

Ask HN: Learning about Venture Capital - leftnode

Hi HN,<p>I'm interested in pursuing a venture capital company to try to get some funding for my business idea, but I have a few questions about VC. If you have a link or some reading material that answers my questions, I'd love to read it too.<p>1. Can you ask a VC company for how much money you need, or do they offer you money based on a valuation?<p>2. How much control do they have over your business? Do they dictate salaries, compensation, bonuses, who you can hire, what tech you can use, etc? For example, say a company gets like $33 million in VC. What's to stop the CEO from making his salary $5 million a year and then just leaving after a year, regardless of the status of company. I realize most entrepreneurs wouldn't do that out of principle, but can the VC's dictate who is paid what?<p>3. Or, to counteract that, do they feed you money a month at a time or do they just cut you one big check?<p>4. What happens if you just totally fail but it was clear it was a legitimate effort? Are there any legal ramifications, or do the VC's cut their losses and each go their separate ways?<p>5. I already have an incorporated business, so I have that side covered, but the business is literally worth $0 because I haven't sold anything or have anything to sell. Say I wanted to raise $500,000 to build out the idea I have, what % of the company would the VC ask for?<p>Any other tips others have for raising capital would be extremely appreciated! Thank you!
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stevenwei
I would recommend you check out a few sites like:

<http://www.venturehacks.com> <http://answers.onstartups.com>
<http://www.bothsidesofthetable.com>

To answer your questions directly:

1) You generally tell them how much money you are trying to raise (based on
your financial projections). The valuation determines what percentage
ownership you end up giving up in exchange for the funding. The total amount
you end up with is negotiable.

2) The VC takes a percentage ownership of your company, and generally ends up
with a seat on your board, Officer salaries are generally determined by the
board. As the founder, you usually specify your salary requirements during the
fund raising process....an overly large salary is a red flag and could turn
investors off. The total amount of control the investors end up with depends
on your specific situation.

3) Usually it is done as one big check. However, it may be split up into
'tranches', which are delivered upon meeting certain milestones.

4) Most startups do end up failing, the investors know the risks associated
and factor that in their decisions about what companies to fund. If it fails,
it fails. The fact that your company is a separate legal entity protects you
from personal liability.

5) Generally investors end up taking a 20%-40% ownership stake in your company
per round. If you raise multiple rounds, each new investor takes a new slice
of the pie.

I would definitely recommend checking out the sites I linked above to get a
much more thorough overview of the fundraising process. I would also recommend
looking into angel investment.

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leftnode
Thank you for taking the time to answer my questions. I'll definitely be
checking out those sites.

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aditya
Read Mark Suster's blog, cover to cover: <http://www.bothsidesofthetable.com/>

Start here: <http://www.bothsidesofthetable.com/pitching-a-vc/>

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leftnode
Awesome, thanks! I have his blog on my RSS list, so I'll check out that
article and read from there.

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sajid
> Any other tips others have for raising capital would be extremely
> appreciated! Thank you!

You really need at least one of the following three things to successfully
raise capital:

1\. Traction. 2\. A successful track record. 3\. A personal recommendation
from someone the investor respects.

It might be possible to get a small amount of seed funding with just a good
idea and a prototype/demo (e.g. Ycombinator).

Also, I cannot recommend venturehacks.com strongly enough.

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pw0ncakes
I don't have any direct experience, but my understanding is that:

VCs will give an amount that seems appropriate to getting to "the next stage",
however that is defined. Their take is determined by the pre-money valuation
and the amount given. A web startup might be able to sell 20% of the company
for $1 million, implying a $4m pre-money valuation. Biotech startups typically
give up 90-95% in order to get $20-40m invested.

VCs will want to know where their money is spent, and generally want the CEO
to pay himself $125-175k. Paying the CEO a million, if not vetoed, would
quickly ruin the relationship with the VCs, which you do not want to break.

Also, and this cannot be stressed enough: _watch out_ for downright evil terms
such as participating preferred and multiple liquidation preferences. VCs
usually ask for a 1x liquidation preference, meaning that they take out their
investment at par before anyone else gets paid. (This only makes sense,
because otherwise you could sell on a down round, liquidating but screwing the
VC). However, evil VCs will ask for a multiple. So, on $4m invested, the
liquidation preference might be $8 million, meaning that if you sell at $7.5
million, you get nothing. Another evil term is participating preferred, which
means that they get an equity-based share _after_ taking the liquidation
preference. So if you take $2 million for 40% of your company at 2x with
participating preferred, then sell at $8 million, the VC gets $4 million plus
40% of the remainder ($5.6 million) instead of the $3.2 they deserve-- and
you, the founders, just got ripped off. These kinds of terms exist because,
although there are a lot of great VCs, there are also a lot of silver-spoon
entitled shits who actually believe they deserve that sort of thing for the
gift of their existence.

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leftnode
Thanks! I appreciate the insight and showing me what to look out for. I have a
good lawyer, so I hope he would have my back with terms like those.

