on confidentiality, 285
on conversion/auto-conversion to common shares, 160–165, 280
on co-sale agreements, 181
on D&O insurance, 183, 284
on dividends, 154–155
drag-along provisions in, 182–183, 252, 284
on employee and consultant agreements, 187
and go-shop provisions, 239
on information rights, 282
on legal counsel and fees, 286
on liquidation preference, 155–159, 279
and no-shop provisions, 187–188, 239, 285
on preferred shares, 141–142
on price per share, 147–149, 278
on pro rata investments, 178–180, 283
on protective provisions, 173–177, 281–282
and recapitalizations, 281, 282
on redemption rights, 159
on registration rights, 178, 282
on right-of-first-refusal, 180–181
sample, 141, 277–286
on stock purchase agreement, 284
on stock restriction, 180–182, 283
on vesting, 183–187, 284
on voting rights, 167–169, 281
Tesla, 110
timing in startup world, importance of, 14
Tiny Speck, 137
Trados case, 220–231
and common shareholders, 221–222, 223
and conflict of board, 222–226
decision on, 227–228
distribution of proceeds from acquisition, 221
and entire fairness rule, 222, 226–229
and management incentive plan, 221, 226–227
takeaways from, 228–231
transfer restrictions, 98–99
Uber, 102, 172–173
United States and venture capital, 3, 271, 275
university endowments, 54–55, 56–57, 71
unrelated business income (UBIT), 93–94
use of proceeds, 278
vacation policies, 244–245
VA Linux, 264–265
valuation, 118–123
and antidilution provisions in term sheet, 165–167
and convertible notes, 144
pre- and post-money, 147–149
of very-early-stage startups, 153–154
valuation marks, understanding, 76–83
venture-backed companies
economic impact of, 3–4, 41
exiting options of (see acquisitions; initial public offerings)
five largest US market capitalization companies, 25, 41
and information asymmetry, 5, 140, 275
VC’s relationship with, 2–3, 4–5
venture capital (VC)
and ability to raise new funds, 67–68
as asset class, 29–30
batting average of, 37–40
cardinal sins of, 44, 50–51, 179–180
competition for, 271–272
distribution of returns for, 30–32, 31, 35, 38, 40
and dot.com boom/bust, 64–65
early years in Silicon Valley, 19–20
as endorsement of a company, 43–44
equity financing as basis of, 26–27, 28
extensions of last round of, 233
and institutional investors, 40–41
life cycle of, 7–8, 114–115, 268
and life cycle of fund, 152
measuring success of, 36–40
median ten-year returns in, 30
and multiple funds, 67
potential replacements for, 273–274
relationship of LPs to, 69–71
reserves set aside by, 66–67
restricted nature of, 35–36
risks inherent in, 39
rounds of, 34–35, 66–67, 115–117, 138–139, 151–152
signaling in, 32–33, 35, 37
size of industry, 40–41
and state of fund, 83–84
three professional roles in, 29
and Yale University endowment, 62–63, 64–65
as zero-sum game, 33–35
venture capitalists
average duration of relationship with, 5, 115
creating incentives for, 114–115
as dual fiduciaries, 201–202
exit of, following IPO, 266–267
and failure to invest in winners, 33
funding from (see difficult financings; raising money from venture capitalists; term sheets)
goals of, 114–115, 126, 139
and information asymmetry, 5, 140, 275
and opportunity costs, 43–44, 83, 212–213, 223
over-involvement with company, 203
and pitches (see pitching to venture capitalists)
role of, 2–3, 29, 274–275
vesting
and acquisitions, 250–251
and founders, 95–97, 99–101, 183, 186, 205–206
and general partners (GPs), 89
and term sheets, 183–187, 284
VMware, 132
voting
on authorization of new classes of stock, 176
on corporate actions, 176
protective provisions on, 173–177
voting rights, 167–169, 281
WARN statutes, 243–244
waterfall valuation method, 77, 78–79
Waymo, 187
whaling industry, 53
winding down the company, 243–246
working capital, 150
Yale University endowment, 54, 59–65
Y Combinator (YC), 20–21
zero-sum game, venture capital as, 33–35
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ABOUT THE AUTHOR
Scott Kupor is the managing partner of Andreessen Horowitz. He has overseen the firm's rapid growth to one hundred fifty employees and more than $7 billion in assets under management. He is also a cofounder and codirector of the Stanford Venture Capital Director's College and teaches venture capital and corporate governance courses at Stanford Law School and the Haas School of Business and Boalt School of Law at UC Berkeley. He is vice-chair of the investment committee for St. Jude Children's Research Hospital and was previously the chairman of the board of the National Venture Capital Association.
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