Term Sheet

Finance Friday’s gets off the ground with today’s post by introducing you to an imaginary startup, the entrepreneurs that we’ll being following throughout the series, and their first challenges: splitting up the founders’ equity and addressing the case where one of the founders provides the initial seed capital for the business. We felt like we needed to put some groundwork in place using a case-study like approach, rather than just jumping into looking at balance sheets, income statements, and cash flow statements. Hopefully, by the time we are done, we’ll all have some new friends and a lot of knowledge. Let’s get started. ...

Last week I expressed my frustration with the current lack of financial literacy that I see all around me. In the spirit of Fred Wilson’s awesome blog series MBA Mondays , I’ve decided to write a series of posts about this and asked for suggestions. I got a bunch, but one that stood out was from a group of incoming MBA students at the University of Chicago Booth. Their suggestion was to write a series of posts that follows the development of an imaginary startup as the company navigates various events, focusing on how each event will impact not only the P&L, but also the Balance Sheet and Cash Flow Statement. ...

I’m stunned by the lack of financial literacy of so many people in so many contexts. The commentary by politicians, economists, and the media on the European debt crisis and the US debt ceiling dynamics is appalling. The general media and blogosphere commentary on the financials of high growth companies, especially those who have either recently gone public or filed their S-1’s, range from perplexing to just plain incorrect. And more and more entrepreneurs who I’m exposed to who are presenting their companies for financing have a complete lack of understanding of their financials – both current and projected. Of course, some of my fellow board members don’t understand how to read financial statements either, which doesn’t help matters much. ...

While some people hate the phrase “failing fast”, I find it instructive when it’s used to signify that one isn’t going to pursue a particular path in the context of a larger set of activities. A few weeks ago, I wrote a post about The Proliferation of Standardized Seed Financing Documents . It generated several hundred email responses and a handful of phone calls. A week or so later, my partner Jason Mendelson wrote a post titled Why There Will Never be a Standard Set of Seed Documents. I’ve concluded that Jason is right so rather than torture myself, I’m failing fast with regard to trying to help create a set of standardized seed documents. ...

As of today’s announcement that Ted Wang at Fenwick & West has collaborated with a group of bay area early stage VC’s and angel investors to create the Series Seed Documents we now have – at my count – four different standardized seed financing documents floating around the industry. TechStars Model Seed Funding Documents (by Cooley) Y Combinator Series AA Equity Financing Documents (by WSGR) Founders Institute Plain Preferred Term Sheet (by WSGR) Series Seed Financing Documents (by Fenwick & West) Many smart and capable people have either worked on these various docs on signed on as supporters. However, until there is one standardized set of documents that everyone – especially the various law firms agree on – I don’t expect there to really be a standardized set of seed financing documents. I wrote about this in my post The Challenge of The Ideal First Round Term Sheet . ...

Over the years my partner Jason Mendelson and I have heard from numerous people that they’ve been exposed to our Venture Capital Term Sheet Series as reference material in a college course. We are delighted by this and whenever we’ve been asked, we’ve always said (and will continue to always say) “with our blessing.” However, we haven’t kept track of any of this over the year and have a few ideas for things we can do to update the material now that five years have passed. ...

We are deep in budget season as the last board meeting of the year typically includes the 2010 Budget – or at least the “2010 Draft Budget” or “2010 Budget – Draft”. This is also known as “the joy of cramming a spreadsheet into a powerpoint presentation.” The budgets I see generally fit into one of the following five categories. Pre-Revenue: We are pre-revenue and won’t generate revenue in 2010. First Year of Revenue: We are pre-revenue but will generate our first revenue in 2010. Growing Revenue: We are on a revenue growth curve in 2010 but will lose money every month. Becoming Profitable: We are currently losing money but will become profitable in 2010. Profitable: We are profitable every month this year. While I’ve written about this before, it’s worth noting that “profitable” is often used to mean either EBITDA positive, Net Income positive, or Cash Flow positive. These are three totally different things and you aren’t really in a happy profitable place until all three are true. ...

Simeon Simeonov , the Founder & CEO of FastIgnite , has put together a nice Stock Option Vesting Calculator . It works just fine for stock vesting as well. Sim is a dynamite entrepreneur who has also done a tour of duty as a VC so he knows the drill well. In the email he sent me about it he said it was inspired to put it together after reading several of the posts in the Term Sheet Series that Jason Mendelson and I wrote several years ago. ...

Suddenly the blogosphere is talking about the need for a standardized first round term sheet. The latest iteration of this seems to have blossomed when TheFunded Founder Institute released a “Plain Preferred Term Sheet” (developed with WSGR). According to the article in TechCrunch , the goal is to (a) protect founders and (b) reduce legal fees. Kudos for yet another shot at this – between all the blog posts that have been written about this over the past few years, term sheets are no longer a mysterious thing to an entrepreneur. ...

Fred Wilson has a nice post up titled The Ideal First Round Term Sheet . In it he describes the process of closing a financing using a standard set of Series A terms from Gunderson that he agreed to as part of the term sheet. In this case, the VC (Fred’s firm – Union Square Ventures) isn’t using a law firm. Fred states: “I’d like to see this practice become standard in our industry. We need to lower the time and cost of raising capital. We need to eliminate a lot of bad terms that have caused a lot of harm (tranched investments, mutiple liquidation preferences, super pro-ratas, etc, etc). We need to converge on a set of standard Series A terms that everyone uses.” ...