Venture Capital Investments: A Cheat Sheet for Entrepreneurs

Feb 27, 2008, 00:00 ET from Jumpstart, Inc.

    CLEVELAND, Feb. 27 /PRNewswire/ -- After they've tapped out their own
 funds, not to mention their friends and families', many Entrepreneurs will
 seek investments from venture capital firms in order to continue building
 their business. While finding an investor is often a necessary step to grow
 a successful business idea, the venture capital world can be unchartered
 territory to many entrepreneurs, and like any industry, has its own
 language. Entrepreneurs entering this land should make themselves as
 familiar with venture capital terminology as possible in order to most
 easily navigate through this process.
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     "As with any specialized technical field, there are certain buzz words
 that venture capitalists use that will be new to an entrepreneur," said
 Lynn- Ann Gries, Chief Investment Officer of JumpStart Inc., the venture
 development organization behind IdeaCrossing
 [], a free online resource that connects
 entrepreneurs with investors.
     "First-time entrepreneurs need to realize that venture capital
 investors will expect them to understand the common terms of their world
 and won't necessarily be willing to educate them. Before speaking with a
 venture capitalist, it is essential that the entrepreneur has done their
 research," Gries concluded.
     If a venture capital firm is interested in an entrepreneur's idea, they
 will present the entrepreneur with a term sheet - a document that outlines
 the key financial terms of the proposed investment. While term sheets
 aren't usually binding agreements, they provide a roadmap for the direction
 a venture capitalist is most likely going to take with their investment and
 the conditions that need to be met along the way.
     Here are just a few crucial phrases from a typical term sheet that all
 entrepreneurs should be familiar with:
-- Capitalization: The debt/equity mix that funds the company's assets. -- Dilution: The loss in percentage ownership that inures to existing owners when shares are sold to new investors. -- Board Representation: Companies are governed by a board of directors. Typically venture investors will seek one or two board seats - enough to have a meaningful impact on governance, in addition to the economic ownership derived from purchasing stock. -- Founder Shares: Shares issued to the founders of the company. Typically at lower price then the one offered to investors. -- Valuation: An analysis of financial condition of the company and the developmental stage of its products or services, as well as the company's prospects in the market. Usually includes the valuations of comparable companies. -- Anti-dilution Provisions: An adjustment mechanism that provides the holder the right to receive additional securities in order to maintain a specific ownership percentage. -- Liquidation Preference: This section spells out how much the investor is entitled to receive when the company is sold. The terms above are just a sampling of the verbiage that entrepreneurs should expect when presented with a term sheet. When it comes to venture financing and negotiating, do your research and don't go it alone. You need to align with advisors who are looking out for your best interest - having an experienced lawyer on your side is a good idea. About IdeaCrossing IdeaCrossing is a free Internet resource available to all individuals and organizations with an interest in supporting and promoting entrepreneurial activity. IdeaCrossing helps entrepreneurs find the assistance and investment capital they need to launch promising new business ventures. Additionally, IdeaCrossing serves the Angel and Venture Capital community by identifying and screening new investment opportunities. Simply stated, IdeaCrossing is about creating the connections that build businesses.

SOURCE Jumpstart, Inc.