Congratulations to Kirk Simpson and the entire team over at Wave Accounting for raising $12 Million in Series B funding from the Social+Capital Partnership (s23p), Charles River Ventures and OMERS Ventures.  We couldn’t be happier for this team!

See their 2011 Under the Radar Presentation HERE.

Company Description | Wave helps small businesses achieve success. How? Wave Accounting is a 100% free online app that takes away the pain associated with accounting and bookkeeping, and gives business owners back their time. Wave eliminates laborious manual entry tasks, and yields accountant-friendly reports, without requiring the business owner to know anything about accounting. Along the way, Wave is revolutionizing the business side of small business SaaS apps: Sophisticated, privacy-protective revenue streams allow us to offer an extraordinary product completely for free — not just a free trial. Wave has already attracted 95,000 small business signups in over 200 countries around the world in just over 11 months.

Congratulations to Rob Bailey and the entire team at DataSift for raising $7.2 Million in funding from GRP Partners and IA Ventures.  Only last week we were watching them present at Under the Radar!  Woot woot!

In case you missed it, here is their presentation from last week’s Under the Radar: DataSift April 26th, 2012 Presentation

Company Description:
DataSift is the social-data platform company, enabling enterprises and entrepreneurs to mine the social web for insights from the billions of public social conversations on Twitter, Facebook, and millions of blogs and forums. As a licensed Twitter resyndication partner, DataSift gulps down and analyses data across the social-web, enabling companies to create powerful filters to listen for social-signals about brands, breaking news, and public opinion. Delivered as a cloud-platform, DataSift does the heavy-lifting for companies creating social-media monitoring, social CRM, business intelligence, financial-trading and news-monitoring applications

Congratulations to 2009 Under the Radar Alumni Eucalyptus on raising yet another giant funding round!  Today they announced a $30 Million dollar round led by Institutional Venture Partners, Benchmark Capital, BV Capital and New Enterprise Associates.

The company also recently announced a partnership with Amazon Web Services to use the cloud giant’s API to connect Amazon’s cloud services with the Eucalyptus-powered private clouds created by companies. And the company says its partner ecosystem has more than doubled to include over 200 of the top cloud and infrastructure automation vendors. (Source: TC)

Way to go guys!

See their 2009 UTR Presentation HERE.

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Congratulations to Under the Radar alumni CloudPassage on raising $14 million in a second round of financing led by Tenaya Capital.  Security in the cloud is all anyone can talk about these days and we’re happy to see Carson and his team will continue to lead the way in this space.

See their Under the Radar Presentation HERE.

Company Description:
CloudPassage is a security SaaS company offering the industry’s first and only server security and compliance product purpose-built for elastic cloud environments. The company addresses the technical challenges of securing highly dynamic cloud hosting environments where consistent physical location, network control and perimeter security are not guaranteed. The company’s early product feature set includes server vulnerability and compliance management, and centralized management of host-based firewalls. The technology operates across infrastructure models and seamlessly handles cloud server bursting, cloning, and migration. CloudPassage is headquartered in Menlo Park, Calif., and is backed by a number of well-known venture capital firms and angels.

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Under the Radar Alumni Boku has raised $35 million in a funding round, thanks to investor Telefónica Digital. Other investors include Andreessen Horowitz, Benchmark Capital, New Enterprise Associates, Khosla Ventures and Index Ventures. Boku has now raised $75 million since 2008. Congrats to the entire team!!

“Payments is an industry that requires scale, and in the three years since BOKU launched we’ve grown rapidly to partner with more than 250 mobile network operators, processing transactions in 67 countries around the world,” said Mark Britto, CEO of BOKU, Inc. “We see this investment as a clear vote of confidence from our new partners at NEA and Telefonica. They recognize that we’ve established a mobile billing system that offers bank grade technology on a global scale; this strategic investment will help us expand our business as well as facilitate the growth of our new BOKU Accounts platform.”

See Boku’s 2009 GRAD Circle Presentation HERE.

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April’s Under the Radar Conference is full of game changing startups!  One of the presenting companies will be Duo Security, who today announced closing a $5 million round from Google Ventures, True Ventures, and Resonant Venture Partners. This brings startup’s total funding to $6 million.  Come and meet Dug Song and his team in person at Under the Radar in less than 2-months!

Company Description: Duo Security’s hosted two-factor authentication service brings strong, scalable security to organizations of any size. Duo’s unique, high-availability architecture provides centralized management, self-service enrollment, and interactive secondary login through an intuitive web interface, eliminating the high costs, complexity, and confusion associated with traditional two-factor systems. Every day, over 500 organizations in 40+ countries around the world rely on Duo for their security. Duo Security is located in Ann Arbor, MI.

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Congratulations to Under the Radar alumni Stitch Labs on receiving $1 Million in funding from True Ventures! Stitch Labs will use the funding for product development and customer growth. The company is also hiring new employees. Stitch was founded in 2011 and is based in San Francisco, California. This is the first round of funding the company has received.

See their 2011 Under the Radar presentation HERE.

Company Description | Stitch, a design-focused fully integrated business management suite for the SMB market, was created to solve problems the founders experienced while operating product-based businesses. Stitch integrates inventory management, order fulfillment, invoicing, accounting and business analytics through numerous sales channels (i.e. online, wholesale, consignment, trade shows) into a single SaaS product offering. Near-term development continues to focus on business management tools in addition to incorporating industry-changing integration technologies through both web and mobile applications. Long-term development will fill the void that currently exists between retailers and manufacturers by leveraging network effects and a uniquely designed database.

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Congratulations to Under the Radar presenter Compass Labs on raising $6 million funding from NEA, and Presidio Ventures. This brings the startup’s total funding to $12 million.

See their 2010 Under the Radar Pitch HERE.

Company Description: Compass Labs is the next generation Ads network, which enables advertisers to reach and effectively engage social media users. Our mission is to bring relevant and timely advertisements to users based on their expressed interests and intent. Compass Labs‘ real-time precision targeting enables brands and marketers to effectively harness the power of social media to precisely target potential buyers at the exact moment they are contemplating a purchase.

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Congratulations to Under the Radar alumni Fanminder on raising $1 million in funding from Silicon Valley executives including Square COO Keith Rabois and PayPal VP of Marketing Peter Karpas.

Fanminder is also rolling out version 2.0 of its customer loyalty platform. Fanminder offers small businesses a web-based dashboard enabling the creation of coupons and discounts distributed via mobile, email and social networking sites and redeemed in-store on customers’ phones. Fanminder 2.0 introduces a series of new features including mobile-optimized webpages for each promotion, an offers gallery, themes and expert-created marketing campaigns. More than 6,000 small businesses are now using Fanminder services, with another 1,000 SMBs signing on every month. Fanminder is currently in the process of raising Series A funding.

See their 2010 Under the Radar Presentation HERE.

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Facebook’s $5 billion IPO filing will make it the largest web company IPO in history.  The engineers that stuck it out for the long haul are doing victory dances.  However what does that mean for the rest of us?  What other ripple effects will the IPO have on our economy?

1. Real estate prices: According to a talk on NPR this morning, real estate agents are getting ready to see a spike in Silicon Valley new home purchases from the newly rich Facebook employees. This may create a buying frenzy in the whole area, carrying over to other bay area residential and business areas.

2. Mobile advertising: According to the S-1 filing, Facebook plans to massively expand its mobile reach.  In the past four months, mobile users have increased 21%. Currently Facebook mobile is ad free, although a high percentage of Facebook’s revenue has come from its site advertising.  As we use our mobile device more and more, we can only expect advertisers to follow us.

3. Social Gaming: With the IPO filing, Facebook has to spend about $10B of the money they raise.  Given that third party games still generate a lot of revenue for Facebook, many wonder if they won’t try to invest in the space themselves and act as a first party publisher.  Internal development would allow Facebook to be leader in the space and create a fuller mobile offering.

4. Privacy: Everyone wants to know how Facebook will handle privacy post IPO. An IPO means Wall Street expectations to monetize, monetize, monetize.  Unfortunately for consumers this could be our personal data.  It will be interesting to see how the company will still build a community that caters to us while making money off of us.

We may see massive Facebook changes now that it’s married to Wall Street.  However, remember that Mark Zuckerberg still own nearly 28 % of the company. Hopefully with his leadership, we’ll still be old school messaging and sharing. Who knows, maybe we’ll start throwing sheep at each other again.

Last year companies like Google, Twitter, Facebook and Salesforce gobbled up a multitude of startups to strengthen their talent and technology strategies.  However, just because they’ve got money to burn doesn’t mean you should consider selling.  75% of acquisitions fail due to timing, out clauses, and cultural fit.  Google’s failed acquisition of Groupon is a classic example. However, some startups hit timing perfectly such as Bebo’s sale to AOL for $850M.

Entrepreneurs must ask themselves if exiting is the right strategy versus building up their company for a potential (yet sometimes reachable) IPO.

To know if selling is the right thing to do successful entrepreneurs must ask themselves these questions:

-  What type of company are you?  A full-fledged offering or a feature looking for a product?

- What type of acquisition are you? Talent, Business, or Technology?  Each will have different valuation.

-  Will your market grow and what are your chances of thriving amid competition if you go it alone?  Who else could your buyer acquire?

-  Is it the right time given your traction?  Will you have a significantly higher valuation in the near term?

-  What is your long term vision for the company?  Is it aligned with the buyer’s goals?

- Is the buyer the right cultural fit for your company?  Could you hang out with them?

- What service level agreements and out clauses do you have with your customers?

- Are your internal finances in order?  What things do you need to clean out from under the rug?

We will be tackling some of these questions with established corporate acquirers and acquired entrepreneurs in Los Angeles in March.  Come join us for an Acquisition Strategy Session in Los Angeles on March 6, 2012.

Cloud computing provider and our Under the Radar alum, Joyent just secured $85 million in their Series D round!  According to a TechCrunch article, Joyent plans to roll out a collection of “seamlessly connected high performance clouds” serving global corporations on every continent.

With more and more money being poured into cloud software and services, investors are betting that corporations will abandon their back room servers and trust more of their data in the cloud.

All Chips In?

However, not every company is transitioning their data over as fast as Joyent’s customers.  According to Michael Driscoll, CEO of predictive data analysis start-up MetaMarkets, “There is still a cultural obstacle with cloud.  Although companies trust their private data with large banks or physical boxes in their back room, some are still hesitant to move it into the cloud.”

What makes enterprises finally place a bet on the cloud?  How will they resolve data privacy concerns? What other emerging cloud startups will provide such valuable benefits that keeping data in the “back room boxes” is no longer an option?

In high technology, the American Dream still holds true.  Build a company, raise some cash, and exit with a few million in your pocket—all before you hit 30.  Startups that don’t have US birthrights aim to at least take a holiday here in hopes they may meet the right people to launch them into success.  However, how do 20-something tech geek CEOs in Albania find their way here?

Accelerators are the new Passport

Accelerators connecting Silicon Valley to other locations are popping up everywhere.   Last year PwC announced a partnership with Plug and Play to launch a new accelerator in Luxembourg in efforts to build up a two-way bridge between Europe and Silicon Valley.

The German Silicon Valley Accelerator is launching this year and will bring six German companies to the Valley for three to six months.

Of course the American dream isn’t limited to California.  New York’s thriving tech scene is another coveted destination. DreamIt Ventures is launching DreamIt Israel, to take five Isreali startups to New York City for three months and an demo event.

With all these pilgrimages to the US, will American VCs be overwhelmed with startup ambitions?  Are new cross country accelerators  just adding more pressure to the Series A crunch?  Or are these bridge building accelerators positive things as they encourage inspiration, global relationships, and a way to keep tabs on worldwide innovation?

New entrepreneurs nervously come to me with the question—“Is it a good time to start a company?  Will there still be money in 2012?”

Seasoned entrepreneurs ask, “Will investors still spend like drunken sailors or will we see a correction?”

Yesterday Dealmaker Media asked a panel of investors from Silicon Valley and Los Angeles to give their opinions on the future funding environment.

“To Start-up or Not to Start-up, that is the question”
Although the erratic spending of 2011 may slow, most investors felt it was irrelevant in the decision to start a company.  Mark Suster, Partner at GRP Partners said, “It’s always a good time to start a company regardless of funding.  I’ve done it in a boom and a correcting market.  It’s actually more difficult in a boom because it’s hard to differentiate yourself.”

After all, how much more room is there for additional Groupon clones or ways to share our photos?  The companies that will get funded going forward will try to solve real problems, not just copycat other business models as a get rich quick scheme.

Aydin Senkut, Founder and Managing Director of Felicis Ventures said, “It’s never a good or a bad time but there are good and bad ideas.  They say that the grape in the toughest terrain produces the best wine.  Sometimes the startups in the most challenging environments turn into the best companies.”

Facebook, for example, was started in 2004 when Silicon Valley was cautious and dry.  This was pre Y -Combinator, pre 500 startups, and pre Peter Thiel’s fund to back entrepreneurial college dropouts. It is now the biggest startup success story, boasting over 800 million active users.

Are Accelerators the New MBA?
With new accelerators and incubators popping up every day (I’ve counted over 100 internationally) the startup pipeline isn’t going to slow as soon as people may think.  Every engineer thinks they can start a company and every MBA thinks they can quit the corporate world (or their expensive tuition) to be ‘lean.’  Is this a good thing?

Paul Bricault, Venture Partner at Greycroft Partners said, “Right now there are a lot of crappy tennis camps and a lot of crappy tennis players.  But we don’t want to go and shut them all down!  We don’t want to discourage entrepreneurs rather we want to get more!”  Paul still feels like LA and regions outside of Silicon Valley are under capitalized.

Mark Suster, having started Launchpad LA sees the positive in providing more opportunities. “The accelerator support network and seed money widens the pipeline.  If it takes ten companies to produce two great ones then we need more.  It’s not a bad thing to convince people to leave their jobs and try something new.”

All investors acknowledged that the winners in any economy are the ones with a brilliant idea, rock star team, and ability to roll up their sleeves and work hard for their dream. However, Aydin commented that it just isn’t entrepreneurs that have to work hard in tight economies.  Investors do as well.  “We are not compensated for taking risks but for doing research for taking calculated risks,” he said.

Aydin travels all over the world to find, meet and invest with the best emerging companies, including the recently popular Angry Birds.

As 2012 approaches with a wavering economy we may be in for a funding slow down and belt tightening.  However, this isn’t a bad thing for entrepreneurs.   Those with passion for their ideas and a dedication to Lean Start up principals have everything they need.

As Fred Wilson once said, “Markets come and go. Good businesses don’t.”

Tuesday December 06, 2011 6:00pm – 9:00pm
$35 Tickets HERE.

INVESTOR OUTLOOK 2012 – Will investors continue to spend like drunken sailors?

2011 will be remembered as the year that IPOs were resurrected, Obama and Zuckerberg became BFFs, accelerators opened up on every corner, and $40 Million A rounds were on the table. Super angels, accelerators and micro-funds are popping up everywhere but as the economy continues to weaken, will tech startups be immune to tightening wallets? Is the state of the economy proving to be a fertile breeding ground for risk-taking and innovation? Are corporates going to go on a M&A feeding frenzy? What does this mean for founders seeking funding in 2012? The party’s got to end sometime, right?

In this Strategy Series, investors from Silicon Valley and LA will discuss:
- Are startup valuations inflated? Will the market correct itself and what does this mean for Seed and Series A rounds?
- Are startup accelerators the new MBA? Is it only for young guns or can mature founders gain value from participating?
- Market opportunities – what trends are investors looking to in 2012?

SPEAKERS
Paul Bricault, Venture Partner – Greycroft Partners
Debbie Landa, Founder, GrowLab
Aydin Senkut, Founder and Managing Director, Felicis Ventures
Mark Suster, Partner – GRP Partners

MODERATOR
Hale Boggs, Partner, Manatt, Phelps & Phillips LLP

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This morning, I met with Luke Kanies, CEO and Founder of Puppet Labs to talk about the Portland, Oregon startup scene and how DealmakerMedia can get involved.  Little did I know, our meeting would end up on the same day that Puppet Labs announced their $8.5Million Series C round.  Luke’s phone was blowing up as we sat at the coffee shop and talked about big picture Portland stuff.  (Surely the LAST thing Luke had on his mind.)  Luke has a lot of passion about his work, his community, and this industry and I’m happy to be able to announce this sizable round of funding.

The $8.5 Million  round included Cisco, Google Ventures and VMWare, Perkins Caufield & Byers, True Ventures, and Radar Partners.  Congratulations to Luke and the entire team!

See Puppet Labs‘ 2010 Under the Radar Presentation HERE.

Company Description:
Today’s enterprise IT infrastructures are growing in size and complexity accelerated by virtualization and cloud computing. Puppet Labs is the company behind Puppet, the leading open source datacenter automation solution. Puppet enables staff to manage their IT infrastructure through a model–driven architecture, automating the configuration of computing devices through a simple cross-platform interface. Puppet insulates IT staff from differences between platforms making IT more secure, efficient, and scalable. Puppet is broadly deployed at 1,000′s of companies world-wide such as Google, the NYSE-Euronext, Twitter, Digg, Yelp, Juniper and JPMorgan Chase.

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From our first conversation with Matthew Prince (CEO) and Michelle Zatlyn (Co-Founder, User Experience), we knew CloudFlare would play a major role in revolutionizing website security. Fortunately, we weren’t the only ones who thought that! CloudFlare has raised an impressive $20M in a Series B round led by New Enterprise Associates!

Read more

Strategy Series and Mixer
Tuesday July 12, 2011 | 6:00PM – 9:00PM
Manatt, Phelps & Phillips LLP | 11355 W. Olympic Blvd. 10th Floor, Los Angeles CA 90064 (Map)

BLOWING BUBBLES – HOW TO GET FUNDED FROM THE ANGELS & VCs BACKING TODAY’S STARTUPS 

Read more

At Dealmaker Media, we were over the top when we first met Daniel Saks and Nicolas Desmarais from AppDirect. With the explosion of business and cloud apps crowding the internet, it only made sense that someone out there would make it easy to find and pay for applications that make it easier to get up and running with your business. With massive acquisition potential and a growing following after a huge presence at Under The Radar, AppDirect has announced a $3.25M round led by iNovia Capital. As a local business, with roots in Canada, we are huge fans of AppDirect and know you will be too.

Read more

Do we know how to pick them or what?! Santa Clara based startup, Nutanix has raised $13.2M from Lightspeed Venture Partners and Blumberg Capital! Check out Derrick Harris’ article in GigaOm for more information…

Nutanix gets $13.2M for Google-like Storage Infrastructure

You can also see Nutanix live at Under The Radar on April 28th in Mountain View. Register here for your ticket to Silicon Valley’s best curated business development conference!

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Congratulations to 2009 Under the Radar presenter Roambi on raising $10-Million in funding!

Company Description | “Display screens are getting smaller – from laptops to PDAs, to ever shrinking mobile devices. However, the amount of information viewed on these devices is increasing exponentially. The problem arises – how do you effectively access large amounts of information on a small screen? Roambi by MeLLmo Inc. is solving this challenge by creating revolutionary ways to access and interact with critical information on small screens. The company’s mobile application suite pioneers the new frontier of smart phones through efficient back-end algorithms and patented, small screen design that is BIG on simplicity, security, and satisfaction. Roambi by MeLLmo is rethinking, redesigning, and redefining the future of information interaction on mobile devices.”

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Congratulations to Philippe Suchet and the entire Zappli/myShopanion team on closing a 500K Seed Round of funding!

Investors include Maynard Webb, the former chief operating officer of eBay and now the CEO of LiveOps, as well as 500 Startups, the fund from former PayPal director of marketing Dave McClureSource: Venture Beat).

Check out myShopanions Under the Radar presentation from just a few weeks ago!  Great job guys!

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Under the Radar Company RightScale Secures $25 Million in Funding from Tenaya Capital!

Just 5-months after presenting as GradCircle at Under the Radar, RightScale has closed a third round of funding, securing 25-Million dollars from Tenaya Capital. Way to go guys!

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2009 put startup valuations on a diet, bootstrapping and revenue models were back in the spotlight; and Angel investors made a comeback.

Despite the fears and outcries from some, startup funding didn’t quite freeze into the nuclear winter many thought it would… To many founders’ relief, startups were still getting funded. But the weakened economy did serve as a crucial “intervention” moment for a tech ecosystem that before that had been living large with dreams of $1B exits for everyone.

So, as we all prepare for winter hibernation before bursting into the New Year, what should startups know as they prepare to take their products to market, and pitch decks to investors?

On December 3rd in San Francisco, and December 10 in Los Angeles, we’re bringing some of the most influential angels and VCs together for candid round table discussions with YOU.

Depending on your city, meet and talk with Brian Pokorny (SV Angels), Jeff Clavier (SoftTech VC), Aydin Senkut (Felicis Ventures), Mark Suster (GRP Partners), William Quigley (Clearstone Ventures)….

What we’ll talk about:
* Is investing back in an upswing yet? If so, what trends are VCs betting on?

* What milestones must be met by startups seeking funding next year to ensure investors take them seriously?

* With the resurgence of angel investment and smaller financing rounds rounds – are VCs still players?

* What will the new fundable trends be: Healthcare 2.0? Green tech? Or are mobile and cloud computing still “in” for 2010?

APPLY TO ATTEND (December 3 – San Francisco)
APPLY TO ATTEND (December 10 – Los Angeles)

See you there!

Guest blogger, Ivan Gaviria today walks us through 5 terms founders should focus on when navigating their first term sheet:

Ivan is a partner at Gunderson Dettmer’s Silicon Valley office, practicing in the Corporate and Securities Group. He has extensive experience working with startup and emerging growth companies through their entire lifecycle as well as representing venture capital, private equity and other investors. For more great resources, we recommend checking our these docs on DocStoc and VentureHacks.

The Series A Term Sheet: 5 Terms Founders Should Focus On

It turns out that a typical Series A Term Sheet for a private company venture capital financing can be as much as 4,000 words long. Given that for many people 140 characters is plenty these days, that is a lot of verbiage for even the most detail-oriented founder.

To try and make it easier to separate the “boilerplate” from the stuff that really matters, I’ve summarized below what I think are some of the terms that a founder needs to drill down on.

Everyone in the tech business is on information overload; the trick is to apply your limited bandwidth in the right places. Of course, as a lawyer, I would never suggest you skim the fine print. My point is that even after your lawyer, the entrepreneurs in your network, your mentors and whomever else you trust have read the fine print and given you their opinion, there are some key provisions that you have to understand and have your own opinion on.

The following comments are done in the order that the points generally appear in a Series A Term Sheet (and I’m skipping valuation on the theory that if you need math help from your lawyer you’re already in trouble):

Option Pool.

Sometimes tucked into a paragraph on “capitalization,” term sheets will generally define price per share as being based on a pre-money valuation of $X and a cap table that includes a “post-financing option pool of Y%.”

The idea is that if the pre-financing option pool isn’t deemed big enough, the investors worry about being diluted shortly after their investment by a pool increase. Accordingly, the desired pool size is factored into the negotiated valuation such that the founders and other pre-financing stockholders bear the dilution. Certainly you wouldn’t expect a new investor to jump into a company with no option pool and accept inevitable and instant dilution. Nor should founders adopt a giant pool and forever protect investors from dilution that is expected in a growing and healthy company.

The key is being thoughtful about finding the right middle ground – how robust is the team at the time of the investment? Is it an industry or region where equity is more or less important a driver of recruiting/retention? Is the hiring plan tailored to the operating plan? Does the team know up front that a major hire will be needed (e.g., is it obvious that the founder group is missing a CEO), etc.

Spending some time on these issues and coming up with an option pool budget helps you have a reasoned approach to pool size. If you can’t tie the pool discussion to the business plan, then it’s just an extension of the valuation discussion and, for the founder, a less effective way of addressing the issue.

Dividends.

There are generally two schools of thought on dividends – (1) they basically should never be declared in an early stage company and any retained earnings should be used for growth and (2) there should be an annual dividend that at least guarantees some modest return. A hybrid favored by some East Coast investors has dividends accumulate from the time the stock is purchased but provides for them to be paid only upon an exit event.

From a founder’s perspective, the second approach can have a real impact on economics. A typical dividend of that type might be 6 to 8% accruing annually – add that up over several rounds of financing and several years to an exit and it can be a major spiff on top of the liquidation preference. So from a term sheet standpoint, you better know what you’re getting!

School (1) generally includes the phrase “when, as and if declared” – the magic words to say there is no mandatory dividend – only a dividend preference for the Preferred if the Board declares a dividend. School (2) will say “cumulative” or “mandatory” and generally have more extensive verbiage around the accrual period, whether they are paid in cash or stock, and whether they are paid regularly or only at exit.

If you’re not sure what you’ve got you need to ask. And always be cognizant that a later investor will want the same terms so an innocent looking 5% on a $750K seed round could be a big deal down the road.

Liquidation Preference.

The basic concept of a liquidation preference is pretty simple – if you liquidate the company, the preferred stock gets money back before the common stock.

But, in the world of venture financings, a sale of the company or its assets is always deemed “a liquidation.” So we’re not just talking about preference over assets when something craters, this is also about how you divide the money when the company gets sold. Who gets their money first when there isn’t enough to go around and how fairly is it shared when there is lots to go around. The problem is that there are half a dozen ways to structure preferences and several of them have multiple names in the lingo – 1X/no participation; “double dip preferred,” “fully participating,” “participating preferred with a cap,” preference multiples with no participation, etc.

In later stages of investment, you also have to deal with “intramural” issues among investor over whether senior preferred should get paid ahead of junior preferred, etc. It’s a bit much to try and review in detail here, but suffice it to say that these provisions are THE major drivers of economics in an M&A exit, and you need to take care to understand exactly what is being proposed and the economic impact at various valuations.

Board Composition.

Virtually all venture capital financings require that the Company reserve one or more seats on the Board of Directors for the investor(s).

Following a Series A financing, a fairly common structure is an odd numbered board (to avoid deadlock) with an independent director as the “tiebreaker” between the directors designated by holders of preferred stock (the investors) and those designated by the holders of common stock (the founders).

In syndicated rounds with multiple investors, 5 is a very typical post-Series A board consisting of 2 investor seats, 2 common seats and an independent. For smaller rounds with a single investor, one might see a 3 person board with 1 investor seat, 1 common seat and an independent. One subtlety to be aware of from the founder perspective is whether a “common” seat is hard wired to the “then serving CEO.” The term sheet typically phrases this as something like this: “Holders of a majority of the Common Stock shall be entitled to elect _____ member(s), one of whom shall be the Company’s CEO.”

In other words, if the founder is no longer the CEO and is replaced, the board seat goes with the office – which can tilt the balance of a board away from the original founder group. Of course the pros and cons of that approach will often depend on the individual circumstances of any particular team or deal; what’s important for purposes of the term sheet is to understand the issue so you can make a knowledgeable decision. Similarly, the choice of the “independent director” can make a huge difference in the tilt of a Board and the choice should be made with care.

For more perspective on Board composition issues, see the following post at Venturehacks.

Founder Vesting.

Often the Series A term sheet will be used to negotiate founder vesting as part of the overall terms and conditions of the financing. With few notable exceptions, the primary value in a typical start up company is in the people and, not surprisingly, investors want to make sure those key people stick around.

As with everything in this business the basic concept is simple – stock owned by the founders is made subject to a repurchase right, exercisable by the Company if the founder quits or is terminated. The repurchase right “lapses” on a negotiated vesting schedule so that fewer and fewer shares are “at risk” over time.

Again, though, the devil is in the details. What percentage of the founders’ shares will be subject to the repurchase right? Over how many years? Will the vesting accelerate if there is a sale of the company? What about acceleration if the founder is terminated without cause? What sorts of things should constitute cause?

It’s a topic on which several hundred words could be written just walking through the lingo – “good reason,” “double trigger versus single trigger,” “constructive termination,” etc. So let me make just two high level points.

First, this is an area where founders often get their first taste of being a bit conflicted. From an individual perspective, a founder might wish to be as aggressive as the market will bear on vesting schedule, acceleration terms and other founder protections.

As a co-founder or CEO, however, one also has to consider the founder/co-founder dynamic as much as the founders/investors dynamic. I’ve often seen co-founders set up aggressively pro-founder vesting terms only to have a team member break up the band and walk away with a lot more equity than the remaining team would have liked. As a related second point, this is an area where it pays to try and strategize a few moves ahead to build consistency into equity terms on the team. Having a patchwork of different deals can create odd incentives or hurt morale if, as a result of different acceleration terms for example, a deal will produce widely different economics for employees at similar levels. In any event, a founder going into a Series A term sheet negotiation should understand his or her existing stock terms and exactly how the term sheet proposes to alter or amend those terms.

Some Final Disclaimers

Having said all of that, I will make a few final disclaimers. First, this entire discussion assumes a company on its first round of professional financing from a VC or angel investor accustomed to working with startups.

Occasionally startups will have an early engagement with a commercial or strategic partner that yields a financing and those deals can vary greatly from what we generally refer to as “market” terms from a venture capital investor. Also as alluded to above, there are additional degrees of complexity as you layer in additional rounds at different valuations. Reasonable VC’s and founders may of course have legitimate disagreements about how to balance these terms, the important thing is to be as informed and self reliant on the key terms as you can be.

Lastly, thanks to the team at Under the Radar for providing this forum and for all they do to support the startup ecosystem.