Day 72 in MIT Sloan Fellows Class 2023, Managerial Finance6, Venture Finance

Fundamentals of startup finance

Venture capital provides funds to build companies from the earliest stages to freestanding, mature organizations.

Limited partners(LPs): institutional net worth investors providing capital to VC funds. They have limited liability.
General partners(GPs): pick and manage the investments within the fund, earn fees and percentage of profits. GPs are reliable for the fund's action.
Term sheet: outline of the terms and conditions in VC investment
- Staged commitment of capital
- Convertible security
- Covenants
  - Financial covenants
  - Negative covenants: restriction on indebtedness or new securities issuance
  - Affirmative covenants: property rights provisions and patents
- Registration rights: define exit options for VC and entrepreneur
  - Redemption
  - Piggy-back registration
- Preferred stocks have have liquidation preference over common stocks and a face value redemption rights
- Anti-dilution provisions
- Participation rights and pro-rata rights
- Right of first refusal
- Drag Along right
- Vesting: the shares eligible for transfer is gradually released