Chris Sloan’s Blog

Great post here from Mark Cuban on how NOT to pitch a prospective investor. Bottom line: be simple, be direct, be on point, and no grandiose puffery bullshit.

Back on the blog horse again…

Fred Wilson posted a great summary of the terms that venture capital investors will care about the most, and why, here. They are:

1. Liquidation Preference. This simply means that, when the money comes out, the VCs get their money out first, plus any accrued preferred returns. In the post-bubble era, this frequently was a multiple of the investment (I saw as high as 3x). Today, the typical deal is just 1x. A related term that is very important to the founders is whether the preference is participating. A participating preference means the VCs get their preference, PLUS whatever they would receive on an as-converted basis. Most deals these days are non-participating, meaning that the VC must choose between either taking their preference OR converting to common and participating with the common. Hopefully (for both sides), they will want to convert, because that means their return is much bigger than 1x.

2. Participation rights in future rounds. Fred notes that, typically, a few early rounds deliver the vast majority of the returns, so the VC will want to be able to participate in those rounds after the initial investment. Secondly, this right helps the investor avoid being crammed down by a highly-dilutive down round, if one occurs.

3. Board seat. This is the most direct way that a VC can influence the company, and thus protect their investment.

If you are an angel investor or might be interested in becoming one, go read this great article by Paul Graham on “How to Be an Angel Investor.” I added “Good” to my post title because he talks about how to be “good” in two important ways: (1) choosing investments, and (2) how to help your portfolio companies.