Mark Venture Capital Proposal Template Made Easy

Mark venture capital proposal template

[Music] hi welcome to the a 16c YouTube channel I'm Frank Chen today I'm here with Scott Cooper and we're doing a three part series you've landed in part two which is all about fundraising what we're gonna do is dig into the mechanics of how you work with a VC during the fundraise process how you interpret the terms of the term sheet and hopefully this will give you a sense of how you can actually have a meaningful dialogue with a venture capitalist we produce this video for the same reason that Scott wrote this book which is as venture investors we do this day in and day out we will see thousands of entrepreneurs will write dozens of term sheets whereas you may end up doing this once in your life and so we wanted to help you understand some of the terms and the art and the science that go into fundraising all right so let's get right into it why do I need to be a Delaware C Corp like what's special about Delaware and what makes other entities hard to fund from a VC's point of view yeah so there are lots of varieties of you know kind of organizations of business you can do there seek warps there's things called partnerships the main reason why you do a c-corp and why it's in Delaware quite frankly is there's a lot of just legal precedent there Delaware had kind of made themselves kind of the home of businesses many many years ago and so it makes people like us and lawyers feel comfortable because we know that there's hundreds of years of you know kind of legal precedent that says hey if this thing happens this is what happens and and things are fairly well settled so you could certainly go other places but Delaware's pretty good the C Corp does a lot of things I think the main advantage of a C Corp is it allows you to have lots of shareholders and so if you're gonna grow over time you'll want to do that it allows you to have kind of different classes of shareholders right so one things we'll talk about probably is the fact that you as an entrepreneur might hold what are called common shares whereas the VC investors might hold what are called preferred shares and Delaware has a very well established legal framework for us to have different shares that have different types of rights associated with them and then ultimately if you go public you know kind of the way public investors are used to you know investing in and taking public seek warps and so it's much easier and quite frankly just more seamless way to think about kind of starting with ultimately quite frankly where you want to end up god so the rails are well defined that's right I don't have to like lay stands with a machete this one every now and then we do get some entrepreneurs who come in here and want to do it and they've got lots of interesting reasons but something I haven't heard a really compelling one 14 reasons I need to be an LLC okay good all right let's pretend I'm still working at a company yeah let's call it big Co yeah and I haven't incorporated yet what advice do you have for me to make sure that whatever I do is protected my old company is gonna come after me right yeah yeah this is one of those things where I would say you know a little foresight you know can go a very very long way so you know what what the VCS will worry about when you come to pitch them as you'll say hey you know I'm working at big Co and oh by the way in my spare time on nights and weekends I develop this wonderful new product and now I'd love you you know Miss B C to kind of fun it for me and the first question that's gonna go off our heads is okay wait a second do you actually own that technology or could there be some theory under which that your existing employer says hey I may own that stuff you may remember this whole case that happened with uber and the company called way mo right we're you know kind of way mo was part of Google and then you know a number of people left and ended up at uber there was this whole question about whether you know kind of the principle of that company had basically taken some kind of proprietary knowledge outside of outside of Google and kind of you know giving it to Ober and the challenge with these cases is you're kind of proving the negative right so in that case you know you know Anthony Lewandowski who was the person he had to prove that you know he didn't take anything right as opposed to them proving that he did take something in a respects now you know the law doesn't actually work that way but in practice in perception that's the way it works so our best advice on this stuff is look if you've got a great idea number one you know don't ever use your work laptop for any of these things right so I have some physical separation and you know when you really get to the point where you feel like okay now it's really this is a real thing you know either take a leave of absence from your company quit your company do whatever you do because the last thing you want to do is find that you've come up with this wonderful idea but you've just been sloppy and all of a sudden you know you just can't find a way to commercialize it anymore yeah got it and then let's get into the question is how much money should I raise and there's a couple Twitter questions around it so beginning with like do I even mention a check saw should I come with an or do I let the VC tell me so yeah let's talk about the broad question so the simple answer to how much money to raise is how much money do you need to accomplish the objective that you will need to accomplish to be able to raise the next round and I know in some ways that sounds funny but you know kind of the best advice I think we give entrepreneurs is if you're raising your series a round today you should be at that point in time thinking about what's the pitch I'm gonna give the series B investors and then essentially work backwards and say okay for the series B investors to be compelled by what I'm doing what milestones what objectives will they need to be able to see therefore how much money will I need to do that how much time will I need to do that and that's kind of the way to kind of back into your your amount of money and you know the answer to the Twitter question is look absolutely you know you should tell the VCS what you want and you should be able to articulate for X amount of dollars this is what I can do and oh by the way if you gave BX plus 50% I could do this much more and part of the exercise I think for you and your VC partners to do is to say okay what is the right amount of money that doesn't delude us too much today but gives us kind of enough degrees of freedom that when we go for that next round of financing somebody will come in and put more money in at a higher price hopefully then you know kind of we did this first round got it so if I'm raising a series a of financing I need to start this whole sort of mental process with what's the Series B investor wants that's exactly how you start yeah I think that's the best mental framework to think about it because you know if you remember if you think about you know from the perspective of the VC who's gonna do the Series A that's what they're worried about is okay like do I believe this person can accomplish enough so that we can continue this ride right and and for you as the CEO you know you care about that too because the best thing you can do is to have this very nicely monotonically increasing valuation and share price over time I tell the story in the book which I know you'll remember when we were at loud cloud and you know Ben Horowitz and I spent a bunch of time raising this this very large round we raced 120 million dollars at an eight hundred and twenty million dollar post-money valuation right and so you know we walk into this all-hands thinking that we're heroes and everybody's gonna clap for us and tell us how smart we are and we get this very muted silence and it turns out that everybody was upset not because we didn't raise at a very high valuation in fact our last round was about sick million so we raise that you know whatever that number is twelve thirteen fourteen times our last round but the company down the street from us storage networks had raised at a billion dollar evaluation right and so I make that you know I tell people that story just because so much of company success and employee engagement is a function of kind of these external benchmarks that people think about and so that's why thinking ahead to the next round is important because as much as you want to focus on accomplishing the objectives for your business you also want to set yourself up so that you can continue to kind of show progress to your employees by demonstrating that kind of a new investor you know values the company at a higher level than you know your prior investor did mmm interesting so that's the perfect segue to this other Twitter question which is how often do you find that founders pushing too hard on high valuations end up hurting themselves and so maybe talk about structurally what happens if you get too high evaluation in this round because yeah on the face of it it's kind of like look too high validation means I suffer the less solution I owe more that's right yeah Victoria right like why is that not always victory I agree and look I will admit fully this is a very hard thing as a VC to talk about because look you know the immediate reaction from an entrepreneur understandably so as well of course you want the valuation to be yourself circus your that's right it's in your own financial interest to pay as little as possible and own as much as my company and you know I won't fight that that argument which is that's true but let me at least try to make the pro case for why I do think entrepreneurs should care about this and I think it goes back to kind of the story I just mentioned which is if you think about running the business you're the CEO you're telling your company okay hey good news we just raised five million dollars from andreessen horowitz okay now here's all the things that we're going to accomplish yours you know your objectives here's what we're going to do in terms of hiring here's what going to do in terms of customer acquisition and you know hopefully you're executing ah blows right and so 18 months comes down the road and you say great we've accomplished all those objectives you know my I've been telling my employees they're right on track and then all of a sudden I go out to raise money and I run into this buzzsaw where a new investor says hey congratulations all that but by the way I think you actually overvalued your company at that last round and so even though all of your metrics are have doubled from where they where you had said you know I'm only willing to pay 50% more for the company or something like that right and you know there's reasons why that may happen that are outside your control right so maybe the market has changed and we just now value companies differently and of course as a CEO there's nothing you can do about that but what you can do is at least de-risk the situation to say okay if I accomplish the things that I set out to accomplish do I believe the market will reflect that in you know how they value the business and it's it's really hard as a CEO to imagine going up and doing an all-hands when you've been telling everybody all along everything's great and now you have to kind of tell them oh by the way it's not that great based on some external metric and even though you know it's only one metric these are important data points that you know unfortunately for better or worse do have psychological impact on how the employees feel about their progress on how you think about recruitment and retention of employees so you know it's a you know it's it's a it's a hard balancing act of course to happen but you know in general the idea of kind of having a stock price that goes up and down all the time is more you know probably you know kind of disheartening to the company then kind of something that where the progress of the business also is reflected in the progress on valuation yeah it's hard because there's sort of an emotional moment which is I'm negotiating this round of Finance that's right exactly and I want to preserve as much ownership as I can and it's harder to think about the long term consequence no doubt about it right yeah it's it's a very hard thing and look as I said this is a hard tension between entrepreneur and venture capitalist because yeah you know and one level the incentives are different which is at the point of time I'm investing as a venture capitalist yes if I could invest less money for more ownership that's better for me where we are aligned is that it's it's not good for either one of us if we end up in these situations down the road we're you know kind of we can't raise more money or we can only raise more money at a substantially lower valuation than we thought because that has both emotional and economic implications for both of us god let's talk a little bit about the form of investment and so you can raise a priced equity round or you can raise a convertible note where there's no price so you have a recommendation in the book and maybe walk me through it yeah so I talk in the book a lot about convertible notes you'll hear this term if you've been in the YC world or something called a safe safe which is basically just a fancy way of saying it's it's a piece of debt that ultimately can into equity at some you know predetermined price in the future the they're very good because they're very simple there's very low legal cost for doing them the paperwork's very easy and all that is good and I'm all for efficiency and cost the failure case that I've seen unfortunately with a number of entrepreneurs is in some respects because it number one it's so easy to raise money on a safe you often find people do what are called rolling closes which is you know usually on a priced round we're like this is your date right get your money in by June 30th or else you're out of this deal right and the safes you know I have this very nice convention which is you know I can close one on June 30th and I can kind of do one on July 31st I can kind of keep doing it and that's very good and convenient the problem is never along that way does the entrepreneur see the actual capitalization table of what is it going to look like when all those safes convert integrity and so several times we've had entrepreneurs come in here and you know it's kind of sticker shock when we give them an offer on the a round and then we actually kind of build the capitalization table out of that and they realize that you know kind of they inadvertently sold more of the company than they had realized based upon this kind of concept of these rolling closes up notes so I'm not you know I'm not against safes I would just say if you do it this is kind of a failure case that I think happens and I think you can accomplish the same efficiency goals with there's a thing called series seed which is a very very lightweight way of doing an equity deal so you know I just would encourage entrepreneurs to make sure if they go that route they really do pay attention and understand how much of the company they've sold and don't kind of find themselves you know kind of you know all the sudden you know frightened one day when they realize you know kind of how much money and they may have given away in the company you know it's very tempting right because the reason that you do a roll in close with these safes is oh I found the perfect advisor that's right or I found the perfect early customer who wants to invest or I found somebody else right under a family and so it feels convenient yeah it's convenient right yeah yeah arbitrarily why we should have these kind of you know you know a specific hard closes at different times but yeah it is convenient and again it's got a lot of value so I don't want to I don't want to suggest it's never the right thing but I think that's that's a it's something to be aware of and make sure that you consider as an entrepreneur yeah so let's imagine I go through this process I've assembled my pitch deck I've got an offer and now I'm the value what he offers like yay any opposition's are evaluating terms yes so you talked a little bit in the term sheet about sort of the economic parts versus the governance part and so maybe let's talk about each of them in turn sure so on the economic parts of my term sheet maybe let's talk about what what is this thing called liquidation preferences what is this yeah there's a whole there's a whole several chapters in the book on this so I'll give you the 30-second version so the simple way to think about liquidation preference it's just the order in which money comes out of the company okay so a liquidation is a fancy way of saying hopefully not an actual liquidation will recite now the company but hopefully a sale of the company but it could certainly be the former as well and so what that means is who gets their money and in what order and generally what happens in venture financing is the money that I invest is a venture capitalist has what's called the liquidation preference on it which means my money comes out first relative to the monies that would be owed the common shareholders which is typically where the founders of founders 19 that's right so if I you know simple example if I invest 10 million dollars and you know let's say we sell the company for 10 million dollars typically I will have 10 million dollars worth of liquidation preference which means all 10 that money comes back to me and unfortunately for you and your employees you have nothing and so that's kind of the simple way to think about it it's fairly common in venture deals but you know kind of you know typically it is you know kind of capped by just the amount of money that the venture investors have put into the company and what's kind of the most entrepreneur friendly liquidation preference formula that I should live with there so there's so many different kinds of liquidation preferred exactly 3x right so what's the most entrepreneur for the most entrepreneur friendly and the one that I think generally predominates quite frankly particularly in Silicon Valley is what you'd call a 1x non-participating liquidation preference if you break that apart 1x just means 1 times the money we put in right so I don't get 2 times my money I don't get 3 times of money I get my 10 million dollars in that example we talked about and then non-participating means I don't get to do what's called double dipping and what double dipping means is not only do I get to take my liquidation preference off but then I also get to share in the proceeds that reflect my percentage ownership of the right so in an example where let's just say I own you know I put in ten million dollars and I own 25% of the company or something like that if I had participating preference I would get my ten million dollars first and then there'd be ten left over right because we sold it for twenty there's ten left over then I would also get 25% of that additional 10 million fundamentally you know and I say this the book look I think that's very unfair to the entrepreneurs and to the common shareholders because liquidation preference is really intended to prep your downside and so it's not obvious something's gone wrong Yeah right once you've once you've kind of gotten your money out it's not obvious to me why you should also participate in the upside and obviously take money away from the founders of the for the employees yeah so when I hear my friends complaining about deals with structure yeah I guess this is an example like unfair liquidation preferences right right unfair liquidation preferences other structures sometimes you see is things there's there's something called anti-dilution protection which is again a basic way to say hey look if we later in the future raise money at a lower price than we raised today it kind of throughs up the venture capitalists to a certain extent you know there's a very common one which is called weighted average you know any dilution which is fairly common but there's also a very egregious form of that which you sometimes hear called a ratchet and what a ratchet is is really a complete price reset so it says hey if today I bought shares at $2 a share and tomorrow you sell shares at $1 share my $2 price converts the $1 price meaning I literally get double the number of equity ownership and a company that I thought and so you'll see structure like that is you know sometimes happens when you know kind of people are trying to balance off valuation with some of these other rights and that's really a lot of what I try to point out in the book is that it's very hard to look at these in isolation because they all have some kind of economic value so if you're gonna push on valuation you might expect a venture capitalist to push on some of these structure items and so you know the big advice that we always give entrepreneurs and I echo this in the book is the simpler you can keep it the better and so if you've got one deal that's got a lot of structure at this price you know ask the question you know for a for a lower price what would a deal that's a clean deal that doesn't have a little structure look like that's often quite frankly the advice that we give to entrepreneurs so I can actually get myself in trouble by so of taking the highest post money right because of all of this structure and yeah how does the money come out in these scenarios yeah I think there's right there's two risks that you always have to think about when you do the structure one is just you're a potentially postponing the inevitable right which is you don't really know what the impact of these things will be until you have that next financing event right and so look the world may be perfect and you may never have to you know everything they go up into the right which we all hope yes but that's not always the case and so you know a great example of this was this is public information but when Square went public they went public at $8 a share their last round of financing was at $16 this year and those 16 dollar investors had this full ratchet that we were talking about so those 16 dollar shareholders basically got issued two times the number of shares to bring their price down to eight and so all the existing shareholders obviously bore the brunt of that incremental you know dilution from those shares so that's kind of thing about one thing number two is just and this is why we always say keep it simple is everything you do today has the risk of creating precedent for the future and so you may think hey look you know you and I are buddies this is you know I'm giving you these special rights because we're friends but when that next investor comes in and looks at the paperwork from the previous round and sees that you gave that stuff to the other investor you know the likely outcome is they're gonna want the same thing and now you start to kind of get the cumulative effect of some of these things which can be you know pretty harmful right so every subsequent investor is gonna kind of want the same deal of the project necessary or better yeah exactly right yeah as we think into the future that's exactly the one shareholder yeah and you just don't know how much negotiating leverage you'll have at that time so you don't want to set yourself up to kind of start start by having to defend or walk away from a deal that you did prior mmm got it so if we've come back to the idea that like when I'm raising the series a I need to really think about suits being an Series C and Series D right it's sort of like the sequence of investors then gonna need right I should sort of think through the entire that's right than the unseen plan yeah before I start fundraising for the series a that's right yeah look I mean you know you wanna you have as much you want to kind of project as much force as you can recognizing that look markets may change you know kind of the fancy environment those are things out of your control what's in your control at least it have a thoughtful plan for if I accomplish these things is that likely to lead to a favorable financing situation and if I make sure that I don't kind of load up my terms with all kinds of crazy bells and whistles hopefully I set myself up for success right so it sounds like on the economic side of the term sheet let's keep it simple as ever the the big advice and think about the subsequent investors so don't do something I'm normal early because I just write it bite you later let's talk a little bit about governance the governance side of the term sheets so maybe the first question is I heard that Google and Facebook have these dual class voting chairs and then like the founders have ultimate control that sounds good to me like don't I always want that I want 10 times the voting chat exactly anybody we do get some entrepreneurs even in the private markets you come ask us for that so the important thing I think to think about in these the idea by the way behind dual class shares for people who don't know is that literally shares have differential voting rights so in the in the Facebook and Google cases you're right that Mark Zuckerberg and Larry Page and other founders have kind of you know a high vote stock which means they have more influence on corporate matters and then everyone else has a low vote stock the reason those exist in the public markets is out of concerns of kind of potential misalignment between long term versus short term incentives in the market right and so in a company like Facebook let's use that you know Mark probably has all kinds of product ideas that he wants to execute over the next three five ten years those will all take time they will cost money there could be quarter to quarter gyrations in his expenses and revenue as a result of these product plans and the main reason why somebody like that puts into a class is because he wants to be able to make sure that if there are investors who are more short-term oriented they can't outvote him and say hey look I don't like your product strategy because of kind of these short-term gyrations the the reason why those tend not to exist in the private markets is we're all completely aligned which is none of us have liquidity right so we can't you know in general and many times we are prevented from selling our shares legally so there's no liquid market and we have a time horizon that's consistent with the entrepreneurs time horizon right you know we don't care you know obviously we don't care about what the new quarter of a quarter other than to the extent it just represents them not being able to manage the business in a way that makes sense and so that's why you tend not to see them in in private markets what we've done with many of our companies is as they get closer to going public we have agreed with them that okay having these dual class shares when if you go public is a good thing to do but but we haven't done that obviously in the private markets got it so my first board members will likely be sort of either my co-founders and then my early investors right at some point we're gonna go on a quest for an independent board member yeah and how should I think about that when do we do that why do I need one should I look for yeah so most boards you're right are don't have in fact most boards that beginning don't have independent board members you're right you probably have yourself and your co-founder and then typically as part of a venture capitalist coming into your company as an investor you will generally give them a board seat the reason I think independents are important is you want to have kind of balance on the board and so one of the phenomenon that we've seen over the last ten years is a change in the board structure in that it used to be that the venture capitalists would outnumber the common shareholders and you know that was of concern to many founder CEOs because it gave the venture capitalists kind of the unilateral right in many cases to be able to remove the CEO if they didn't like them over the last ten years that's really shifted and more of our boards have more common shareholders more founder and you know employee LED board members then do then they have preferred shareholders and so and that's that's understandable and fair given you know some of the kind of changes we've had in governance the idea that behind an independent is can we find someone who is you know kind of not representing either adjust the founders and not representing the preferred shareholders but someone who's going to take a more neutral and expansive view of the business and so I think you know it's hard to think it's hard to probably do it early in your days but as the board grows you know maybe as the board gets to four or five people having an independent or two will be valuable and I think most people who've done it have great gotten great value out of it and often times they'll look for an industry expert in the domain they're in or maybe you know they're looking for hey we need more sales and marketing help and so let's bring in someone who has you know kind of expertise from an organizational perspective so those are the characteristics we tend to see with independents yeah and as I approach an IPO if all goes well that's not like the it'll be expected that I have an independent boardroom that's exactly the checklist items first going public that's right yeah so you'll see this with companies right when they go public there are the the different exchanges Nasdaq and NYC have what they call listing rules which require some number of independence they require some number of financial experts to be able to sit on things like the audit committee so it becomes much more prescriptive as you go and so you'll often see a company kind of you know t-minus one or two years leading up to an IPO start to kind of augment their boards to satisfy these listing standards got it let's talk a little bit about pro-rata rights so there's gonna be this element in the term sheet that says here are what my existing investors or it can be expected or are allowed to invest yeah subsequent rounds so what how should I have that conversation with an investor yeah what kind of pro rata rights do I want them to have yeah and so it's pretty typical when you do a fund raised at you know kind of one of the things that we as venture capital ask for is exactly this right and what it means is it's the right for us to invest additional dollars in the next round of financing in order to preserve the economic ownership that we already have in the company right so if I owned 25 percent of the company today this gives me the right to hopefully put more money in later such that my 25 percent kind of stays you know in around that at a higher price because I've managed that's alright at a higher price right so in general it's a very good thing now pro-rata rights become more challenging in the very very good case which is a nice place to be but you know if you are just executing phenomenally well and you've got a new investor you're gonna raise money and a new investor comes in and says hey I want to put a bunch of money in but for me to make my business model work I need to own a certain percentage of the company right because if you go back to where we started from our last session so much of what the venture capitalist incentive is can I get a Facebook and I get a Google and you know there's kind of two big cardinal sins in this business one is you miss one of those companies you don't invest in them the other is that you invest in it but you don't own enough of it so that when it gets to be Facebook it still doesn't meaningfully change your economics and this parata thing is kind of an example of the latter where that new investor may come in and say hey look I'm gonna give you all this money but I still only own 3% or 4% of the company and so hey I want you to go back to your existing investors and tell them don't do your pro rata but let this new investor do it know admittedly it's a good problem to have right because it means we've got people who are bound you know and kind of pounding down the door to let us in but that does create tension and you often see this even in the seed kind of Series eight a seed side of things that seed investors feel like many times that they get compromised and that the a round investors are trying to kind of prevent them I'm doing pro rata so it's a very common thing to have but I think it's something where it puts you as a CEO in a situation where you may have to manage kind of conflicting incentives among your investors and so you know you just need to kind of go in eyes wide open and hopefully you've got a good enough dialogue with your existing investors where you can say hey you know let's figure out some compromise here that makes sense where everybody can feel like they can you know walk away happy from the table and what should I expect from my existing early investors so somebody invest in my a should I expect them to be along for the ride and do their pro rata in the B and the C and the D all the way yeah you know different firms have different philosophies on this you know the way we do here is if we're the a round investor our general thinking is that you know unless something dramatic happens with the company you know we should expect that we're going to participate pro rata in the next round of financing we think I think that's kind of generally the convention in the industry beyond that though the answer for most firms and we treat it the same way is it's kind of an independent decision at that point in time because you know the dollars can get very very big and you know kind of you have to think about you know how much do I own at what kind of cost basis so I think it's an important conversation actually to have with your VC you know when you take money from them because you certainly don't want to kind of you know miss set expectations you know between the two of you and you also want to be able make sure when you go raise money that you're not creating some signaling effect otherwise where the new investor is expecting your existing investor to participate and the fact that they don't do it they read as a negative signal I mean that can happen sometimes if you haven't kind of had this conversation and you know already you know set the right expectations up front yeah so I need to be clear with you as soon as you put your money in I can count on you for the next round or maybe the round after that but like we should just be on the same page exactly right doubt that Yeah right good so last few questions on sort of governance and let's talk about stock restrictions like what what are they how should I think about them yeah so this is one that's come up more often because of this phenomenon now that companies are staying private longer right so it used to be not a big deal because companies about you know six years or so from founding was kind of the median time to going public now we're talking to ten twelve years and so the things that you want to think about as a founder is two things number one is whether my investor is going to do and so often you will see that investors will have restrictions on their ability to sell shares and those come in lots of different flavors which we won't go into detail but you can read about on the book and then the other question is what do you do about employees right because you're probably gonna have employees who will have fully vested their shares some of whom will have left the company and you know this is one it's a tough one to navigate right because on one level as a CEO you know I think you want to you know you want to get flexibility to your employees particularly the ones who are still you know at the company right doing great work the thing you want to be careful about though is making sure that those shares don't kind of take up demand that would otherwise exist for people to buy shares from the company where the cash would come into the company and therefore allow you to kind of raise money and grow the business right so if you think about this at some level there may be a finite amount of dollars that all the investors are willing to put in this company and if you have employee share sales competing with sales that you're making is the company to try to raise raise money to put in your own coffers there can be a kind of a tension there and so more generally these days we see fairly restrictive provisions here which is most companies try to kind of you know say hey look if you're gonna sell as an employee you need the consent of the company or something like that so that you kind of have more control over the timing and also the volume potentially these purchases mm-hmm thinking about employee incentives since we this is sort of part of the discussion my friends who are doing longer vesting schedules or back-loaded employee options instead of sort of you know 148th over four years right they're doing you know 10 20 30 40 yeah right to incent people to stay longer yeah how should I think about those types of incentives yeah you know there's lots of discussions on this right now the short answer is I'm not sure there's yet a real change in convention I think most people are still doing the priest rate for years or years the big change that you may have heard about from some people is normally when you leave the company and you're vested you typically have about 90 days to either exercise your shares or you have to forfeit them and because of this elongation of companies staying private a lot of companies now have extended that period and they say hey look we're gonna give you a year or two years or something because we recognize there's not a liquid market in the form of an IPO to be able to sell them and we know it's expensive for you to come out of pocket to have to exercise your options so there's probably more creativity I would say happening on that side less creativity on fundamentally rethinking whether we should have just a different vesting schedule overall that reflects you know kind of the fact that companies are staying private longer got it so if I wanted to be a sort of maximally employee friendly as possible I'd be extending the time that's exactly right you can choose to exercise that's exactly yeah and some companies have done that and you know the only thing that you know and we've talked about this in some of our blogs knowing I think about there is that means that those shares you know those shares will be what's called there will be what's called an overhang meaning that you know kind of they're sitting out there you don't really know if they're gonna get exercised or not but it you know sometimes in the alternative people might not have exercised them those shares can be returned to the company and the company could use them obviously to issue new options to people so there's a there's a very emotional understandably so and a very kind of deep debate on this but yes in the in the perfectly employee friendly case you would extend it out as long as possible to give people the maximum time period Goti great thanks for talking to us about appreciate all of the economic and governance turns that attention can be very intimidating yes I'm glad you sort of went through it and demystified it thanks Frank all right congratulations you've survived to the end of part two where we talked about understanding fundraising and the terms that go into a term sheet hopefully this gives you a sense of all the mysterious terms you've now seen maybe for the first time when a term sheet has arrived next up we're gonna do part three of our series and part three is all going to be about living with your venture investor over a long period of time so you might actually have the same person on your board of your company for ten years and so Scott has great tips for how to understand the the bends in that relationship and how it will change over time and we're going to dig right into three concrete scenarios that you might end up encountering one in which you are winding down your company one in which are selling your company and one in which you are actually going public congratulations and we'll see you at part three