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Secrets of Sand Hill Road

“He slept like a baby every night - waking up every few hours crying…

The Art of the Pitch

Getting your foot in the door

  • Get a warm introduction from:

    • angels and seed investors
    • law firms - since they work with a lot of startup founders who are incorporating companies and with a lot of VCs
    • for both groups, introducing their best startups to VCs helps them win too
    • don’t have these? find another way
  • You’ll need:

    • likability

    • networking

    • hustle

    • showing up

    • following up

    • persistence

    • salesmanship

    • confidence

    • experience

    • storytelling

    • luck!

1: Market Sizing

  • You need to help the VC understand your market size

    • e.g. when Lyft was pitching, naturally, people evaluating the opportunity would use the existing taxi market as a proxy for market size, then make a guess about how much of that market Lyft could capture

    • Lyft argued that people made assumptions about the availability of taxis, security of taxis, convenience of hialing taxis, etc., but with GPS, smartphones and apps, the market was way bigger

    • also, drivers wouldn’t need to buy taxi medallions -> more supply of drivers -> more customers -> more demand for drivers -> cycle of network effects

  • Network effects

    • actually commonly applicable, not just to companies like Lyft, Facebook, Airbnb

    • e.g. Freenome argued that if cancer screening techniques improved (became less invasive) + better predictive value -> people would get more cancer screenings -> more people get early detection -> bigger market

  • What if you’re going into an existing market?

    • you need to explain what and why macro trends in that market are evolving, and why you have an opportunity to own it

    • e.g. Okta, a SaaS for managing log-ins

      • Microsoft Active Directory already existed, and was the market leader - but it was for applications managed inside a company’s IT environment

      • Okta argued: the rise of SaaS applications -> companies will use many more external applications -> different teams will use disparate applications e.g. HR, Sales, Engineering will each need to use their own SaaS applications, each of which are externally developed and managed -> companies need new ways to manage employees' access and security -> new market opportunity

      • Sounds like a stretch? Okta’s market cap is $25bn (and was $45bn last year)

  • What if the market doesn’t exist yet?

    • you might have to imagine that a new market will rise because of some new technology

    • e.g. Burbn argued that iPhones would become dominant -> people would want a photo-sharing app for the iPhone

      • people shared photos before the iPhone - but that market size clearly didn’t stay the same

      • (Burbn is Instagram)

    2: Team

  • We agree the opportunity exists. Why you?

    • ideas are a dime a dozen, execution sets the winners apart from the pretenders…
  • Why are you uniquely qualified to win the market? What unique skills or edge do you have? i.e. founder-market fit

    • e.g. Nicira was founded by someone who had a PhD in that subject

    • it doesn’t have to be so specific, you could have a skill in a go-to-market strategy in your domain etc.

  • Talk about your wins, talk about your failures. What do they say about your likelihood of succeeding in your current venture?

  • How will you build the right team around you? What makes you a natural-born leader? Learned leader? Why would people quit their jobs to work for you?

    3: Product

  • No VC expects you to correctly predict the needs of the market

  • Your product probably won’t be what you pitched

  • They’re evaluating the process by which you came to your initial product plan

    • How does your brain work?

    • What data have you incorporated from the market?

    • How is your product 10x better than incumbents?

    • Basically, your thought process should be robust enough to adapt to changing market demands

  • Always demonstrate strong beliefs, weakly held

4: Go-to-Market

  • Does the business model support customer acquisition profitably? The VC wants to know whether your business can be viable in the long run

  • How will you acquire customers?

    • Outside sales force? Can your product’s selling price support this?

    • brand marketing? online forms of customer acquisition?

    • how to the costs of these activities relate to the lifetime value of a customer?

  • You don’t need robust financial models, you need a framework, so that VCs understand the way you think about customer acquisition, and how deeply you understand your audience

    • e.g. Okta’s GTM strategy: sell to SMEs - SMEs are more open to new technologies + don’t have large teams of people to run things -> need an affordable outsourced software

    • in reality, enterprise sales was better -> large companies had lots of individual SaaS applications deployed across many departments -> better value proposition

    • i.e. you don’t need to be right, you need to apply real-world experience against theories grounded in reasonable assumptions

  • Repeat: you’ll probably pivot, whether minor or major

    • Tiny Speck game -> Speck -> Slack
  • Master the domain you’re proposing to attack, think about every important detail of your business in a way that shows preparation and conviction

    • e.g. VC attacks your proposal in meeting: you can’t just abandon your plan and pivot immediately, you’re supposed to have spent eons thinking about it

    • thoughtfully discuss how you arrived at your conclusions, defend, listen to feedback, incorporate it into your thinking, adjust as appropriate

5: Next Financing Round

  • what milestones do you intend to accomplish with this round of money?

  • your VC is probably projecting ahead to the next round to gauge the level of market risk in funding you

    • they need you to achieve your aims, they don’t want to be and can’t be your only capital provider at the next round
  • how much are you raising? will you have enough money to accomplish what you say you’re going to accomplish, such that you can raise your next round at a higher valuation?

    • if not, you need to discuss:

      • raising more money at this round, to have enough money to reach your milestones

      • lowering the current valuation

      • finding other means of increasing their confidence around your forecast…

  • generally, you want to aim to double your valuation at the next round

Raising Capital

Is VC the right option?

  • VCs care about market size: the opportunity must be big enough to create a self-sustaining, standalone business of scale

  • If your market opportunity just isn’t huge, there are smaller VC funds who exit at lower end valuations - or VC funding might just not be right for you

  • Remember that VCs respond to their own (financial) incentives too, which are:

    • to build a portfolio of investments, knowing that many won’t work, and that a small number will generate the lion’s share of a fund’s returns

    • eventually turn those large returners into cash to pay back their limited partners

How much, and at what valuation?

  • As much money as you can that enables you to safely achieve the milestones you’ll need for the next fundraising

  • Think about your next round when you’re raising your current round

  • In the next round, you’ll need to demonstrate how you’ve sufficiently de-risked the business such that the investor can put new money into the company at a price that appropriately reflects the progress made since the last round

  • generally, 12-24 month cycles (should be a reasonable time period in which meaningful progress can be made)

  • not raising too much maintains focus for the company by forcing real economic trade-offs during the company’s early-stage development

  • Not necessarily the highest valuation

    • overvaluing the company at the current round raises the stakes for yourself in terms of what you need to achieve to clear the valuation bar for the next round

    • Q: I’ve more than doubled my business since the last round, but the valuation isn’t double that of the last round - why?

      • The next round valuation is a reflection of the current state of your business and the current state of the finacing world

      • i.e. market environment - the valuation metrics (e.g. multiples) by which your business is being judged could have changed

      • investor may feel that you were given forward credit during your previous round (i.e. your last round was raised at an expectation of doing 3x, but you only did 2x, so you actually under-performed)

  • So: raise sufficient money to give you time to achieve the expectations that investors would have of the next round

  • Don’t raise a small amount of money at an aggressive valuation, which establishes a high-watermark valuation but doesn’t give you the resources to do so

  • Compeitition (more VCs looking at your current round, or ‘deal heat’) drives valuation, and VCs may be put off if your previous round looks too high, and you might fail to generate competition for the next round

  • If your company faces a disappointment in fundraising, employee expectations and sentiment might be affected (e.g. Monzo c. 2020); the company’s valuation is a highly visible external benchmark employees seize on as a measure of interim success

  • LoudCloud lessons:

    1. Employees do judge the success of the business by its valuation

    2. Employees compare to other companies that have raised money recently (they might even be comparing to a benchmark which isn’t that relevant)

    3. Don’t underestimate the value of always maintaining momentum by ensuring successful financing rounds. You want your valuation graph to look up and to the right

Term Sheets

The Deal Dilemma

Building your cap table

  • The answer is generally: raise the right amount of money in the courrent roud that allows you to achieve what you think you need to hit the required milestones for the next round
  • if you’re offered two deals (one with more capital but more dilution), think: if you had the extra capital, would it allow you to achieve even more than you were generally anticipating in this round?
  • understand the trade-off between the known level of dilution now, and your best forecast as to what dilution might incur in the next round based on various levels of business achievement
  • understand your payout matrix (which shows you at different potential exit price points how your proceeds are divided between the common and preferred shareholders)
  • note: investors might offer deals contingent on earlier investors waiving antidilution protections (or modifying them)

Evaluating governance terms

  • (these are generally U.S. terms)

  • preferred vote vs. Series A

  • think about potential board composition with each VC offer

    • common-controlled board?

    • think about who will control the board (i.e. will have material influence on major corporate decisions)

  • generally, think beyond valuation and consider the full set of economic and governance terms on your future

Board Members

Dual fiduciaries

  • VCs are dual fiduciaries

    • as board members they have fiduciary duties to the shareholders of the company, but as GPs they are also fiduciaries to their LPs

    • the GP’s economic interest may differ from that of the common shareholders; they may hold different share classes

The Board’s role

  • interaction with the CEO

    • one of the Board’s roles is to hire and fire the CEO, but the CEO will have much more knowledge about the company’s affairs than the board members of VCs

    • VCs may overstep their bounds e.g. get too entangled with day-to-day operations

      • as the CEO, you should engage with your board member to understand why

      • are they doing this unwittingly?

      • do they have a deeper concern with your management of the business?

  • guidance on long-term strategic direction

    • advice on raising additional capital - after all, the board will have to approve actions at some point

    • they should be able to provide lessons learned from prior experiences (not dictate your strategy)

Approval of corporate actions

  • (U.S. laws)

    • to issue stock options, board must determine fair market value of the stock

    • if the company issues stock options where the exercise price is below the fiar market value of the stock, employee may be liable to pay taxes at the time of the grant on the difference between the strike price and the fair market value\

    • don’t create tax problems for your own employees!

    • hire outside firm for 409A opinion if necessary (valid ~12 months, as long as there is no material change)

  • reviewing CEO and executive compensation

    • ensure critical people have sufficient economic incentives to coninue contributing materially!

    • unvested stock options provide economic incentives

    • so, ensure key contributes have sufficient unvested equity to incentivise desired behaviour

  • maintaining compliance and good corporate governance

    • generally, board members wantto protect themselves from personal liability for the company’s legal issues, so they want to meet regularly to ensure that the company is going in the right direction
  • VCs should open their network to the CEO’s benefit

    • introduce corporate customers, partners, executive candidates, external advisors, lawyers etc.
  • what the board’s role is not

    • not to run the company

    • not to dictate the company’s strategy

    • not to dictate the product strategy

    • address any overreach from your board members!

    • CEOs must manage their board - set the right expectations, have regular 1:1s with them, explain what you expect of them, how you intend to run board meetings (should they read the deck beforehand? what’s the meeting for? do they need to prepare?), how feedback will be shared both ways

    • good board members shoudl let you know if a member of your executive team has reached out to you to meet

Legal Obligations

General duties

  • duty of care

  • duty of loyalty (no self-dealing, act in company’s best interests)

  • duty of confidentiality

    • VCs do have to think about this when investing in competing companies - espeically when portfolio companies pivot and become competitors with another company as a result of that

    • more complicated when they have board seats

    • implement Chinese wall

  • duty of candor

    • disclose requisite information to shareholders on corporate actions
  • business judgement rule

    • court is generally fine with actions by the board so long as at the time the decision was made, the board acted on an informed basis, in good faith, with the honest belief that the action was taken in the best interest of the corporation and its shareholders
  • entire fairness

    • if claimants can show that the board violated its duty of loyalty (i.e. put its interests above that of the common shareholders), the court might apply the entire fairness rule instead

    • burden of proof shifts onto the board to prove that they were acting in the company’s best interest

    • the courts will also dive deeper into the decision-making process of the deal in question, asking:

      • whether the decision-making process was fair

      • whether the price or what the common shareholder obtained from the deal was fair

    • directors cannot indemnify themselves against breaches of loyalty (i.e. they can have personal liability, while they can do so for breaches of duty of care)

In Re Trados

  • Trados was a startup being liquidated; investors had $57.9M liquidation preference; board accepted $60M offer

  • board instituted management incentive plan which paid out $7.8M to senior execs (carved out from the acquisition proceeds) to incentivise them to work towards the acquisition

  • so, initially: $57.9M for investors, $2.1M remaining for common shareholders

    • after: $7.8M for execs, $52.2M for investors, $0 for common shareholders
  • essentially, if you’re a BC board member with liquidation preference and are selling the company for a price out of the money (you’re going to take your liquidation preference), just assume you’re conflicted

Things to note

  • boards of startups likely will have members who have some form of conflicting interest - by virtue of their liquidation preference, participation in MIP, etc.

  • what you should do:

    • hire bankers to solicit bids from multiple parties (if affordable)

    • if not, reach out to at least a few parties for the acquisiton

    • have a banker issue a fairness opinion

    • be careful about changing incentive plans too close to the time when voting on a deal

    • consider setting up special committees if possible, to wall off conflicted board members

    • consider implementing a separate vote of disinterested common shareholders (those who have the least voting power)

    • be sure that the board does not overreach its role in any acquisition

    • ensure that your board understand the potential for conflicts with common shareholders, and look for ways to mitigate the conflicts

    • document discussions (e.g. where you inform or remind the board about its fiduciary duties) in minutes, to ensure that it’s on record - make sure that you also consider the rights of common shareholders on the record

Difficult Financings

Reducing liquidation preferences

  • term sheets can have auto-converts (on certain circumstances, the preferred stock gets converted into common stock) - to eliminate the liquidation preferences that the existing preferred has accumulated

    • why would VCs agree to this? they may realise that their overhanging liquidation preferences may disincentivise the current team
  • reverse split: an investor may convert existing preferred stock into common, and reduce their ownership in the company by splitting their existing ownership percentage into a lower percentage

    • why would they agree? they may wany to give the company’s employees a fresh start by reducing the dilution they face when the company raises new capital to survive

    • they may do so to attract new capital into the company

    • of course, this isn’t commonly agreed to

  • often, down rounds or recapitalisations are led by existing investors

  • you should be discussing with your existing VCs the range of possible near-term exit valuations, and size the remaining liquidaiton preferences appropriately

  • consider increasing the option pool and providing new grants to remaining employees

    • e.g. if existing employees with stock options leave (when their options are out of the money), and those options expire, be sure to make those options which are returned into the pool available to the employees who are staying

    • increase the option pool

    • management incentive plan (i.e. some specific employees get paid before liquidation preference) - can add ‘no double dipping’ clause, where if the common shareholders ultimately do get acquisition proceeds, the management’s share gets reduced pro rata (so they don’t benefit above others from the incentive plan and as holders of common stock)

Carsanaro v Bloodhound

  • company was in trouble, got sold for $82M, but founders and common shareholders got almost nothing

  • most of the money went to preferred shareholders to satisfy their liquidation prefeence, and to $15M management incentive plan

  • as before, fair process and fair price standards applied by the board

    • board failed to canvass outside investors and gauge external interest before seeking insider-led financing

    • board didn’t provide full information to common shareholders

    • board didn’t update terms of financing when company’s financial performance improved

    • terms were not approved by disinterested board members

  • things to note:

    • run a market check, run a full process with outside investors

    • even if you think no one else will take the deal because the company is in a bad state, you should do it, and get ‘no’s before proceeding with an inside-led round, to prove a true lack of market interest

    • don’t entangle new option grants to employees too closely with insider financing - while you may want to re-incentivise the team, doing so after financing closes (vs. before) will help to eliminate suspicion that a board member’s vote was contingent on their receipt of a new grant (i.e. ‘bought’)

    • give other investors and common shareholders the opportunity to participate in the deal via a rights offering (i.e. give everyone on the cap table a right to participate pro rata on the deal on the same terms) - in a down round, most people will turn down, but do it anyway to protect against future litigation

    • implement a ‘go-shop’: allow the company to shop your term sheet to other potential investors (a proactive market check)

    • get approval from disinterested shareholders if you can

Winding down

  • (U.S.) consider WARN Act - you have to provide employees’ 60 days' notice before shutdown, or be liable for 60 days' employees' wages

  • faltering company exception, if you’re actively pursuing financing and providing notice would jeopardise your likelihood of obtaining financing

    • if you want to exercise these exceptions, be sure to keep minutes showing taht all your obligations are met (e.g. you’re actually raising a round)
  • potential liability for wages and accrued vacation

    • you can’t keep employees working beyond what you can afford in payroll

    • if you do so, you could be personally liable to pay

    • same for accrued vacation (it’s money that employees have earned - so to avoid employees having lots of accrued vacation, many companies have a use-it-or-lose-it annual leave provision)

  • note: generally, in wind-downs, debt holders are first in line (ahead of unsecured trade creditors, equity holders), but the board doesn’t owe fiduciary duties to them



  • get to know your evnetual acquirers, engage with them

  • often, entrepreneurs wonder: why should I reach out to potential competitors?

    • note: you don’t need to expose anyone to your trade secrets, IP, road maps etc.

    • just build relationships

    • disclose whatever you’re comfortable with

    • even if not for acquisitions, they may be good business development partners

  • companies get bought, not sold

    • you can’t just wake up and decide you want to sell your company, and assume that you’ll have loads of potential suitors

    • it’s better to have potential acquirers solicit your interest in being acquired

    • when acquirers are thinking of making an acquisition in your space, you want to be on their list of potential targets (i.e. you want to be invited, even if you don’t actually want to go)

  • things to consider:

    • price, obviously

    • the form of consideration (cash? buyer’s stock?) - if the latter, you might want to create a ‘collar’ (i.e. between the announcement of a sale and the final closing, set a reasonable upper and lower bound of stock price movement, and if the price stays within those bounds, the price doesn’t change, but if not, the price changes)

    • easier if the buyer is public - what if the buyer is private, so you’re getting illquid stock?

    • what happens to employee options?

      • unvested options get assumed by the acquirer - employees' options continue to vest on the same schedule, but they work for the new employer

      • unvested options get cancelled, and employees get a new set of options with new terms

      • unvested options get accelerated - automatically vested (acquirers don’t like this, of course - it’s very unusual for employees to have this, and is often reserved for special cases e.g. where your CFO won’t be able to be offered a job at the acquirer, which has it’s own CFO, etc.)

    • generally, think: which employees of the acquired company will be critical to the business going forward?

      • acquirer will probably have list of key employees, and will also incentivise accordingly

      • key employees may ask for more incentives

      • acquirer will probably create closing conditions (i.e. the acquisition doesn’t get closed until these are met)

    • voting approvals

      • generally, majority of common and preferred shareholders voting as separate classes

      • drag-along provisions usually apply

    • escrow accounts

      • seller may have to set this aside, used to cover surprises that may happen after the acquisition
    • indemnification

      • buyer generally wants the seller to indemnify it from some claims that may arise post-closing

      • which claims can be covered beyond the escrow account? e.g. if a third party brings a major IP claim, can the acquirer get money back from the seller? what’s the limit on the recovery? is it capped by the purchase price? etc.

      • what’s a fair exclusivity period? should realyl be gauged by the amount of time required for remaining due diligence and documentation, e.g. 60 days is common

    • board responsibiliites

      • Revlon duties - the board has no obligation to sell the company, but if it does so, it must maximise the value of the common stock (i.e. act in good faith to get the best price reasonably available)

      • similarly to above, run a broad outreach to multiple acquirers, using bankers if possible

      • consider potential alternative paths

      • consider go-shop provision into an offer to permit competing bids to surface

      • document well-vetted process e.g. document everything to show that you’ve considered all possibilities to maximise shareholder value

  • often, you’ll be a critical part of the post-acquisition organisation, so you have to think about what things will look like, and think about integrating with the new organisation


  • what for?

    • raising capital, branding, liquidity. customer credibility - esp. useful in B2B selling…
  • underwriters, drafting prospectus, roadshow, confidential filings, required disclosures…



Clavance Lim /