Secrets of Sand Hill Road
Page 32
dual fiduciaries, 201–202, 212
duty of candor, 215
duty of care, 211–212, 215, 217
duty of confidentiality, 212–215
duty of loyalty, 212, 215, 218
and winding down the company, 246
financial crisis of 2008, 59
financial forecasts, 150–151
fixed income, 63
foreign equities, 62
foundations, 55, 57
founders
adaptability of, 49
and board of directors, 97–98, 171–172
and capitalization tables, 190–191
and common stock, 93
and company vs. product-first companies, 44–45
departure of cofounders, 94–95, 96–100
egomania in, 47–48
and evaluation of early-stage companies, 43, 44, 49
founder-market fit, 45–47, 131–133
and information asymmetry, 5, 140, 275
and intellectual property, 101–103
leadership abilities of, 47–48
and product development, 49
and stock restrictions in term sheets, 181
and storytelling skills, 134
and taxation, 71
and vesting, 95–97, 99–101, 183, 186–187, 205–206
409A opinions, 205
fraud, accusations of, 218
Freenome, 128
full ratchet, 166
funds of funds, 56
general partners (GPs)
and board seats, 179, 214–215
and carried interest, 74–77
and choosing a corporate structure, 93–94
and clawbacks, 80–81
co-investments of, 86–87
compensation of, 73–77
as dual fiduciaries, 202
and equity partners agreement, 88–89
and exit of VC after IPO, 267
and indemnification, 89–90
investments as domain of, 85–86
and LP–GP relationship, 70–71, 85–88
and management fee, 72–74
and managing conflicts, 214–215
obligations of, 87
and state of fund, 84
suspension of, 87–88
and vesting, 89
See also limited partnership agreement
Glass-Steagall Act, 54
going to market, 135–138
good corporate governance, 206–207
Google, 10, 25, 41
Gornall, Will, 3
go-shop provisions, 239, 255
governance terms in term sheets, 196–198
Graham, Paul, 20
green shoe, 265
growth assets, 57–58, 61–63
HA Angel Fund (Horowitz Andreessen Angel Fund), 19
The Hard Thing about Hard Things (Horowitz), 18
hedge funds, 57–58, 62
Hewlett-Packard, 18–19
Hindawi, David, 46
Hindawi, Orion, 46
Horowitz, Ben
and Andreessen Horowitz, 21–22, 270
angel investing, 19
aspirin/vitamin analogy of, 50
on founders’ leadership capabilities, 47
The Hard Thing about Hard Things, 18
interview with, 12–13, 14
“hurdle rates,” 83
illiquid assets, 64
incentive stock options (ISOs), 104–105, 185
indemnification, 89–90, 183, 253
inflation, 56–57, 61
inflation hedges, 58, 63
information asymmetry, 5, 140, 275
information rights, 282
initial coin offerings (ICOs), 274
initial public offerings (IPOs), 257–268
and alternative forms of financing, 108–109
and conversion to common shares, 160–161
costs involved in, 107
declining number of, 106–109, 160–161, 249
and dot.com boom/bust, 9–10, 15
effects of efficiency rules on, 107–108
and emerging growth companies (EGCs), 261–263
and exit of VC, 2, 266–267
and the green shoe, 265
and initial filing range, 17
and liquidity, 258–260, 265
and lockup agreements, 265–266
mutual funds’ impact on, 108
percentage of venture backed, 3
and pressure on public companies, 109
pricing, 263–265
process of, 260–268
and prospectus, 261, 263
and reasons to go public, 257–260
and road shows, 263
and secondary offering of shares, 267–268
time frame for, 10
Instacart, 45
Instagram, 45, 130
institutional investors, 29–30, 40–41
insurance companies, 56, 57
intellectual property, 101–103
invention and assignment agreements, 101
investment banks, 260–261
investors’ role in venture capital, 29. See also limited partners (LPs)
iPhone, 130
Isabella, Queen of Spain, 53
J Curve, 75–76, 76
JOBS Act (2012), 36, 261, 263
jobs created by venture-backed companies, 4
Kalanick, Travis, 172–173
Kauffman Foundation, 4
Kelleher, Herb, 46–47
Kerrest, Frederic, 132
Keynes, John Maynard, 17
last round valuation method, 77, 78–79
law firms and attorneys, 91, 102, 125, 286
Lehman Brothers, 12
Levandowski, Anthony, 102
liability
and business judgement rule (BJR), 216–218, 222
and compliance and good corporate governance, 206–207
and D&O insurance, 183
and WARN statutes, 243
and winding down the company, 243–245
life cycle of venture capital, 7–8, 114–115, 268
life cycles of funds, 66–67, 68, 152
limited liability companies (LLCs), 93
limited partners (LPs), 53–68, 69–90
about, 69–71
benchmarks of, 54
capital raised from, 2
and clawbacks, 80–81
and co-investments of general partners, 86–87
and dot.com boom, 10
and exit of VC after IPO, 266–267
goals of, 56
and GP–LP relationship, 70–71, 85–88
inflation’s effect on success of, 56–57
relationship of VCs to, 69–71
and secondary offering of shares, 268
and suspension of GPs, 87–88
and taxation, 70–71, 93, 94
types of, 54–57
types of investments made by, 57–59
Yale University endowment, 54, 59–65
limited partnership agreement (LPA), 71–83
and carried interest, 74–77, 82
on expectations for GP, 87
and GP–LP relationship, 85–88
“hurdle rates” in, 83
on investment domain, 85–86
and J Curve, 75–76, 76
and management fee, 72–74, 81
“preferred returns” in, 83
recycling/reinvesting provisions in, 81
on suspension of GPs, 87–88
and valuation marks, 76–83
liquidation, vo
ting on, 176–177
liquidation preference
and comparing finance deals, 192–193
and conversion of preferred shares to common shares, 162–163, 164
and preferred shareholders, 162–163, 177
reducing/eliminating, in difficult financings, 177, 234–236, 240
and term sheets, 155–159, 279
liquidity, 258–259, 265–266
Livingston, Jessica, 20
lockup agreements, 265–266
LoudCloud, 12–18
author’s experience at, 2, 12–13, 14–15
business of, 13
decision to go public, 15–17
EDS’s acquisition of, 18
valuation of, 121–122
loyalty, duty of, 212, 215, 218
Lyft, 45, 127–128
management fees, 72–74, 81
management incentive plans
and Bloodhound case, 237–239
and double-dipping prohibition, 241–242
following difficult financings, 241–242
and Trados case, 221, 226–227, 229–230
wrong incentives created with, 242
market checks, 237, 238, 239
market size
and Airbnb, 52, 127
and evaluation of early-stage companies, 50–52
and Lyft, 127–128
and pitching to venture capitalists, 127–130
and raising money from venture capitalists, 114–115
McKelvey, Jim, 133
McKinnon, Todd, 132
median ten-year returns in venture capital, 30
mergers & acquisitions. See acquisitions
Microsoft, 25, 41, 272–273
Middle Eastern countries, 55–56
milestones, 115–118, 138–139
minority investors, 174, 182–183
Mixed Media Labs, 213
momentum, maintaining, 121–122
Morgan, J. P., 53–54
mutual funds, 108
Nasdaq index
and dot.com boom/bust, 10–11, 15
and median ten-year returns in VC, 30
natural resources, investments in, 58, 63, 64
Netscape, 10, 14
network effects, 128
networking and building relationships, 248
Nicira, 45, 131–132
non-disclosure agreements, 187, 285
non-qualified options (NQOs), 104–105, 185
no-shop provisions, 187–188, 239, 285
notes, convertible, 28–29, 142–147, 148, 233
officers, 183, 206–207
Okta, 128–129, 132, 136
Opsware, 2, 18–19
option pricing model (OPM), 78, 79
Oracle, 51
Otto, 102
pari passu, 157–158, 164
partnerships, 70–71, 92, 93
pass-through entities, 71, 92–94
pension funds, 55
Pinterest, 45
pitching to venture capitalists, 124–139
and discussing learning from failures, 131
and getting an introduction, 124–126
and goals of VCs, 126
on going-to-market, 135–138
on market opportunity, 127–130
and planning for next round of financing, 138–139
on your founder-market fit, 130–133
on your product, 135
on your team, 134
pivoting
and adaptability of founders, 49, 135, 137–138
of Butterfield, 137
conflicts resulting from, 213–214
Planck, Max, 49
post-money valuation, 147
power-law curve, 30–31, 31, 36–37, 38, 40
“preferred returns,” 83
preferred stock
about, 163
and comparing finance deals, 196–197
and voting, 174, 235
preferred stock/shareholders, 141–142
about, 93, 141–142
and acquisitions, 252
and authorization of new classes of stock, 176
conversion to common shares, 160–165, 177, 235, 280
and corporate actions, 176
and dividends, 155
and drag-along provisions in term sheets, 182
and fiduciary duty of board members, 215–216
and liquidation preference, 157–158, 162–163, 164, 177, 235
and liquidation/recapitalization, 176–177
and protective provisions, 173–177
representation of, on board, 171
and stock restrictions in term sheets, 182
pre-money valuation, 147
price per share, 147–149, 278
price-to-earnings ratio (P/E ratio), 10–11
private equities, 57, 62
“product-first company” concept, 44–45
products
and ability to pivot, 49, 135, 137–138
and adaptability of companies, 136–137
adoption of new, 49–50
aspirin/vitamin analogy for, 50
and evaluation of early-stage companies, 48–50
and pitching to venture capitalists, 135
product-market fit, 45, 48, 49
testing of, 49
profits, distribution of, 92–93
pro rata investments, 178–180, 283
prospectuses, 261, 263
protective provisions in term sheets, 173–177, 281–282
“prudent man rule” (1979), 41
public companies, 257–260. See also initial public offerings (IPOs)
public equities, 57
pull-up mechanism in recapitalizations, 235
Quattrone, Frank, 12
Rachleff, Andy, 51
raising money from venture capitalists, 112–123
and considering candidacy of companies, 113
and creating incentives for VCs, 114–115
determining the amount, 115–118
and market size, 114–115
and rounds of financing, 115–117, 138–139
and valuation, 118–123
and value of scarce capital, 117–118
real estate investments, 58, 63, 64
recapitalizations
about, 233
and employee option pools, 240–241
and fiduciary duty questions, 236
and management incentive plans, 241–242
and ownership structure, 176–177
and pull-up mechanism, 235
purpose of, 234
success following, 239–242
and term sheets, 279, 280, 281, 282
redemption rights, 159, 280
registration rights, 178, 282
Regulation ATS (Alternative Trading System), 107
research & development (R&D), 3, 41
research analysts, 260
reserves set aside by VCs, 66–67
reverse splits of stock holdings, 177, 235–236
Revlon duties, 254–257
Ries, Eric, 45
right-of-first-refusal (ROFR) agreements, 99, 180–181
rights offerings, 238–239
risks inherent in venture capital, 39
road shows for initial public offerings, 263
Sarbanes-Oxley Act (2002), 107
scarcity of capital, value of, 117–118
secondary offering of shares, 267–268
security, 141–142, 278
seed-stage companies, 19, 28
self-dealing, accusations of, 218
shutting down the company, 243–246
signaling, power of positive, 32–33, 35, 37
skill sets, 132
Slack, 137
smoothing model, 61
Southwest Airlines, 46–47
sovereign wealth funds, 55–56
Speck (multiplayer online game), 137
Square, 133
Stanford University, 41
startups, forming, 91–111
and ability to pivot, 137
and accelerated vesting of stocks, 99–101
capital required for, 20, 270–271
choosing a corporate structure, 92–94
and comparable company analyses, 150
and distribution of profits, 92–93
and employee option pools, 103–106
and founder breakups, 94–95
and initial public offerings, 106–109
and intellectual property, 101–103
and nontraditional sources of growth capital, 272
and remaining private, 110–111, 272, 273
and right-of-first-refusal (ROFR) agreements, 99
and shift from post- to pre-IPO appreciation, 272
and stock vesting, 95–97, 110–111
and transfer restrictions, 98–99
state pension funds, 55
stock options
about, 104
and acquisitions, 250–251
determining fair market value for, 204–205
and employee departures, 240
incentive stock options (ISOs), 104–105, 185
non-qualified options (NQOs), 104–105, 185
tax treatment of, 185–186
and vesting, 105–106
stocks
and accelerated vesting, 99–101, 186–187, 250–251
authorization of new classes of, 176
of former cofounders, 98–101
liquidity of publicly traded, 258–259, 265–266
reverse splits of stock holdings, 177, 235–236
and right-of-first-refusal (ROFR) agreements, 99, 180–181
stock purchase agreement, 284
stock restriction in term sheets, 180–182, 283
and transfer restrictions, 98–99
See also vesting
storytelling skills, 134
strategic direction of company, 203–204
Strebulaev, Ilya, 3
success, measuring, 36–40
Swensen, David, 59, 60, 64
Tanium, 46
taxation, 71, 92–93
teams
and evaluation of early-stage companies, 43–48
and market size/quality, 51
and pitching to venture capitalists, 130–134
tech bubble. See dot.com boom/bust
term sheets, 140–169, 170–188
on aggregate proceeds, 142, 278
antidilution provisions in, 165–167, 280–281
on board of directors, 171–173, 281
on capitalization, 154, 278