VC 101

Everything you wanted to know about VC

Read at your own risk. Don’t rely on anything in this presentation as financial or legal advice.
Made during my Web2 days, so nothing here is specific to Web3, tokens, or crypto VC
It’ll help you understand a lot of this lingo
[work in progress, dictionary is towards the end]
Two major types of funding: Debt & Equity
Debt: Has to be paid back. First in line during Equity: “Dilutive”. Given under
liquidation. “Non-dilutive”. Preferable terms can be riskier conditions.
had when risk is low.
Options:
Options: ● Private Equity - Medium risk /
● Bank loan - Your revenue is reliable and medium reward.
solid! (haha) ○ They will do whatever it
● Invoice Factoring - Giving you money now takes to get returns. Fire,
reorg, take on debt, etc.
for customers I know are going to pay
● Venture Capital - High risk /
● Venture Debt - I see you have a lot of VC high reward
money…… (often done by tech-savvy banks
like SVB)
Downside: They own you
Downside: Can go into default…...
What is a Venture Capital Firm?
Practical definition: Invests other people’s money into high-risk companies

Legal definition***
● A minimum of 80% of the fund’s committed capital has to be invested in qualifying
assets
○ Qualifying: Private businesses
○ Non-qualifying: Crypto, public equities, non-businesses (e.g. funds)
● No redemption rights for LPs
● Debt restrictions

**This is why A16Z is technically an RIA (Registered Investment Adviser) now… so they can invest in crypto, hold more
public equities, etc.
Andreessen Horowitz Shifts Business Model From VC To RIA
VC as an asset class: “Venture Capital” = “Risky Capital” VC is
up
here
Pros:

● Potential for massive gains.

Top funds tend to outperform
other asset classes.
● Bonus: Usually uncorrelated
with equity markets

Cons:

● High risk (Sharpe Ratio <1

as a category)
● Highly illiquid
Most VCs are not good...
Median return is ~1.7x

Why do LPs keep investing in

them?

- Uncorrelated with other

assets.
- Small part of portfolio
- Institutionals (e.g.
endowments) allocate
5-10% to VC usually
- Like/trust manager.
But the returns are promising 🤩
Standard VC Goal for a “top In exchange, VC gets...
fund”:
● 20% of the profit (“Carry”)
● Returns above most other ● 2% of committed capital every year
asset classes: 22%+ IRR (“management fee”)
before fees
● -> 4x to investors in ~7 years
(3x after fee)
● Most investors that exceed
this really exceed this
Who are the stakeholders?
● GP (General Partner) - “Owner” of the firm. Makes investment decisions. Usually has
to put their own money into the fund (“GP Commit”)
○ Hires a ton of people. Principals, associates, etc.
● LP (Limited Partner) - Investor in the firm. Usually just quiet/passive money, no
governance rights like a startup.
Types of LPs

● Other fund managers: GPs, funds themselves. Want access / deal flow.
● HNWI : Rich People.
● UHNWI / Family Offices: Really rich people
● Corporates: Strategic investments
● Funds of funds - Funds that invest in funds
● “Institutional’ - Pension funds, Endowments, Sovereign Wealth Funds
○ Usually allocate a small percent (2-10%) to VC. Some endowments have started
to increase allocation.
○ Like to write big checks ($5-10M) and back the same manager across multiple
funds.
○ Often don’t really come in until a Fund 3 (big fund + established track record)
How money flows: Investing
● LPs invest in the VC firm
● VC firm invests in startups
Payouts: What happen every year regardless:

● 2% management fee on committed capital paid every year

● Adds up to 20% over fund’s life
○ Only 80% of the fund is “investable capital”.
○ That 20% is called the “fee load”
Payouts: How do returns get distributed by funds?
Payouts: What happens when startups exit:
"Management Recycling: Funds reinvest
cash to avoid fees because it is not
considered committed capitol anymore"
VC Fund Math: Why they need a “100x”
VCs need to at least be able to return capital to investors. So every investment should
have the potential to be a “fund returner” (can return the size of the fund).
Imagine you make 50 investments
- Each is 2% of the fund. (50 * 2% = 100)
- You’re diluted to 50% by the exit.
- Therefore… you need at least one 100x investment to “Return the fund”.

And ownership at the beginning can make a big difference:

● Big seed fund need to turn $200M into $10B (50x)
● Microfund needs to turn turn $20M into $10B (500x)TVC = ~500x (
○ Why? Ownership is often ~1% vs ~10%
Fee Recycling: A tool for early exits
Imagine I have a $50M fund.
● Over 10 years, 2% annual fee load adds up to 20% ($10M/$50M in fees).
○ That means only $40M is “investable capital”.
Let’s say one of my investments quickly returns $10M. I then invest that into a new
company. That $10M has no management fees.
● I’ve now deployed $50M in capital! My investors effectively paid $0
management fee.
● Investable capital went from $40M to $50M, which also makes it easier to
return money as a multiple on committed capital.

Best article on the topic:

https://feld.com/archives/2018/08/the-economics-of-vcs-recycling-management-fees.html
What the structure actually looks like

You can then have multiple funds

(Limited Partnership) associated
with the same Management Co and
GP Co
Fund timelines: usually 10-year total lifetime

● Deployment periods: Usually 4 years (can be as short as two)

● Post-deployment period: Usually another 6 years (time to let companies
grow and exit)
● Extensions for another 1-6+ years.
● Long relations with LPs 😍

Other terms:
“First close” - First LP commitments
“Last close” - Last LP commitments
VC shuffle: Overlapping funds makes for a lot of fees
- VCs often have multiple overlapping funds. Lots of management fees. 🤑
- LPs don’t really know if you’re good until year 5/6/7 of Fund 1 by which point you have several funds.
That’s why Fund 1 is often focused on logos and markups.

(VCs often can start raising another fund once the previous is ~80%+ deployed)
Capital Calls: Only get the money when you need

● Investors don’t actually give you all the

money up front!
○ You “call” it as needed. Usually enough
to make investments without having to
wait for money.
○ VCs don’t always call all capital.
● The capital call starts the IRR clock.
Imagine a startup exits for 2x in Jan 2024
○ Call capital Jan 2021: 25% IRR
○ Call capital Jan 2022: 42% IRR
○ Call capital Jan 2023: 100% IRR
^^ Some VCs hack this by using a
“Capital Call loan” to get capital later…..
What happens at the end of the fund lifecycle?

Hopefully all companies have exited (that’s why the deployment period is only 4 years vs
all 7)

What can happen to give liquidity to LPs

● VC funds can extend the fund lifecycle! (usually will have 1-year or 3-year extensions
they can trigger)
● VC fund can sell company shares in secondaries
● LPs can sell their individual stakes on secondary market
● Funds can sell the fund as a package! (Sell all their positions in a bunde, usually to a
PE firm).
○ Can be bad; new owner can start forcing exits.
Good vs bad investments

● Good investments
○ Return a lot of capital early
● Bad investments
○ Don’t return a lot of capital
○ Take forever (A $1B exit could bad on an
IRR basis if it takes 20 years)

This is why usually specialist VCs focus on biotech

or hardware – fields that can take a long time
before they exit.
Major VC/LP Terms
● TVPI (Total Value to Paid In capital multiple) -
○ Value of funds holdings + distributions / LP contributions
○ Includes markups and value of called capital
● DPI (Distributions to Paid in Capital).
○ Aka “cash-on-cash returns” -> money actually returned to LPs
○ LP distribution / LP contributions
● RVPI (Residual Value to Paid in Capital)
○ TVPI excluding previous distributions
○ (basically, valuation of remaining investments)

Basically: TVPI = DPI + RVPI.

● MOIC (Multiple on Invested Capital) -

○ Value of fund holdings / dollars invested
○ Excludes fees from denominator and excludes called capital not yet invested.
IRR (Internal Rate of Return)
IRR helps LPs benchmark against other asset classes.

● Gross IRR: Before fees

● Net IRR: After Fees
● Realized IRR: Only including distributed capital

LPs usually use IRR to compare against other asset

classes they could invest in.
Best VC metrics resources:
● VC Terminology
● EE_The Ultimate VC Metrics Cheat Sheet
VC Fund Math Example:
The only real things that matter in VC: Returns!
Returns = (1) ownership at Exit * (2) valuation at exit
1. Ownership at exit
a. Ownership often determined by ownership at initial investment
b. ….determined by initial check size and initial price
c. ….often determined by how early the see a company

2. Is picking good companies

The only real things that matter in VC: Returns!
Returns = (1) ownership at Exit * (2) valuation at exit

IRR = returns / years-to-exit

That’s why it’s not enough to be a unicorn eventually.

There’s a few different ways to get liquidity to shareholders:

Private Exit: $ – $$$ Public Exit: $$$$

● Secondary - sell some shares ● IPO - Sell some shares to

privately institutional and retail investors via a
● Acquihire - Buy team broker
● Acquisition - Buy company ● DPO - Sell some shares directly to
○ Asset sale (buy only the the public
assets) ● SPAC - Sell all shares to a company
○ Stock sale that exists only to acquire other
companies.
Fund size influences what moves the needle

This is why VCs care about TAM…. it dictates how

big your company can get.

But they also care about bottoms-up analysis /

GTM to understand how quickly you can hit these
numbers.

—- this is also why VCs go after the “sure bets”

What do LPs look for when investing in a fund?
1. Past returns (actual)
a. Cash on Cash (CoC) returns.
2. Indicators of high future returns
a. Good deal flow
b. Markups
c. Ability to get into good, high-growth deals
3. Differentiated from other investments they make
(esp. For institutionals that diversity across funds)
a. Stage, geo, networks, thesis, strategy etc.
Back to investing...
Equity gives you a right to the company’s cash + a vote on
running it
1. Economic rights - Rights to a company’s future cash flows
a. Back in the day: Get paid regular dividends
b. In practice: Right to cash from exit (or liquidation)
2. Governance rights - Voting rights on how a company should be run
a. In practice: Right to make sure a company doesn’t screw you over. E.g.
shareholders have to vote on acquisition, new stock issuance, etc.
b. Can also mean being able to, say, force a company to be acquired.

Sometimes, companies strip away (2) at the IPO when the founders want to retain control (e.g.
Facebook, Palantir, etc.). Largely, public investors don’t seem to care…...
Types of investment instruments:
● Priced Round: I invest and in return I get actual preferred shares
○ Expensive to do - lots of legal work (shareholders have a lot of rights to negotiate! See
example rights in later slides.)
● SAFE Round (Simple Agreement for Future Equity): I give you money and I get a right to
equity later based on certain trigger events. Defers legal expenses, choice about “real”
valuation. Ownership is finalized at the first equity round.
○ Pre-money valuation: I get diluted by future SAFEs
○ Post-money valuation: I lock in my ownership at the Series A (prior to accounting for new
capital).
● Convertible notes:
○ A “debt” instrument. Investment amount it accrues interest and has a “term” at which it
has to be paid back or extended.
○ The SAFE basically took the convertible note and remove the interest + term since they
were rarely enforced.
Types of investment instruments in crypto:

● SAFT (Simple Agreement for future tokens)

○ A SAFT grants investors rights to future tokens once they are launched. A SAFT is
usually signed with there is no associated equity investment.
● Token Warrant
○ The right to purchase a certain amount of future tokens at a nominal cost. A Token
Warrant is usually given as a part of an equity round.
● Token Side Letter
○ While a Token Warrant is an official contract for future tokens, a token side letter is
a more casual document that says that if the project launches tokens they’ll give
them to the investor. Sometimes used if a project is worried that a token warrant
could look too much like a contract for a security.
Side Letter

Most often, all investors will come into a round on the same terms using the same instrument
(whether a SAFT or a priced round Share Purchase Agreement).

But sometimes, an investor will want some special rights (pro rata, information rights, or
something else). A founder might put these into a “side letter” just between them and that
investor.
QSBS

● Qualified Small Business Stock are shares purchased in a small business (that meets
certain revenue and asset guidelines). QSBS shares held for 5 years incur no federal
taxes (up to $10M) and potentially lower state taxes.
● QSBS starts for founders when they issue themselves shares.
● QSBS starts for investors at the first equity round, since that’s when they first receive
shares. SAFEs are widely considered to not count towards the “QSBS” clock.
SAFE Terms

SAFEs are the most common instrument for early (pre-seed / seed) round these days.
Popularized by YC, they give VCs a certain future ownership based on their invested
amount.

They are a “convertible” instrument”. The VCs don’t actually receive shares until the next
equity round into which the SAFEs “convert” into a specific amount of shares that the VCs
receive.

SAFEs have a few major terms:

● Valuation cap
● Discount Rate
●
Pre-money vs post money cap
Pre-Money valuation refers to a set valuation of the company that excludes the capital invested.

Post-Money valuation refers to a set valuation of the company including all new capital.

So if a VC invests “$10M at $100M post”, they are effectively valuing the company at $90M without
the new capital.

The practical effect of this on SAFEs is:

● With a “post money cap”, the conversion denominator is fixed. If a VC invests $1M at a $10M
post, they will receive 10% of the company at the next equity round.
● With a “pre-money cap”, the denominator is based on the amount raised on convertibles. So a
VC that invests $1M at a $9M pre will receive at most 10% of the company, but they could be
diluted by future SAFEs. This is why most VCs switched to using a post-money cap when
founders started raising more and more SAFE rounds.
Valuation Cap
VC ownership isn’t locked in until a priced round happens. At that point the SAFE “converts” into equity.
The ownership is the greater of:
1. Invested amount / post-money cap
2. Invested amount / (Priced round valuation * discount)
Example: $1M investment at $10M post-money cap with a 15% discount:
At the next equity round, the investor will receive shares equivalent to the GREATER OF either:
1. 10% of the company ($1M divided by $10M cap)
2. 10% of the next valuation minus 15%
a. If the next round is lower than an $11.5M valuation, the investor will receive more than 10%
ownership.
Most people think the discount always applies. No. In this example, the discount only applies if the next
valuation is $11.5M or lower.
SAFE Math: Other conversion scenarios
(Just use https://safegenie.io/…. Except seems broken for pro ratas)
● The investors in a priced round will usually want to establish an “option pool” for new employees.
This option pool often dilutes converted SAFEs but does not dilute new capital invested in that
round.
Calculating the pre-money can be really tricky
● Example:
○ Solo founder owns 95%.
○ Accelerator round: YC $150k for 7% post-money (w/ full pro rata*)
○ Seed round gives up $2M @ $20M post-money (10%) w/ full pro rata

Series A: Investor invests $8M. Wants $20%. $40M post.

● Dynamics:
○ SAFEs convert into equity, own 17%.
○ 15% Option pool dilutes above, but not new money
○ Series A Lead takes 20% ownership after the above.
● Aftermath
○ Total Dilution: 14.4% (Seed) + 20% (Series A) + 15% (new equity pool)
○ Founder ownership: 51.6%
Side note: Option price is based on valuation
● 409A Valuation = The valuation that determines the strike price of the options.
○ It’s the valuation of “common” shares.
○ Often much more conservative than the VC valuation (which is for preferred shares).
SAFE Math: I honestly ask the lawyers every time
Common round Terms

● MFN (Most Favored Nations) - “If any other SAFE gets better terms then me, I’ll get
those terms too” (valuation cap, etc). Sometimes can apply for only the next SAFE
round.
● Pro Rata - “I get to invest to invest in future rounds the amount needed to maintain my
percentage ownership in the company.”
● Usually only given to “major investors” - investors that invest above a certain
amount.
● Can eat into later rounds
Common round Terms

● Right of First Refusal - If anyone wants to sell stock, they have to offer it to us first.
● Co-Sale stock - If anyone is selling stock (e.g. secondary), we get to sell at the same
terms.
● Right of First Offer - We get the option to invest in any future rounds first.
● Information Rights - I get to see the financials regularly.
● Transfer restrictions - You can’t just transfer the stock to anyone you want. Keeps cap
table clean, avoids ROFR loopholes.
● Board seats (and board observers)
● Liquidation preference: How much money I need back at a minimum (usually 1x, can
be 2x or 3x depending on how unfavorable the round is….)
● Option pool size
Common round - Board

● Board seats - The board controls the company. Hires/fires CEO. Votes on everything
(even stock grants)
● Board Composition
● Usually no board at Seed. Sometimes investors will want a board seat with a
priced round. In this case they might allow 2 founders + 1 VC. Or, more commonly,
they’ll want 1 VC + 1 founder + 1 “independent” (either agreed upon by founder
and investor, or chosen by a majority of common stock)
● At Series A, investors might push for a 2+2+1 (two founders/common, two VCs,
one independent).
● Board Observer
● No voting rights, but can sway conversation. Either small fund or associate.
VC Terms common-ish in later stages

● Drag along - If a majority of voters vote a certain way, everyone else has to vote that
way too.
● E.g. Prevents an individual investor from holding up an entire acquisition.
● Pay-to-play - If you don’t invest in this round, your preferred shares will convert to
common.
● Warrant coverage (uncommon) - Like options, but for funds vs employees.
● No-Shop (common in later rounds) - You can’t go around asking for more term sheets.
VC Terms: Anti-dilution provisions:

● Weighted Average:
● If we invest $10M at a valuation that results in a price-per-share of $2, and
someone else later invests at a $1/share price, our original price will be adjusted to
somewhere in the middle.
● 💀 Full Ratchet:
● The earlier investors get the new, lower price

💀 Investors can end up with significantly higher ownership

VC Terms: Participation Rights
Most investors have “Non-Participating” Liquidation Preference which means that at the time
of liquidation they have to choose between receiving their liquidation preference or the value
of their % ownership.

Example: A VC invested $1M into a company. They own 10% and have a 2x liq pref. If the
company exits for $100M, they would have the choice between receiving:

1. 10% of the exit ($10M)

2. 2x liq pref on their invested capital ($2M)

Obviously they’ll choose #1! But if the exit was smaller (say, $5M acquihire), the VC would
rather receive the $2M liq pref than 10% of $5M (only $500k).
Participating Preferred

Participating Preferred means that the VC can double dip: “Give me my money back at the
liquidation preference (2x) and then 10% of what’s left.”

Using the previous example of a VC that invested $1M for 10% of the company w/ a 2x
participating preferred liq pref:

● In a $100M acquisition they would receive $11.8M ($2M liq pref + 10% of the remaining
$98M)
● In a $5M acquihire they would receive a whopping $2.3M ($2M liq pref + 10% of the
remaining $3M).
Pref Stack
As companies start raising money, they accrue capital that have different liquidation
preferences, participation rights, antidilution measures, etc.

The “pref stack” is the order in which investors get paid out. And if the investors don’t get all
of their money back (at whatever liq pref multiples they invested at), there will be zero left for
common stock (founders and employees).

Usually the priority list goes: Debt > Preferred > Common

At left: Eventbrite raised $334M but their

“pref stack” means that investors need to
receive $400M back before common
stock receives anything.
High liquidation pref + Full Ratchet + Participating Preferred = bad
If an investor puts in $100M at $1B valuation and the startup is acquired for $1B, how much
do they get?

● At 1x liquidation: $100M + $99M = $199M

● At 3x liquidation: $300M + $70M = $370M
● And potentially much more if there was a down round.
● Since preferred gets paid out first, this is usually referred to as “nothign left for
common”
Three types of term sheets:

1. Hot round - you tell us the terms

a. This is where people get wild valuations / etc
2. Decent round - let’s figure out some terms
3. Not round - These are the terms, take it or leave it
Term sheet archetypes:

1. Multi-stage: “We’ll just buy more ownership later and can pay whatever now”
2. Single-stage: “We want to own as much as possible right now”
3. Microfund: “Just get us in the round plz”
4. Ownership-oriented fund: “We want to own as much as possible”
5.
[WIP] Which terms are standard / negotiable? (Pre-Seed)

● Instrument
● Economic
○ Cap / Discount
○ Pro Rata
○ Liquidation pref
○ MFN
● Non-economic
○ Board Seat
○ Information Rights
Questions founders should ask at the first meeting:

● Do you have any ownership requirements?

● What is your follow-on strategy? Do you seek to maintain your ownership always or
selectively? Do you ever “buy up” more ownership in future rounds?
● What are the most important economic and governance terms to you?
How VCs think (Diligence): Derisk derisk derisk

● Big market size - Derisk exit valuation

○ Many VCs “don’t take market risk”
● “Who else is leading?” - Derisk markups / startup won’t drag on
● Team - derisk execution
● Traction/LOIs - Derisk adoption risk
How VCs think:
● What VCs mean when they…
○ “You’re too early” -> “We don’t like you right now but may like you later.”
■ Reason 1: It’s gonna cost us nothing to wait until you have more traction.
Your round probably isn’t gonna get done right now anyways and if you start
picking up traction we can just swoop in and pick up where we left off.
■ Reason 2: We’re a huge fund and we don’t mind paying up later (e.g. A16Z)
○ “Let’s keep talking” -> See above
● Only one thing gets VCs to invest now: Urgency
○ Price will go up, or someone else will do the deal and I won’t be able to do it
anymore.
● Only one thing gets VCs to improve the terms: Competing term sheets
○ Current or expected competing term sheets from investors of the same caliber.
VC motivations:

● Ok to call capital later.. In no rush to invest.

○ So if they don’t have to write a check now, they’ll wait (for you to derisk the
business further).
○ Esp. If they can invest later for the same terms.
VC motivations - Based on fund age/performance

● Microfund: “Look at my markups, I can pick good companies! Invest in my bigger

second fund plz. I’m not a money bonfire.”
● Not top funds: max(management fees)
● Top funds: max(carry) + keep the Children’s Hospital operating
○ Either bigger and bigger funds (e.g. A16Z/Sequoia) or constant-sized funds
(Benchmark)
● Evergreen fund: We’re in no rush to make money.
● Tiger Global: YOLO as long as we’re returning 15% (which is not that hard).
VC motivations

Based on fund size:

● Benchmark: Small fund. Need 20% ownership at Series A to make sense.

○ Can’t afford to buy additional meaningful ownership.
● A16Z/Sequoia/GC: Our funds are yuge, we can always buy up later.

Based on fund lifecycle:

● Early in the fund: we chillin’
● In year 6: We really are gonna need an exit in the next 2-3 years…. May pressure to exit, etc.
●
VC Strategies
● Investments ● The bigger the fund….
○ “Spray and pray” - works? (check out fund
model) ○ The bigger the checks they
○ Own a lot of a few companies - Easier if need to write.
you can do it. ○ The bigger the ownership
● Thesis they need.
○ Reactive (e.g. Founders Fund)
○ Thesis-driven (USV, FJ Labs) Some funds struggle crossing this
● Marketing threshold from not leading to
○ Under the radar (True Ventures)
○ Marketing company (Turner Novak, A16Z) leading…..
● Stage
○ Single-stage (Benchmark)
○ Multi-stage (GC)
● Fundraising
○ Sequoia - $$$$$$, Benchmark - always
raise the same $425M.
Follow-ons

● Bridge = bad
○ If you need money to stay alive… maybe you should just die.
● Follow-on
○ Sometimes pro rata (most) or “back up the truck” (invest more! - some)
■ This is why VCs keep some money in “Reserve” (often 40-50% of a VC fund).
○ Sometimes lead an SPV with LPs to invest large amounts (beyond pro rata, or
when pro rata gets too big)
○ Sometimes try to lead everything (sequoia, GC, Accel)
🚦 Signaling risk?

● If I invest in the Seed and not the A…. other investors ask `why not? Looks bad.
Reason why some folks don’t take money from multi-stage.
● Why some funds have a “barbell strategy” -> Invest in Seed, skip the A, and invest later
in the B+.
How Valuations work

● Old way: DCF

● New way:
○ “Is this the cheapest I’ll be able to get in?”
○ “Is someone going to pay more to mark me up?”
○ Growth-driven
● By stage
○ Early stage: ????
○ Really late stage: Comparable to public-company multiples.
How Valuations work

● Old way: DCF - value of future cash flows.

● New way:
○ “Is this the cheapest I’ll be able to get in?”
○ “Is someone going to pay more to mark me up?”
○ Growth-driven
● By stage
○ Early stage: ????
○ Really late stage: Comparable to public-company multiples. Growth. Cohort
analysis.
Receiving
How an investment
valuations work: 101
VCs should play bridge – Welcome to Dancoland
“It’s a valuation… not a price.”
● Price, option pool
● Price pre- and post-investment
● VC Ownership over time / across stages
VC in 2021
● Playing Different Games - by Everett Randle
● How the process works, what is a “lead”, “Term Sheet”, etc.
● Angel List
● “Party Round”
● Looser accreditation requirements
● Vs 5 years ago
○ Valuations really high
○ Rounds super fast
○ Loooooots of capital, esp. Emerging managers
○ “Founder Friendly” - no replacing CEO, etc.
● But also
○ Public multiples are really high
○ Easier exits (SPAC attack)
● NDR
Hot topics in VC world
● How small of a check is too small?
○ I just put a $5k check into a Series D
● Party rounds - good or bad? Know what you’re getting yourselves into.
● SAFEs…. Do you really know your dilution? (Yes, have your lawyers make a sheet)
● Valuations… too high?
● Multi-stage funds… bad for seed round?
● Too much capital?
● Companies… raising too much?
● Softbank… stupid or genius?

^ Mostly incumbent VCs complaining

Hot topics in VC world
● Roll-up vehicle
○ A ton of small angels take up space on a cap table. And for big things you need
signatures from everyone.
○ Previously, the solution was syndicate. But a syndicate needs a “lead” that’s not
associated with the company.
○ With an RUV, the company can sponsor their own syndicate.
● SPAC
○ Quick exit at crazy multiples.
○ Why? SPACs are allowed to use forward-looking projections. IPOs can’t.
How bruno thinks a cap table should look:
A good cap table has investors that add
Factors I consider in an investor:
value in 4 categories:
● Are they approachable/accessible?
● Operational: How to run a company
● Strategic: How to crush it in your industry ● Do they hustle?
● Downstream fundraising: Making it way ● How many companies do they work
easier to raise future funding with?
○ Either they have more money to
throw at you, or they can dramatically
increase/facilitate access to capital.
● Support / Cheerleader
○ Someone you can complain to. Who
will tell you it’ll be alright.
How to build a brand in 2021:

● Twitter (Turner Novak, Logan Bartlett, Hustle Fund)

● Tik Tok (Redpoint guy)
● Youtube (Gary Tan, Hustle Fund)
● Clubhouse (Andrew Lee)
Resources

● Venture Deals
● Secrets of Sand Hill Road
● VC content: NFX, AngelList, A16Z, First Round Review
● Twitter
● Investing your own money
● My top favorite articles
○ Alex Danco on Bridge: https://alexdanco.com/2020/02/28/vcs-should-play-bridge/
○ Everett Randle - https://randle.substack.com/p/playing-different-games
Revisiting: The exit will never** be worse for VCs than it is for founders

Toptal: SAFEs never converted…. Gumroad: Bought out investors for like $1, and then
Hahaha only founder owns stock. built a huge company…. Kept it all to himself!
VC Glossary
Term Sheet

A “term sheet” is a summary of the terms of an investment. Since priced round documents
are often very complex, investors will have a company sign a “term sheet” prior to drafting
the final docs. The term sheet includes an overview of the major terms.

It also often includes a “no shop” clause that says that the company will not solicit other
investors for 30-90 days while the deal is finalized. This is mainly targeted towards
companies talking to other leads, and investors often will carve out discussions for angels,
smaller checks, or co-investors already in conversation.

Since SAFEs are so simple… more often than not the investor will just send a SAFE, or
communicate the terms verbally or over email. Founders will often say they “received a term
sheet” to colloquially mean that they received firm interest from a VC to invest at specific
terms.
Lead Investor

● In a priced round, the “lead investor” is often the one to set the terms that other
investors will also sign onto. A lead investor is usually a majority of the dollar value of
the round. But if no investor has most of the round, the “lead” could still be used to refer
to the largest check or checks in the round.
● In smaller rounds or SAFE rounds, founders will often set the terms of the round and
then seek investors at those terms (or close to them).
● Most round documents will give specific rights to “Major Investors” that meet a specific
dollar threshold. This is usually done to reserve specific rights like pro rata to only a
handful of investors vs everyone on the cap table.
83(b)

● Vesting Shares granted to founders, advisors, and team members are taxable at the
time of vesting.
● An 83(b) election with the IRS lets you recognize the taxes at the time of grant. This is
usually done early on when shares are worth very little and the tax would be negligible.
● 83(b) only applies to shares that have a “significant risk of forfeiture (i.e. vesting). It
doesn’t apply to unvested or fully vested shares, nor does it apply to options that have
not yet been exercised.
Data Room

Investors often ask for a “data room”. There are two major types of data rooms:

1. Legal Data Room - Usually includes all of a companies important corporate documents
and contracts (incorporation, bylaws, employment contracts, NDAs, CCIAs, etc.). Often
needed before a priced round closes as a part of diligence.
2. Business Data Room - Things like financial projections, cohort analyses, revenue
numbers, etc. This is usually used in later rounds (A+) for investors to look at when
they’re still deciding whether to invest.
 TAM / SAM / SOM
● TAM refers to the total potential revenue that a company
can generate from its product or service, considering all
customers, regardless of accessibility.
○ Social network TAM: Every human on earth
● SAM is the portion of the TAM that a company can
realistically target and serve given its resources,
capabilities, and market penetration.
○ Social network SAM: Every human with a
smartphone and friends that meets your criteria.
● SOM is the portion of the SAM that a company can
realistically capture, considering its competition and other
factors that affect its ability to win business.
○ Social network SOM: Your SAM limited to specific
geographies and users you might be able to target
with advertising/marketing.

In practice, people usually only talk about “TAM”, and more often
than not in a context that resembles somewhere between the SOM
and the SAM. But I can’t remember the last time I heard SAM/SOM
or saw them on a slide.
Questions?
Appendix
Equity 101:

1. Start Company - Not worth very

much
2. Build company - Valuation
grows over time [illiquid]
a. VCs hop on the roller
coaster at some point of
this journey
End of the Startup Lifecycle: Sell or just keep running indefinitely

1. Start Company - Valuation $100 [illiquid]

2. Build company - Valuation grows over time [illiquid]
3. Exit Liquidity
○ Non-VC Path
■ Keep it private! Distribute profits, do whatever you want!
■ Sell whenever (to another company, PE, IPO)
○ VC Path: Investors need liquidity from a sale
■ Exit or bust
● Though small/early investors may be able to cash out in
larger growth rounds.
Not every startup “exits”, or even raise VC to begin with

So why do startups raise?

● Want to grow quickly, capture the market (“fuel on the fire”)
● Need $$ to get off the ground at all (deep tech, etc.)
● Want more runway / wiggle room to succeed.
 But not every venture-backed startup makes it
Most startups fail. The odds are against you!

https://techcrunch.com/2017/05/17/heres-how-likely-your-start
up-is-to-get-acquired-at-any-stage/
https://www.cbinsights.com/research/venture-capital-funnel-2/
*The faustian bargain
 But if you raise enough money, you usually become too big to just
shut down

https://techcrunch.com/2017/05/17/heres-how-likely-your-start
up-is-to-get-acquired-at-any-stage/
*The faustian bargain
But not all exits are made
equal...

An exit will almost never be worse

for VCs than it is for founders

E.g.

● Mattermark: Sold for scraps

(~$1M)

● Fanduel: $600M, founders

got nothing

● Juicero: 0 :(
… because not all stock is made equal
Founders: Common Stock

Employees: Common Stock Investors: Preferred Stock

● Last in line to get paid out ● First in line to get paid out, after debt.
● Usually has the least “leverage” in ● Often has economic leverage
any scenario. associated with it (we’ll discuss later)
● Usually worth less than preferred ● Usually worth more than common
stock (This is the “409A” valuation, stock (Usually the “headline valuation”)
which converges as you get closer to
an IPO)
Appendix 0: Tips on a great pitch
A pitch should both give “yes” reasons and
eliminate “no” reasons

● Don’t give them “easy outs”

○ Small market
○ No traction (often proxy for lack of validation or unproven founders).
○ Unvalidated willingness to pay on customer side.
○ Unclear go-to-market
○ Unclear path to the Series A.
● A VC’s default is no
Appendix 1: Misc Topics
Funds 101

● Funds by Geography
○ West Coast - fast and loose. Cutting edge.
○ East Coast - Conservative. Lower valuations. Look at financials more closely.
○ Europe - “What is a SAFE?”
How VCs think - Risk

● Market Risk - Do people want this? If it works, will anyone care?

○ Lot of VCs don’t take market risk. Market has to be huge.
● Execution Risk - Can the team execute? Do they have the skills to ship what needs to
be shipped?
● Technology Risk - Will the tech work?
● Team Risk - Is the team committed?

When you’re pitching, different investors might be comfortable with different types of risk.
Appendix

Cohort analysis
Metrics that VCs they look for
● Revenue:
○ B2B: ARR, MRR, Run Rate, Bookings
○ Marketplace: GMV, AOV
○ Consumer: MAU/DAU, ARPU, cohort retension
○ All: LTV/CAC
● Growth
○ YoY/MoM Growth (users or money)
○ NDR - Growth within accounts
● Churn - “Logo Churn”, Revenue churn, etc.
Websites:
● https://www.klipfolio.com/metrics/category/saas
● https://saasoptics.com/saaspedia/arr/
●
How VCs add value

● Most don’t
● Some do
○ Recruiting team in-house - (SignalFire, A16Z)
○ Press
○ Platform Team
○ “Strategy” / “Thought Partner”
What is a SPAC?

● I raise $300M for a public company, Bruno SPAC, to go find a company to buy.
● I then find a company.
○ We merge at an agreed-upon valuation. They get to keep the $300M.
○ I get 20%.
○ Other investors put more money in (via a PIPE - Private Investment in Public
Equity)
Fund notes:
● 506(c) fund: Allows “general solicitation”
○ All/most rolling funds are 506(c) funds.
○ Why not do it? More strict accreditation verification.
● Most funds need an “ERA”
○ Exempt Reporting advisor. Makes sure fund isn’t investing in fraud.
Equity ownership: Very similar to employees!
Founders start owning 100% of the company and then slowly give it out to others.

Employees: Equity often given out to Investors: Equity given for capital.
attract better talent or be able to afford Investors often set the terms.
talent. Companies set the terms.
● I own a share (RSA ) ● I own a share (Equity investment)
● I own a share but I get later under ● I get a share later (SAFE, Convertible
certain conditions (RSU) Note)
● I can buy a share later (options) ● I can buy a share later (warrant)
VC Fund Tooling

● Fund Formation - Creating LLC, LPA, etc.

○ Lawyers
○ Services biz: Assure
○ Tech biz: AngelList / Carta / Allocations
● Fund Admin - Ongoing management of the fund
○ Same as above

Diligence: https://www.notion.so/bfaviero/Fund-Info-9889c1fda6b642b8bf4235defcde6e02