founders see this as a costly exercise, but to skip this step is penny-wise and pound-foolish. If you are the founder responsible for negotiating the investment, it is your responsibility to understand what you’re negotiating. Even if you have terrific counsel whom you trust (hopefully you do!), you’ll only be able to determine what’s worth fighting for in a negotiation if you understand the substance of each term.

Finally, founders should be sure to recognize that corporate counsel is legally obligated to represent the interests of the company. While the interests of the company and its founders can often overlap, that is not always the case. When making decisions that have a personal impact, founders should consider hiring their own lawyers to represent their personal interests. When we refer to lawyers or counsel in this guide, you can assume we are referring to corporate counsel that represents the interests of the company, unless we explicitly state otherwise.

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Term Sheet Negotiations

Term sheets, and the final legal documents that follow them, are the result of a decades- long tug-of-war between investors and founders. Each clause can be used either defensively or offensively by either party. This is why term sheets are so complicated. In the business of company-building, the incentives for one party to find a loophole to keep or take more ownership are high. The contracts that term sheets set the stage for are the mechanisms both sides use to keep the other party from taking unfair advantage of them.

Term sheets can contain more than 20 specific conditions, each of which is highly nuanced and evolving. Founders don’t need to memorize every term, but they are responsible for negotiating term sheets and getting their company a good deal. Some founders only care about the pre-money valuation and amount raised and then rely on their counsel to tell them what to do with the rest of the term sheet. Every founder with a term sheet in front of them wants it signed yesterday, so they can finish this fundraising round and get back to their company! This temptation is understandable, but you should be cautious about giving even a great lawyer complete decision-making power.

caution Unfortunately, the temptation to just get the thing signed is exacerbated by the fact that term sheets often have an expiration date or an exploding deadline. While there are many firms that do not put an expiration date on term sheets, those that do, use it as a pressure tactic to discourage founders from shopping a term sheet around for better terms. Many founders panic when they see the exploding deadline and then fail to take the necessary time to understand the terms they’re negotiating.

importantIf you need a few extra days to better prepare for a negotiation and speak with your lawyer, don’t be afraid to ask for it. It’s better to take the time to be thoughtful, and if an investor truly wants to work with you, they’ll move the deadline back. But you also want to find the right balance—don’t drag this period out unnecessarily. If it’s taking too long for you to sign the term sheet, investors may start to think there’s something wrong with your process or that there’s some risk with your company. If you’re not sure how much time is right, ask your counsel or close advisors.

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Economics vs. Control

Brad Feld and Jason Mendelson of Foundry Group first encouraged people to view the terms of a term sheet on two axes, economics and control, in a running series of blog posts that eventually led them to create one of the most widely respected books on venture capital, Venture Deals. Economic terms are related to who gets paid how much and when. Those related to control dictate who can or can’t do what with or without permission from the other party. This distinction is a deeply helpful frame of reference for understanding and negotiating term sheets.

Founders often forget that they’re negotiating for good economics—for themselves and their team—and appropriate control dynamics. We encourage founders not to think of control in absolute terms, as once you take money from someone else, you are giving up some control.

For example, founders often obsess over maintaining 50.1% ownership of their company after the Series A. Mistakenly, they think this is a control term when it is actually an economic term. More ownership directly translates to more money for the founders in the event of an acquisition or IPO. Founders may think that the class of stock they sell to investors is an economic term, when it’s actually a control term—preferred stock protective provisions can force founders to bring major decisions to a vote that can only pass with majority support from the preferred stockholders, even if the founders own more than 50% of the company.

As you read through each term and eventually begin negotiating, consider which terms primarily impact economics, and which impact control.

Side Letters

Definition A side letter is a separate contract used in a negotiation to give investors separate terms for an arrangement than those outlined in the primary contract documentation. For example, in the case of a minor investor that wouldn’t normally get information rights, the company can draft a side letter granting that investor those rights.

Side letters are often a fancy way of saying, “Hey, give me rights that no one else gets,” and founders should be wary of giving one investor special rights. On the other hand, some investors, like the venture arms of large corporations, have special reporting requirements that other investors may not require—side letters can be a great tool in a situation like this.

Essential Terms40 minutes, 25 links


Every term sheet is structured differently, but “securities” is typically the first thing you will see. This is a very simple, one-line term stating the type of stock investors are purchasing and the round of financing. It will look something like this: “Shares of Series Seed Preferred Stock of the Company.”

Investment Amount

You can also expect to see this term at the top of your term sheet. How much is the investment?

If this is your lead investor term sheet in a priced round, there will be bullets covering the following:

  1. How much the lead investor is putting in.

  2. How much others are putting in.

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Price per Share and Valuation

This term will include the price per share the investor will be paying, and the valuation the price is based on. We discussed the interplay between price, valuation, and dilution of ownership in Determining How Much to Raise.

important You may receive a term sheet with price per share blank. You and the investors are negotiating a valuation, and once that amount has been agreed upon, your lawyer will do the math to determine the price per share.

danger It’s common for VCs to just say “valuation” in an offer without specifying whether they mean pre-money or post-money valuation. For example, “I’ll write you a check for $5M at a $20M valuation.” But there is a big difference between a $20M pre-money valuation and a $20M post-money valuation. As a founder, it’s critical to be aware whether you’re discussing pre-money or post-money valuation, so speak up and make sure both sides are clear.

Practically, when negotiating this term you need to communicate with your investors about the following:

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Liquidation Preference

You may see “liquidation preference” as a term in your term sheet, “liquidation rights,” or simply “liquidation.” This is a big one.

Liquidation preference means that preferred shareholders get paid before anyone else. You’ll often see preference expressed as “a 1X liquidation preference,” where the 1X refers to the multiple—that is, a return of the original investment amount. We discuss preference in detail in Choosing a Financing Structure.

Practically, founders will need to be able to explain liquidation preference when speaking with new investors inquiring as to how much money has been raised to date. Additionally, most seasoned executives will ask about liquidation preference when joining to get an idea of how much the company would have to sell for in order for them to make any money off any stock you offer them.

In the term sheet, you will see a line that says something like, “The proceeds shall be paid as follows.” That’s called the liquidation preference stack, after which the remainder of the proceeds from a liquidity event will be distributed to holders of common stock.

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Conversion Rights

Conversion rights have important downstream consequences. They are complicated and can be confusing—we cover this term in Choosing a Financing Structure.

danger Having multiple automatic conversion thresholds can give the investor with a higher threshold leverage to block an IPO.*

Protective Provisions

caution While most protective provisions are not negotiable, many founders do not realize the control dynamics these provisions create. In most significant priced rounds following the seed, the company will have to agree to protective provisions. Too often, founders inaccurately believe ownership percentage is the ultimate driver of control dynamics. But protective provisions, while they shouldn’t be considered backdoor mechanisms for investors to sneakily exert control, can absolutely compel you to compromise on big decisions for your company. It is critical for you to know what decisions you will have to consult your investors on after agreeing to protective provisions.

important You’re likely to spend a lot of time here with your lawyer. Despite appearing as a single term, the protective provisions section of your term sheet will typically outline up to 12 decisions investors can veto.

Here are some of the situations commonly covered by protective provisions:

  • Changing the certificate of incorporation or bylaws of the company. This term is usually not negotiable. Good counsel will push to alter this provision to allow the preferred stock to vote on any change that “adversely affects the rights” of preferred stockholders, but not any change to the certificate of incorporation or bylaws. Anyone seriously considering converting their company to a B corporation should take note that, after this provision is in place, their investors can veto this conversion.

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Option Pool

Option pools are usually agreed upon and allocated before a financing takes place. Companies usually create an option pool before the first employees are hired, but option pools also get refreshed, or new option pools get created, before subsequent financings. This is important, because if the pool is allocated after an investment, then the new investor(s) will be diluted with the founders and prior investors.

important Investors will almost always negotiate for the pool to be allocated before the investment takes place. Founders should make sure to understand how the option pool will impact their ownership* (visit our primer on ownership for more details). Founders should also be sure investors aren’t using the option pool to manipulate the optics of the deal.*

Option pools are part of the pricing dynamic in a negotiation, and founders should be clear whether they are required to create or refresh an option pool prior to or after the round of financing they’re raising.

important You must communicate with your investor about whether the option pool is being calculated pre-money or post-money. Investors often require companies to “refresh” or “true up” the option pool to some target allocation (depending on the deal, often 10–15%) of a company’s fully diluted capitalization, but factored into the pre-money valuation or prior to an investment. If this isn’t taken into account when expressing the pre-money valuation, a founder may think they’re getting a better deal than they are.

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Aspects of your company’s vesting policies may be negotiated in your term sheet. Depending on what the investors are hoping to affect, this term may appear as “founder vesting,” “founder and employee vesting,” or simply, “vesting.”

For more on the basics of vesting, visit our primer on ownership.

dangerWhen getting started, many founding teams delay legally outlining the terms of their vesting. Often this is because the founding team trusts each other and believes it is safe to figure out the terms of their ownership later. This is always a mistake. Founders also get into trouble when they decide not to use a vesting schedule but instead give each founder a share of the company that is fully vested on day one. This practice is the cause of endless headaches and can ruin long-held relationships. Consider the following scenario. Three founders start a company, they’ve been friends since high school, they trust each other, and everyone says they’re committed for the next ten years. As a result, they agree not to utilize a vesting schedule. Two years later, two founders agree to fire the third founder for inappropriate behavior. Since they didn’t utilize a vesting schedule, the third founder will continue to hold their full share of the company; had they used a standard vesting schedule, they would hold half as much. This failure to utilize vesting is why investors usually require founders to all be on a vesting schedule, just like employees.

Definition Accelerated vesting (or acceleration) is vesting that occurs outside the vesting schedule and is triggered by contractually specified events. Single trigger requires only one event, such as the sale of the company, for accelerated vesting to occur. Double trigger requires two events, generally the sale of the company plus the person involuntarily leaving the company without being fired for cause.*

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Voting Rights


Board Seat

Investors may negotiate a board seat on the company’s board of directors.

When a startup forms a board of directors, the primary role of the board is to make key strategic and operational decisions for the company. The board typically holds regular three- to four-hour board meetings. These are often held quarterly or every six weeks; when a company is young they could be held monthly. In these meetings, the board discusses progress, goals, challenges, key hires, and all sorts of operational issues. A board meeting is used to align the operations with the interests of the investors and founders. While board meetings are often viewed as a tool for investor oversight, they are very much also about founders seeking the board’s counsel and advice.

Definition A board observer is an individual who participates in a company’s board meetings as though they were a board member, except that they are not permitted a formal vote and do not have the same level of responsibility to the company as full board members.* Venture capital funds like to ask for board observer seats in order to weigh in on matters of importance to them and show more inexperienced investors the ropes of how board meetings work. Some investors will negotiate for a board observer seat in addition to a full board seat, while others may negotiate only for one of these.** Although they are non-voting, board observers can have considerable influence on startups because they are present during board discussions.*

caution Granting board observer seats can be a dangerous and slippery slope. Board observer seats can be used as an indirect control mechanism. Though they are non-voting, board observers sit through the entire board meeting, participate in discussion, and have access to all board materials. Board observers change the dynamic of a board meeting by weighing in with thoughts and opinions. If your board is only three people and you grant a board observer seat to one of your investors, 50% of the room will now represent your investors’ firm and their interests. Finally, once you grant one firm a board observer seat, future investors will not only ask for observer seats as well, but many will insist you grant them one. All board observers are legally obligated to behave in accordance with confidentiality agreements, but they may be more likely than more senior investors to share board materials with outside parties in violation of these agreements. If a board observer behaves badly, they should not be allowed back, but you may not always know when something has been leaked.

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Information Rights

Definition An information rights provision in a term sheet outlines the information a company must deliver to investors beyond what state law requires.* Generally, this includes a commitment to deliver regular financial statements and a budget to investors. A term sheet’s information rights typically terminates in the event of an IPO and often gives investors access to the company’s facilities and personnel.*

While the default reporting period is quarterly, investors may ask for financial statements on a monthly basis early in a company’s life. Many companies elect to provide monthly financials to major investors for a long time.

Founders have a wide range of opinions about transparency. Some founders won’t mind sending every investor their financial statements monthly, and others will be less comfortable sharing information with too many people. Sending your financial statements to each different investor when they request it can become burdensome, and founders should consider how comfortable they are with their financial statements being in the hands of a large number of investors. If you do grant information rights to investors below your major investor threshold, make sure you aren’t committing to providing two different sets of documents on two different schedules to different investors after you raise a further round of funding.

When offering any information rights at the seed stage, make it clear to each group that they will have the same information rights and schedules as your Series A investors. Keep in mind that there may be a major investor threshold in a subsequent round that is higher than a previous investor’s ownership percentage, and you’ll likely need to continue to agree to information rights for those who have held them before.

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controversy In addition to paying their own lawyers for work done related to negotiating a term sheet, the vast majority of venture capital funds require the startups they invest in to pay for a portion of the investors’ legal bills. Investors’ legal fees, if not paid for by the startup, come out of investors’ management fees. A small group of venture capital firms, including K9 Ventures, Afore Capital, Bloomberg Beta, Homebrew, and Spark Capital, believe investors should pay their own legal expenses. Critics believe these firms are employing a marketing tactic akin to “founder-friendly religious activity,” saying that who pays legal expenses is a minor point in the scale of an investment deal, and over-negotiating on the bill is ultimately a waste of energy.

At the very least, founders can manage the legal fees by putting a cap on them. In early-stage deals, a cap of $10K–$25K should be acceptable. Caps on legal fees can be powerful when founders are negotiating with a syndicate, as it motivates the investors to coordinate the legal activity rather than throwing a gaggle of lawyers into the negotiation.

For most financings, the majority of the legal costs come from legal diligence and corporate records cleanup, not the back-and-forth between lawyers arguing over the terms of a term sheet or the stock purchase agreement in the long-form docs.

danger Even if you’ve negotiated a cap on the portion of your investors’ legal fees you’re responsible for covering, your counsel’s fees can get out of control if you aren’t careful. If your lawyers are arguing about anything meaningful, you should tell them to bring it to you before it goes back and forth between different legal teams more than once.

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Pro Rata Rights

Definition Pro rata rights (or pro rata) in a term sheet or side letter guarantee an investor the opportunity to invest an amount in subsequent funding rounds that maintains their ownership percentage.

Pro rata is Latin for “in proportion.” Most people are familiar with the concept of “pro rating” from dealing with landlords: if you’re entering into a lease halfway through the month, your rent may be “pro rated,” where you pay an amount of the rent that is in proportion to your time actually occupying the property.

Almost all investors try to negotiate for pro rata rights, because if a company is doing well they want to own as much of it as possible. After all, why not double down on a winner than use that same money to invest in a newer, unproven company? In the 2018–2019 fundraising climate, though, it’s safe to say we’re at “peak pro rata.” Everybody wants pro rata, even those who don’t entirely understand how it works or affects companies.

Some founders include a major investor clause in the term sheet, which reserves certain rights and privileges to those they deem “major investors.” Whether to grant pro rata rights to all investors or only those above a major investor threshold is a tricky decision for two reasons.

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Participation Rights

Participation rights have important downstream consequences. They are complicated and can be confusing—we cover the topic in detail in Choosing a Financing Structure.

Terms when Financing with Convertible Instruments

Interest, valuation cap, and discount are all additional terms that will come up on your term sheet if you are financing with convertible notes or convertible equity.

When negotiating a term sheet, founders need to own the discussion around how their convertible instruments will convert, as the VC they’re negotiating with won’t have information on their cap table. Many founders are shocked when their counsel tells them how much they’re going to be diluted in a priced round after they have raised multiple convertible notes or safes, because they did not understand the interplay between valuation caps and conversion to equity. We elaborate on all of these terms and the details of conversion in Choosing a Financing Structure.

important Make sure you discuss with investors whether convertible notes or safes will be converted in the pre-money or post-money valuation. If you’re negotiating a cap on a convertible instrument, make sure both sides of the table—and your legal docs—are clear on whether the cap is pre-money or post-money.

dangerFounders should also familiarize themselves with how liquidation preference overhang works when it comes to convertible instruments. In your term sheet, you can set up shadow preferred stock or create the discount via common stock to make sure liquidation preference overhang doesn’t happen.

Other Terms28 minutes, 47 links

The terms we’ve chosen to designate as “other” are not any less likely to show up on your term sheet than the “essential” terms above. The difference is that the terms in this section have layers of complexity that most founders will need their lawyers to take the lead on or explain to them. You should be able to talk to a friend at a party about essential terms like pro rata rights; but if you can’t casually chat about anti-dilution, don’t worry about it. You’ll communicate closely with your lawyer about any issues they see in the term sheet related to these terms, and you can and should use this section as a reference when you get off the phone with your counsel.

Major Investor Clause

Some founders choose to include a major investor clause, which defines what the company considers to be a “major investor” based on an amount invested, or by number of shares purchased.

The major investor clause matters because, if included, the company can reserve rights and provisions for major investors only. Typical terms that the company will reserve for major investors include information rights, pro rata rights, co-sale rights, and the right of first refusal.

If you include a major investor clause, make the threshold an amount that will limit the number of investors who earn the designation. Even if you’re raising a $1M party round, the threshold could be $100K or $200K, as a carrot for larger checks.

Beyond an incentive for larger checks, major investor thresholds are beneficial because they reduce the number of investors you have to coordinate or negotiate with during subsequent rounds of funding regarding pro rata rights, or in a situation where someone wants to sell their stock and the ROFR and co-sale agreements are triggered. Granting information rights, pro rata rights, rights of first refusal, and co-sale rights to every investor has consequences you should be aware of before making a decision.

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Definition Anti-dilution provisions in a term sheet adjust the number of common shares into which preferred shares convert in the event of a down round or other stock dilution. The purpose of these provisions is to protect investors’ stock ownership percentage in a company.

When negotiating anti-dilution clauses, lawyers may not get into the details of how anti-dilution works. They should, however, advise you to request contingencies to anti-dilution clauses. These contingencies allow space—or “carve-outs”—for founders to get around the clause in certain standard circumstances, like issuing shares in an acquisition, offering options for employees, or taking on venture debt that allows you to do those things without triggering anti-dilution.

Anti-dilution can be calculated by a broad-based weighted average (or BBWA), or as full ratchet. BBWA is absolutely customary, whereas ratchet-based anti-dilution is very atypical. If you’re interested in reading more about either, we recommend reading Yokum’s “What is weighted average anti-dilution protection?” and “What is full ratchet anti-dilution protection?” at Startup Company Lawyer.

Definition Full ratchet anti-dilution is a form of anti-dilution that adjusts the rate at which convertible preferred stock can be exchanged for common stock to reflect the lower price of shares issued in a down round. This adjustment recalculates the number of shares of common stock into which each share of preferred stock is convertible by dividing the price per share when the preferred stock was purchased by the price per share of common stock in the down round.* Full ratchet anti-dilution provisions benefit investors over founders because of the disparity they create between the values of common and preferred stock,* and they are relatively rare compared to weighted average anti-dilution provisions, which create less disparity.

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Conditions Precedent

Conditions precedent to financing is legalese for “these things have to happen before this deal is actually binding,” which should be a reminder that term sheets are usually not legally binding documents. This part of the term sheet can range in size, may include several items, and, as Brad Feld writes, “if you can dream it, it has probably been done.” Common items include, per Brad Feld:

  • “approval by investors’ partnerships”

  • “rights offering to be completed by company”

  • “employment agreements signed by founders as acceptable to investors.”

Drag-Along Agreements

Drag-along agreements are important in the event of an acquisition. Under Delaware law, the general standard is that a majority of the outstanding shares have to vote in favor of an acquisition—common and preferred voting together, a majority of the stockholders have to vote in favor of selling the company. At the time of an acquisition, however, almost every acquirer will require a supermajority (usually 85–95% of stockholders) to vote in favor of the deal. A simple majority of 51% leaves the acquirer open to the risk of 49% of the company opposing the deal and creating trouble through lawsuits.

Definition Drag-along agreements (or the drag-along provision) require certain minority shareholders to comply with a transaction approved by a specified majority percentage of shareholders.* In the context of venture capital term sheets, VCs are often majority shareholders while founders are minority shareholders.* Transactions that commonly trigger drag-along agreements include a sale of the company to, or a merger with, another entity.

While drag-along agreements are primarily designed to protect majority shareholder rights and make companies more attractive for acquisition, they also benefit minority shareholders by ensuring they receive the same transaction terms as the majority shareholder(s).* However, founders should be careful with drag-along agreements because investors can use these agreements against them.

Since founders usually hold common stock and investors typically hold preferred, founders should make sure the triggers to drag include:

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Definition A dividend is a distribution of a company’s profit to shareholders. Preferred stock pays predetermined dividends,* while a company’s board of directors must authorize any dividends to holders of common stock.* Many established public companies and some private companies pay dividends on common stock, but this is rare among startups and companies focused on rapid growth.* Startups rarely pay dividends on common stock because they generally prefer to reinvest their profits into expanding the business.

caution Companies backed by traditional venture capital firms will almost certainly not ever issue dividends. Because of this, most founders don’t negotiate on dividend rights in term sheets. Venture capitalists are looking for fund-returning results, not 6–8% dividends. Negotiating on dividend terms at the Series A can be hazardous, as the company may inadvertently signal that they’re interested in becoming a cash-flow positive dividend-distributing business, not a venture-scale fund returner.

Dividends come in two major types: non-cumulative dividends and cumulative dividends.

  1. A non-cumulative dividend can be declared by the board and distributed to shareholders at any time. They are most common in venture-backed companies. Non-cumulative dividends are sometimes referred to as “if, when and as” or “when, as and if” dividends. This comes straight from the language you’ll find in term sheets related to dividends: “…if, when and as declared by the Board.” Some non-cumulative dividends require the company to pay some percentage to preferred stockholders before any dividend is issued to common stockholders, which can become onerous if a venture-backed company should switch strategies to become a cash-flow positive dividend-distributing business.

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Pay-to-Play Provisions

Definition A pay-to-play provision in a term sheet requires investors to participate, at the company’s request, in subsequent financing rounds on a pro rata basis. If an investor does not participate when requested, they face consequences that can range from losing some privileges like anti-dilution protections to having their preferred stock wholesale converted to common stock.

Pay-to-play provisions are extremely rare in technology investment deals. But they are absolutely common in biotechnology or life sciences deals because those types of companies require such a large amount of capital to get a product to market. Early investors in biotechnology or life sciences companies need to be prepared to pony up cash in future financings and go the distance.

Learn more from the Startup Company Lawyer blog post, “What is a pay to play provision?

Registration Rights

Definition A registration rights provision in a term sheet allows an investor to require a company to register the investor’s shares with the SEC when certain conditions are met, ensuring that the investor has the opportunity to sell their shares in the public market. Commonly listed conditions are: a certain period of time passing after the initial investment or an IPO; the company qualifying for a simplified registration; and/or the company registering other shares for public sale.* Registration rights are desirable to investors because the SEC’s Rule 144 limits the sale of a company’s stock to 1% of the total outstanding shares in a three-month period but only applies to unregistered stock.*

Registering shares is usually seen as a good thing for both a company’s management and investors. When a company goes public, large investors like Fidelity and T. Rowe Price may buy up large positions and hold them. This means the company’s stock is not widely available for purchase on the open market and can lead to volatility. When a large investor is able to sell a meaningful position after the lockup period, this increases the number of shares available for trading, which can reduce volatility. Again, good for everybody.

Usually, if big investors want liquidity near an IPO, there will be a separate conversation between management and investors as to how to make this happen outside of registration rights.

danger In extremely rare cases, registration rights can be used to force a company to go public. This is sometimes referred to as demanded registration rights. It’s so rare, in fact, that we could only find one modern example of this happening, between IVP and Applied Medical Corporation in 2012.** In this case, IVP was granted registration rights that they used to force Applied Medical to go public so they could get liquidity. A forced IPO cuts off opportunity for other forms of exit such as a sale and can greatly damage the company if the timing is wrong.

Restrictions on Sales

Term sheets may specify various restrictions on sales (ROS or transfer restrictions). Types of restrictions include: preventing stockholders from selling within a certain time period or until a certain valuation has been reached; subjecting sales of stock to consent by the board of directors and/or other stockholders; giving some stockholders right of first refusal on the sale of others’ stock; incorporating a co-sale agreement; and simply prohibiting the sale of stock altogether. These restrictions may appear in a clause titled Restrictions on Sales or under other headings.

Redemption Rights

Definition A redemption rights provision in a term sheet requires the company to buy back the investor’s preferred shares at a specified time, upon a specific occurrence, or at the investor’s request.* Typical provisions stipulate that a certain amount of time must pass after the original financing and, if redemption is not mandatory, the holders of a specified percentage of the relevant preferred stock series must vote in favor for redemption to occur. Redemption may take place in a single transaction or installments.* Redemption rights protect investors in the case that a company becomes profitable but not big enough to be an IPO or acquisition candidate.*

danger One version of redemption rights that is particularly dangerous is an “adverse change redemption” clause, which Brad Feld recommends never agreeing to.* This clause gives investors the option to request redemption if there are any significant changes to the company’s prospects. Since it’s usually vaguely worded, this clause gives investors the power to force the company to pay them for their shares in a wide range of scenarios based on arbitrary judgment.

Right of First Refusal and Co-Sale Agreement

The right of first refusal and the co-sale agreement govern how and to whom founders and employees can sell their stock.

Definition A right of first refusal (ROFR) provision in a term sheet gives the company and/or the investor the option to purchase shares from founders or other major common shareholders before they are sold to a third party. If the company or investor exercises this right, the sale must be on the same terms offered by the third party. Some term sheets first give the option to the company, then to the investor,* while others simply give the option to the investor.* If there are multiple venture capital investors, the ROFR provision typically specifies that each has the option to purchase a pro rata portion of the shares being sold.*

Definition A co-sale agreement (co-sale rights or tag-along provision) in a term sheet gives one group of stockholders the right to sell their shares when another group does so, and under the same conditions. In venture capital deals, these clauses are typically used to ensure that investors will be able to participate on a pro rata basis in any sales made by founders or other stockholders who pass a specified ownership percentage threshold.

Co-sale rights are typically paired with the right of first refusal. Co-sale rights will assume that ROFR rights haven’t been exercised, and only kick in after ROFR rights have been passed.

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No-Shop Agreement

Definition The no-shop agreement (no-shop clause or no-shop provision) in a term sheet is a confidentiality agreement prohibiting founders from using the term sheet to solicit offers from other potential investors.

Including the no-shop agreement means investors don’t want you using the terms of their deal to gain leverage with another firm—allowing it will let investors know you’re pursuing this term sheet in good faith.

Management Rights Letter

Definition A management rights letter is a statement from a company that outlines the extent of an investor’s power to review and influence how the company operates. Term sheets may specify that the company provide this letter when the financing deal is closing and/or at the investor’s request.

Pension funds are subject to heightened rules for fund management under the Employee Retirement Income Security Act (ERISA), which protects individuals’ retirement and health savings, and they may act as limited partners in venture capital funds. When this happens, venture capital funds run the risk of also being subjected to the ERISA rules. To avoid this, they often seek management rights letters to support a claim that they should be exempt from ERISA.*


Definition An assignment provision in a term sheet specifies that the investor may transfer some or all of their shares to a partner or closely related entity. This provision allows investors to move shares between funds and make distributions to their limited partners.*

danger Many standard assignment provisions require the recipient of the transferred shares to agree to the same terms as the investor. Founders should be wary of an assignment clause if it does not include this requirement or, even worse, if it uses language that explicitly allows assignment without the recipient taking on the investor’s obligations under the original investment agreement(s).

You may also see the word assign, or assignment, elsewhere in the term sheet. In these cases, it refers to any situation in which one individual or entity transfers a right to another.*


Definition An indemnification provision in a term sheet is a commitment by the company to defend and compensate board members in the event of litigation and/or settlement relating to the venture capital financing or the directors work on the company’s board. Indemnification provisions may also include a requirement that the company provide insurance for its directors to cover these costs.

danger Founders and investors should be aware that many states’ corporate laws do not allow companies to indemnify their directors for intentional misconduct. This can include acting in bad faith, acting in a manner that cannot reasonably be considered to be in the company’s best interest, and acting unlawfully while knowing their conduct was unlawful.* Venture capital firms and the board members they designate may be particularly vulnerable to claims that they have a conflict of interest with holders of common stock because of their own interests as holders of preferred stock, and companies generally cannot indemnify board members for this type of misconduct.*

IPO Participation Rights

Definition An IPO participation rights (or initial public offering shares purchase) provision in a term sheet specifies a minimum percentage of shares that the investor may have the option to purchase in the event of an IPO. Some term sheets state that the investor must have this option if the company IPOs, while others simply require the company to do everything in its power to provide the option.*

danger Investors may like to see an IPO participation rights clause in a term sheet because it signals the company is headed toward an IPO,* but this clause can cause trouble with the SEC if the participation rights are granted too close in time to the IPO. Before a public offering, a company’s shares are not registered with the SEC and Section 5 of the Securities Act of 1933, as amended, prohibits selling or offering to sell unregistered securities unless an exemption applies. To stay on the right side of the SEC, founders and investors may consider including language that grants IPO participation rights only “if permissible under the securities laws.”*

important If a term sheet is going to include an IPO participation rights provision, founders should generally prefer the “best efforts” provision that stops short of mandating that the investors must have the option to purchase the specified percentage of shares. This is because a company works with other entities, such as investment banks, when preparing an IPO, and the company does not have complete control over how shares will be distributed.*

Founders’ Activities

Definition A founders’ activities provision in a term sheet specifies that founders must spend 100% of their professional time on the company. If a founder wishes to work on another project, they must get approval from the company’s board. This provision may also require a founder who leaves the company but retains shares with voting rights to use their vote(s) to match the balance of votes cast by other shareholders. In effect, this would prevent a founder who leaves from continuing to make decisions for the company.

Sample Term Sheets10 links

contribute Sample term sheets in the wild are hard to find. Please let us know if you can contribute!

Real Signed Term Sheets

Sample Term Sheets

After the Term Sheet2 links

Once a term sheet has been negotiated, reviewed, and signed by all parties, there are a few things you need to do before you can consider a round “closed” (for early-stage fundraising, rounds are usually rolling), and there are further consideration regarding when (and whether!) to announce a financing.



Teamwork begins by building trust. And the only way to do that is to overcome our need for invulnerability.Patrick Lencioni, bestselling business management author*

No matter who you are, coming to this guide means you’ve taken a risk on something new. Parents, siblings, a spouse, a former boss, your best friends, your teammates, they’ll raise their eyebrows and ask you point blank, “How do you know this will work?” “How do you know this is the right decision?” And you’ll say, “I don’t know.” The smartest, hardest thing you will ever admit as a founder—over and over and over again: “I don’t know.”

“I don’t know” is the mark of a strong and confident leader. “I don’t know” is the first step to surrounding yourself with the people who do know and can help you learn. Other people who don’t know but are asking the same questions. People asking questions you never would have thought of. The people with whom you’ll figure it out, together. When you take venture funding, we want some of those people to be your company’s investors.

What it’s like to start, fund, build, run, and sell a company…you’ll hear it called a roller coaster. High highs, low lows, and lots of unexpected turns. We prefer to compare it to running a river of Class 5 rapids. If you go it alone, it could kill you. But you’ve hired us as your downstream guide. Now gather a team of people you can trust, people who are better together than they are apart, who can call out danger ahead and navigate through it. Even with everyone listening to instructions, rowing in lock-step, you will almost certainly flip the raft. Venture capitalists are looking for leaders who can convince others the river is worth rafting. It’s your job to pull the team together and flip the raft right side up and keep going—even when no one knows what’s coming next.


Appendix A: Networking and Mentorship31 minutes, 38 links

When starting a company and raising venture capital, it is imperative to grow and maintain a wide network of individuals who can make introductions, listen to your ideas, and help you navigate the complicated world of startups. In short, you need a network of people to guide you through the process. The following advice will help you accomplish some of the more difficult tasks ahead, and give you the tools to succeed in your startup and in fundraising.

What Is Networking?

Definition Networking is the art of building mutually beneficial relationships, usually with the goals of developing ideas and furthering one’s career. A network can be an established group of people or organizations that an individual seeks to become a part of, or it can be something an individual builds. A network might be based on similar experiences its members have in common, or their similar backgrounds; they might face the same challenges, or possess similar attitudes or affinities.

When most people think of networking, they think of awkward meetups, guys in terrible suits gathering business cards at a badly lit conference, and LinkedIn. Yes, it can be these things. But network is another word for community. It’s all about relationships. Whether you’re trying to start a relationship with an investor, a sales lead, a potential mentor, or a peer you can bounce ideas off of, think of networking like a friend introducing you to their other friends. To build the network that will help you start, grow, and launch your company successfully, you just need to make a single connection.

What Makes a Great Networker?

Some people are naturally good at making connections and building trust. Some were lucky enough to have had a family member, teacher, or boss who introduced them to networks of influential people early in their career. But most great networkers are great because they’ve practiced. Learning how to get the right meeting with the right person is absolutely a skill, and if it turns you off or scares you now, know that you can improve the more you try and fail and try again.

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On Mentorship

Successful networkers know that many well-established people are not only willing to help younger or less experienced people learn the ropes of an industry, trade, or career, they love sharing their knowledge and experience to help others. Early in their careers, many people make the mistake of thinking to themselves, “This person I admire is successful—why would they ever want to help someone like me? I haven’t accomplished anything yet!” Excluding the arrogant jerks, well-established people often recognize the role others played in helping them get where they are. They want to pay it forward, and it feels good to be useful.

One approach to finding a mentor is to think about your goals over the next year or two. Are you trying to become a better CEO? Are you an engineer who has never studied marketing and sales and wants an introduction to those fields? Are you a salesperson who doesn’t understand how products actually get built? Come up with a list of how you want to improve in your capacity as founder. Take this list to your friends and ask them who they know who’s really good at one of these skills you wish you had. Post portions of this list on Twitter. Research people at companies that excel at one of the things you want to learn about, and start asking around looking for a connection.

Your mentors don’t have to be people who are famous. Start with someone who is more knowledgeable than you on what you’re trying to learn or accomplish. Get a cup of coffee with them. Share your list of goals with them at the end and ask them if they know anyone else they can introduce you to who they think might be helpful. Author and Airbnb manager Megan Gebhart did this 52 times and met the co-founder of Apple, Steve Wozniak, on her 45th coffee.

Mentoring Across Difference

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Tips and Strategies

In addition to the high-level strategies above, here are some important tips to remember as you build and grow your network.

Early Steps

If you don’t know where to start when it comes to networking with a goal of raising venture funding, there are a few specific ways to set you and your company up for success:

  • Work at a VC-backed startup. This may be beneficial for several reasons. Founders are often willing to introduce their best performing employees to their investors if those employees express interest in becoming founders themselves. If the company does well, the company’s brand will be recognizable to many investors.

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Appendix B: Returns, Management Fees, and Carried Interest9 minutes, 13 links

How Venture Capitalists Measure Returns

Depending on whether a company has exited, venture capitalists use two different metrics to measure returns: cash-on-cash return and IRR.

Definition A cash on cash return (or CoC) is the amount of money an investor receives after an exit takes place divided by the initial investment amount. Some refer to a CoC return as a realized return, emphasizing that the return is actual cash in a bank account.

Steve Anderson, investor at Baseline Ventures, invested $250K into Instagram. Assuming he did not make any follow-on investments into the company, his cash-on-cash return when Facebook bought Instagram would be $120M divided by $250K or a whopping 48,000%.* Cash on cash returns are also commonly expressed as a multiple, as in, “Anderson made 480X on investment,” where $250K multiplied by 480 is $120M.

Returns can also be expressed as a multiple of the fund the investment came from. For a $100M venture fund that has returned $300M, the multiple for the fund would be expressed as “a 3X return cash on cash.”

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Carried Interest and Management Fees

While the power law of returns generates revenue for venture capital firms, individual venture capitalists at a venture firm make money in two ways: carried interest on realized returns and annual management.

Definition Carried interest (carry) is a performance fee, in the form of a portion of future profits from an investment, paid to general partners or fund managers in a venture capital firm. Carry is calculated as a percentage—typically between 20% and 30%*—of the return on investment after limited partners have been paid out 1X their investment. Carry is split (though not always equally) between partners. A common expression for carried interest payout is “2 and 20,” which means a fund charges a 2% management fee and a 20% carried interest fee.

controversy Carried interest is controversial. In tax law, carry is not considered part of an individual’s take-home pay and so is not affected by income tax. Instead, it’s taxed at a much lower rate as a long-term capital gain. Including carry, the average venture partner took home $634K in 2017.

Management fees are an amount, typically calculated as a percentage of the funds committed to the firm, that limited partners owe annually to the venture fund in which they are invested. Management fees frequently cover fund operating expenses, or overhead, which include rent, office supplies, and salaries and benefits.*

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Appendix C: Example Fundraising Pitch Decks58 links

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