Understanding the entrepreneurial finance game

Startup founders need to make many decisions every day covering different fields: marketing, hiring, product development, IT, operations, and financing just to mention some of them. Considering that an entrepreneur often starts a new company because of his knowledge of a market, or a technology, an area that remains unknown is financing.

To achieve an understanding of this topic you can start with a good book. The book I’ll like to share with you is: Getting between the balance sheets, by David Frodsham and Heinrich Liechtenstein (IESE professor).

Describing the story of a fashion startup the reader is introduced to the four things that every founder needs to know about entrepreneurial finance:  1) Operating the cash, 2) Raising the investment, 3) Staff equity, 4) Selling the company. An area that I found particularly interesting is the one related to raising the investment, where you’ll find a very good guide to understand concept like: premoney valuation, liquidation preferences, accrued dividends, and anti-dilution.

To help the founders when dealing with investors or layers, the book provides an excel file with a capitalization table and an interesting analysis, as a result of a survey to 421 European VC firms. The purpose of this study is to explore the valuation techniques and terms mostly used in the term sheets, how negotiable they are, and how they change depending on the stage of the investment and other factors.

You can find examples of term sheets following this link. These documents are a result of the effort of a group of VCs who understood the need to produce a standard contract, reducing the problems related to the many legal details of this type of documents.

Which is your experience with rising financing? Any lesson learnt that you would like to share?

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