Want to Know How VC’s Calculate Valuation Differently from Founders?

by Mark Suster on July 22, 2010

Back in 1999 when I first raised venture capital I had zero knowledge of what a fair term sheet looked like or how to value my company.  Due to competitive markets we ended up with a pretty good term sheet until we needed to raise money in April 2001 and then we got completely screwed.  It was accept the terms or go into bankruptcy so we took the money.  Those were the dog days of entrepreneurship.

But the truth is that I didn’t really understand just how screwed I was until years later when I finally understood every term in a term sheet and more importantly I understood how each term could actually be used to screw me.  Things like “participating preferred stock” in legalese unsurprisingly never actually call out, “hey, this is the participating preferred language.”  We got a3x participating liquidation preference with interest (not participating with a 3x cap, but 3x participating.  Ugh. I explain the difference later in the post or you can click through on this link above for an explanation).

This is a very clear post about how to read a VC term sheet and what it means to you in the long term. I’ve not seen something as concise but detailed for this before.

Thanks for such an excellent resource!