the two most important things i've learned to understand odd VC behavior:
1) VC firms only get their annual management fee on dollars they invest. if they have a $1 billion dollar fund, they get $25 million a year
in fees iff they actually invest all the capital
2) when VC firms go to raise a subsequent fund in 3 years, the "marks"--ie the valuations from the last round of their portfolio companies--
are what they mostly talk to LPs about, and the biggest determiner in how well they're doing.
so when your VC tells you they think it's a really good idea for you to raise a huge round at a high valuation,
remember that their incentives may be different than yours.

[His review:]

Feld's book covers most of the issues in a vanilla VC term sheet. It's decently written, and Feld is good at explaining the concepts involved.

But don't be misled: this is a book written by a VC. You should be cautious. Feld's in business to find and sign entrepreneurs, and it's in his interest to set your expectations low and make himself and his peers look harmless. VCs love entrepreneurs who "go along to get along". After all, the VC wants control of your company (for his minority stake) plus as much of your company as he can grab. He'll want the option pool to come out of your end. And those "independent" directors? They'll usually be pals of the VC, or hoping for a job from the VC. In other words, when the crunch comes, they'l side with the VC. Which is why the VC is always happy to have independents on the board. VCs take control of companies through many subtle techniques. Don't be a schmuck and wake up having made them rich while you toil to vest stock in your own company.

There are many blogs written by VCs, each offering "helpful" advice for entrepreneurs. Beware! VCs are not in business to serve you. They serve their LPs. Entrepreneurs are disposable. You are not their customer. They don't work for you--but you may end up working for them.

Remember that.

Be careful when the crocodile tells you how to cross the river.

_________________________________________

My credentials: former VC and have run VC-backed software companies.

[In the comments on his review:]

I think there is some value in Feld's book, and also in Term Sheets & Valuations - A Line by Line Look at the Intricacies of Term Sheets & Valuations (Bigwig Briefs) and Wilmerding's other book Deal Terms - The Finer Points of Venture Capital Deal Structures, Valuations, Term Sheets, Stock Options and Getting VC Deals Done (Inside the Minds).

I strongly recommend Charles Ferguson's High Stakes, No Prisoners : A Winner's Tale of Greed and Glory in the Internet Wars. Ferguson built Vermeer and sold it to Microsoft. His accounts of dealing with VCs were exactly what I've seen in my own experience. Ferguson went on to become an award-winning documentary filmmaker.

Most entrepreneurs do not understand the real nature of a VC deal. The VC is buying an option-an option to keep pushing money in if the company succeeds. The VC's tools are preferred shares and convertible debt, the shareholder agreement, and the likelihood that the startup will need more money in future. By these means the VC is able to take effective control of a startup, even if it only seems to be a minority holder on paper.

Most entrepreneurs kid themselves that they have bigger "valuations" than they really do. When VCs take preferred stock that converts, it is worth much more than it seems. Not only do the VCs get priority, and many special blocking rights, but conversion into common is at their discretion. If the prefs are participating preferreds then the situation is even worse. Most entrepreneurs and the media naively think the conversion price and percentages implies an overall valuation. It does not, at least where prefs are concerned. To see that in reality, just ask a VC to give you the same valuation but take common shares alongside you. Except in the end-times of a bubble, the answer will be "no".

The best way to improve your deal with a VC is to get competition for your deal (if possible), to learn about what deal terms mean, and to get an experienced VC-savvy lawyer. But really, once you take VC cash the only way to win is to become successful. Once they are in, they rarely leave-but often founders are pushed out. Nobody says anything bad about VCs because they're scared about being black-listed.

Ask yourself if you really want VC money. It's dangerous cash.

Good luck!

Tricks to watch out for