Chapter 10 Venture capital financing and documentation

Abstract

The purpose of this chapter is to outline the steps involved in obtaining venture capital funding for a start-up business. The chapter first discusses access to Venture Capitalists (VCs) and provides the reasons behind VCs’ preference for investing in a traditional C corporation rather than a limited liability company or other pass-through entity. The chapter then describes both the due diligence performed by VC's counsel and the documentation a start-up must provide to satisfy that diligence need. Next, the chapter addresses typical terms of financing deals with VCs, including the types of securities issued and the rights, preferences, and pricing of those securities. Finally, the chapter concludes with a chart identifying the VC financing terms available before and after a significant market downturn and a sample term sheet summarizing the terms of preferred stock to be issued to a hypothetical VC or VC group investing in a start-up business.

Citation

Carney, W.J. (2008), "Chapter 10 Venture capital financing and documentation", Libecap, G.D. and Thursby, M.C. (Ed.) Technological Innovation: Generating Economic Results (Advances in the Study of Entrepreneurship, Innovation and Economic Growth, Vol. 18), Emerald Group Publishing Limited, Leeds, pp. 287-311. https://doi.org/10.1016/S1048-4736(07)00010-0