Red Flags

What the greatest technology investors say about Red Flags

Investors Only Care about Two Things

Jason Mendelson venture capitalist and Managing Director Foundry Group

“In general, there are only two things that investors really care about when making investments: returns and control.  Returns refer to the end-of-the-day financial return the investor will get and the terms that have direct impact on these economics.   Control refers to mechanisms that allow the investors to either affirmatively exercise control over the business or to veto certain decisions the company can make.”  Mendelson says that if an investor resists terms that don’t impact returns or control,  it may be a negotiating tactic, he may not be savvy or could just be a jackass.  Jason Mendelson, Do More Faster  by David Cohen & Brad Feld  copyrt 2011, Get Help with your Term Sheet  pg 238

 

 

 

 

High Valuations Can Limit Exit Opportunities

Josh Kopelman Partner First Round Capital and former entrepreneur

Kopelman advises that entrepreneurs who “[] try to maximize valuation [] in many cases [] might be shortsighted” because high valuations can limit exit opportunities.  “[] too many founders are not aware that they are shutting off the majority of exits -- and therefore increasing risks -- when they accept a high valuation.”  “[] the “unwritten term in the term sheet” [means] few VC’s will willingly part with a “winning company” (i.e., a company that is executing/performing well) for less than a 10x return.”  Thus, a VC could block an exit that could have been a fabulous payout for entrepreneurs and angels.  Josh Kopelman The Unintentional Moonshot, July 10, 2007, http://redeye.firstround.com/2007/07/the-unintention.html;  When the music stops... March 10, 2006;  http://redeye.firstround.com/2006/03/as_a_little_kid.html

Be Wary of Term Sheet Tactics

Jeffrey Bussgang venture capitalist and General Partner Flybridge Capital Partners and former entrepreneur 

“The term sheet is essentially a preliminary, nonbinding document between the entrepreneur and the VC [summarizing key financing terms].  Some VCs issue a term sheet early [] to lock up the deal – and keep the entrepreneur from going elsewhere []. Entrepreneurs need to be wary of these situations and not be afraid to push the VC to define more clearly whether the term sheet  represents a real commitment or merely a discussion document. [] Most VCs issue a term sheet [] only when they have made a final decision []. [] [Be wary of] the “exploding term sheet” [expiring within 24 hours, which is a red flag].  [] Neither side should pressure the other [].” Jeffrey Bussgang, Mastering the VC Game –A VC Insider Reveals How to get from Start-up to IPO on your terms (book), copyright 2010, pg 127-128