Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist
Summary
This is the full-title edition of Feld and Mendelson's guide to venture financing, written to give founders the same understanding of term sheets that investors and lawyers have. Both authors founded Foundry Group and write from the investor side while stating what founders should watch for.
The organising insight is that terms divide into economics and control, and that these should be negotiated separately because they operate independently. Economic terms include the price and the pre-money and post-money distinction, the option pool and its effect on effective valuation, liquidation preference including participation and multiples, pay-to-play, vesting and acceleration, and anti-dilution. Control terms include board composition, protective provisions and the specific actions each veto covers, drag-along rights and conversion.
They also explain how venture funds work as businesses, including the limited partnership structure, management fees, carried interest and the ten-year fund life, and argue that founders who understand fund economics can predict investor behaviour that otherwise appears arbitrary. The negotiation chapters cover how to run a financing process, what leverage a founder actually has, how term sheets are negotiated in practice, and the common mistakes founders make including optimising for headline valuation.
The material covers United States practice and requires adaptation elsewhere. Terms have shifted across the editions and any given edition dates. The authors are investors, so what they present as standard reflects that perspective. It remains the most complete term-level reference available to founders, and the argument to negotiate price and control while conceding elsewhere is the practical core.
Key takeaways 8
- Term sheets divide into economic terms and control terms, which operate independently and should be negotiated separately.
- Liquidation preference determines the distribution of proceeds at every exit value except the largest, and participation changes founder outcomes substantially.
- The option pool is normally created pre-money, which dilutes existing holders and lowers the effective valuation below the headline number.
- Protective provisions give investors vetoes over defined actions regardless of ownership percentage, which is where control actually resides.
- Board composition determines most decisions before an exit and matters more than the ownership split.
- Fund economics including the ten-year life, management fees and carried interest explain investor behaviour that founders otherwise find arbitrary.
- Founders should concentrate negotiation on valuation and control and concede most other terms, since attention spent elsewhere costs leverage.
- Optimising for headline valuation while accepting aggressive preference and control terms is the most common and most expensive founder error.
Who should read it
Founders raising venture capital who need a term-by-term reference written by investors, specific to United States practice.
About Brad Feld
Co-founder of Foundry Group and Techstars; earlier co-founder of Intensity Ventures and Mobius Venture Capital
Venture Deals is the standard practitioner reference on term sheets and Startup Communities named a field; both long outlived the blog posts they grew from.
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