Before we get into the meat of all the stuff of venture deals we need to talk

about the players. There are a lot of people running around doing a lot of
important things, both for the companies and getting these transactions done.
In this section we’ll explore who all the players are.

Clint: What role do the entrepreneurs play in the fundraising process? Can’t
they just outsource this to their attorney?

Jason: First of all, the whole reason the industry exists is because there are
entrepreneurs, so the big role is that without entrepreneurs there is
no industry.

There is absolutely no way to outsource this to your attorney, for a

couple of reasons.

One, why would you want to outsource your reputation to somebody

else? Whoever you hire is going to be that front person in your
fundraising process. Trust me, you do not want your lawyer going out
to VCs and being that front person, you want to have that direct
relationship.

Clint: What about the venture capital firms themselves? There’s a bunch of
folks running around in these firms; which ones are important for
fundraising and how do you think about that?

Jason: Make sure if you’re dealing with a venture capital firm you are always
dealing with a partner level person. They’ll have a business card that
says Managing Director or General Partner. It’s okay to start with an
associate, but make sure very quickly you’re getting up to the
partnership, or you may be wasting your time. Usually associates and
people below partnership level don’t actually have the ability to do a
deal.

Clint: What about angels? There are a lot of angels running around,
especially in early seed stage investing; what role do they play in all
this?

Jason: Angels are great, especially if you know them, they can be people who
can fund you early and help you a ton. They can be very focused on
your company.
 The big difference between angels and venture capitalists is angels
are usually investing their own money, while venture capitalists are
primarily investing other people’s money. There’s a different
relationship the angel may have with your company, it may be more
personal, it may be more interested, and there may be a deeper level
of contact with an angel than with some VCs, it really depends.

They’re super important and they’re very early stage investors

usually, which is nice to help you get started before you even reach a
VC.

Clint: So we have angels running around, we have venture capitalists

running around, how do you put all this stuff together? What’s this
syndicate thing?

Jason: A syndicate is nothing more than who all is investing in your

company. Sometimes you’ll do a transaction that will have angels and
VCs. The key is finding a lead investor. Herding dogs and cats is
tough, what you want to do is find somebody who is going to take the
reins and say, “I’m going to lead the terms, I’m going to lead the
negotiations.” By getting that lead investor sometimes their aura
alone will bring in other investors to your company.

Clint: So we don’t want the lawyer out front negotiating with the VCs. What
role do we want the lawyer to play? What’s the different between a
good lawyer and a bad lawyer in funding?

Jason: The funny thing is I always ask entrepreneurs, “Do you have a good
lawyer?” The answer is, “Yes, I have a good lawyer.” And I say, “How
do you know?” I actually don’t know if I have a good dentist or a good
orthopedic surgeon, so how do entrepreneurs know if they have a
good lawyer.

The first thing is you get a good lawyer by getting references from
people who you know have been in the industry a long time. What you
want to do is have your lawyer advise you how to go back and forth
between the venture firm and yourself.

I always think entrepreneurs do a better job of negotiating and get

better results when they’re negotiating directly with the VC partner,
 not the lawyer to the VC partner. Use your lawyer every step of the
way to make sure you’re getting a good deal.

Clint: Are there other folks running around, like mentors and advisors? Who
else is around this fundraising?

Jason: You may have mentors and you may have advisors. The big difference
is mentor are usually people who are doing it because they just want
to, they’re not asking for anything in return except for maybe some
good karma and a beer every once in awhile.

Advisor types, whether they’re lawyers, accountants, or professional

advisors, they’re usually wanting to get paid. They can be very helpful
too, but I always advise entrepreneurs to be a little bit more leery
before you start paying money out to anybody to help you.

Having a good mentor network is absolutely the most important

network you’re going to have. These people can help you run your
business, make introductions to funding, keep you on the straight
and narrow, and also be a great resource to a CEO. As we always like
to say, being a CEO is a very lonely job; find people you can talk to.

Clint: Questions about the players?

Student: At what point does it make sense for a company to open up a

dialogue with an angel investor or VC firm? And how would you
recommend the company go about opening that dialogue?

Jason: I personally think it’s never too early to have that dialogue, so long as
you’re dealing with reputable people. We spend 50-60-80% of our
time dealing with entrepreneurs and speaking to them –
entrepreneurs we’ll never fund. It’s about giving back to the
community, helping to create the ecosystem, helping broaden the
network.

With good folks go early, go often, get their experience, get

everything know in your head so that your company will be more
successful. Who knows, maybe just because I’m not funding your
company, I might know somebody who is.
 I would caution you, if your company is in an area that I invest and I’m
not going to fund, don’t ask me for intros. Because me going to a VC
saying, “Susan, I’m not funding this company, but maybe you’d like
to,” that’s always a dead intro. But if you’re doing something in the
natural food space, I may be able to have a connection for you.

Student: How do venture capitalists make money?

Jason: We make money by taking other people’s money and returning a lot
more money. We have what are called limited partners, those are the
names of our investors. The venture capitalist structure is a
partnership, that’s why they’re called limited partners.

We have investors that are pension funds, endowments, high net

worth individuals, insurance companies, etcetera; they give us money.
Our job for them is to take, as Brad likes to say, a bucket of money
and return a much larger bucket. And if we do, we get to take 20% of
the profits, generally, along with some management fee, which pays
our salary.

Student: You said to be careful when it comes to paying money to advisors.

What about giving them equity early on?

Jason: Equity to advisors is certainly better than cash. I would advise all
startups not to spend any of their cash on advisors. Advisors looking
for cash from a startup, I’d be looking at them saying, “What are you
trying to do to me?”

Equity is normally is reserved for advisors and board members if

they’re super valuable. I would be careful, I would put vesting on it. I
would make them earn their equity over a couple of years, or four
years, in case they’re not doing their job you can pull the equity back.

We’re talking very small percentage points, maybe a quarter of point

of the company at most.

Student: You mentioned the importance of having a lead investor. What if I

have a bunch of angels who say they want to put money in, but I
don’t have anyone presenting me with a term sheet to negotiate with?
Jason: One of the thing I’ve seen companies do, with most failure, is creating
their own term sheet. I would not advise a company creating their
own term sheet and giving it to angels saying, “Hey, what do you
think about this?” It’s kind of death by 1,000 paper cuts as they come
back to you. It has worked, but in general it does not.

It is really crucial for you to find somebody in your syndicate to say,

“Jill, you seem like someone I want to work for. People respect you.
Are you willing to drive this process with me and get this done?” and
at least get somebody in that syndicate to help you close the deal.