I was asked this question at a talk I gave to the recently graduated TechStars Boulder class and thought it deserved wider dissemination than to just the group in the room at the time. This is a loaded question and while there are many variations I do actually think there are some general norms that are followed in most cases. So here goes with some guiding principals and then below that some numbers. Keep in mind that I’m talking about Seed and Series A stage businesses.

- Pay yourself as little as you can. Cliché, of course, but true. At the seed stage the modest amount of money you have raised is best spent on product and attracting initial customers than it is on paying yourself. This advice is generally true across the organization. It’s also true that generally founders and early employees own a large portion of the business at this stage and as a result, business progress at this stage disproportionately benefits founders. So the trade-off is most beneficial to the founders and employees – including the CEO.
- Don’t starve. There’s no sense in paying yourself so little that you can’t live or will be overly stressed about paying your bills. Seed stage investors are sympathetic to varying life conditions and you don’t need to tighten the belt so much that it ends up distracting you from your focus on building a great business. Some founders are happy to live in their parent’s basement and take almost no money; others have families or student loans, etc. and can’t work for minimum wage.
- Have an open conversation with your investors about what you need. As is typically the case, you should be as transparent as you can with your investors on this topic and have a open dialogue about compensation.
- Map out a plan. As part of this open conversation be clear about what your expectations are going forward and what milestones might trigger incremental compensation (raising a larger round, getting product into the market, hitting a certain revenue target, etc.).

So what does this all translate to? I think market (and this seems to be true whether you’re in San Francisco, New York, Boulder or somewhere else) is that companies that have raised $1M or less tend to pay their CEO between $75k and $125k (skewed very much to the low end of that scale – companies that have raised less than $500k tend to top out at $75k for CEO comp). Companies that have raised between $1M and about $2.5M tend to pay their CEOs around $125k. Companies who have raised above that amount skew up from there. Not science, but these observations are based on a sample size in the many hundreds.

It’s funny how things have a way of working out. I wrote recently of our experience with SEOMoz – from initial meeting a few years ago to finally investing in them earlier this month. Today we announced our investment in Mocavo - a genealogy search platform that provides users with the best tools available to find information on their ancestors. More specifics on the business in a minute but the year long journey from TechStars to Foundry investment is worth noting.

I first met Mocavo at the start of last year’s TechStars Boulder. I liked founder Cliff Shaw a lot and appreciated (although at the time didn’t share) his passion for genealogy. When he asked me to mentor them through the program I thought it was a pretty safe bet. “Sure thing Cliff,” I said at the time, “there’s zero chance that I’d invest in a genealogy site, but it would be fun to work together!” Through the summer I held to that party line.  Cliff and I kept meeting regularly even after TechStars (Cliff knows my soft spot for sushi and would regularly invite me to the Mocavo offices for brainstorming sessions with the team over take-out). But over the winter the lightbulb went off on what a big idea Mocavo really is. I had known that genealogy is a huge (and growing) market but was beginning to realize just how novel the tools that Mocavo is bringing to the market are. And the pent up demand in genealogy circles for better access to content, better tools for sharing this content and better ways to bring offline content (the majority of historical content still resides offline). And how passionate genealogists are about their pursuit of family history and as a result how much time, effort and money they spend in their pursuit.

Launched in March of 2011 (although their paid features only launched a few months ago), Mocavo has seen great growth in visitors to its site, searches on its platform and information indexed in its search engine. The company isn’t out to replace existing genealogical tools – it’s here to augment those tools and provide an overlay social experience that is natural to genealogy. I couldn’t be more excited to be working with the Mocavo team (along with Cliff, I’ve gotten to know Richard, Andy, Ryan really well over the last year).

Welcome to the future of your past!

There’s been plenty of chatter over the past few years about the potential pitfalls for entrepreneurs taking seed money from VCs. This includes a recent and very thorough overview of the issues by Elad Gil which I’d highly recommend reading, even if you’re already familiar with the issues around seed financing (and in particular the so called “party round” where everyone takes a piece but no one takes the lead).

I’ve noticed something recently that’s a bit of the flip side of the same problem that everyone is talking about but that I haven’t seen mentioned yet. I’m seeing an increasing number of Series A pitches where a company has at least one venture investor in its seed, the business is very clearly doing well and where the entrepreneur is simply not pursuing their existing institutional investors for money (note: please give me a little credit here for knowing the difference between an entrepreneur not pursuing money from their existing investors and their being told by their investors that they’re not interested; I’m talking about cases where it’s either pretty clear that the business is seeing excellent traction or where we’ve actually been able to confirm that they’re trying to go around their existing investors).

You could call this the VC seed signaling problem.

A VC throws some money around into a bunch of different seed rounds assuming they’re buying optionality for their Series A. But by essentially ignoring these seed companies some investors are showing them that perhaps they’re not the value added VC that they claimed to be. I’ve heard a variation of this themea number of times in the past few months. Entrepreneurs completely disappointed with the lack of attention they’ve received from their seed investors and as a result choosing to either try to keep them out of their Series A rounds or minimize their participation (most have received pro-rata rights as part of their seed investment so sometimes this becomes a negotiation – again, clearly evidence that these entrepreneurs are indeed telling the truth on this subject as their seed investors try to negotiate for more participation in the Series A).

I find this pretty amusing. At Foundry we view seed investing the same way we view all of our investing – we believe that we’re in this business to add value to the entrepreneurs and companies we back regardless of the capital we have invested (great post from Brad here explaining this in more detail). Clearly that view is not held across our industry.

Fred Wilson put up a post today that grabbed a slide from a recent presentation Mark Suster gave at a Founder Showcase event. The chart (and Fred’s post) back up with numbers the qualitative argument I was making in my recent post on Pattern Recognition (I wish I had these data when I wrote my original post!).

In my post I argued that while there is plenty of talk about a handful of high flying companies (Zynga, Twitter, Facebook, etc.) that vast majority of venture back companies can expect significantly more modest outcomes. In fact history suggests that a majority won’t even return invested capital to investors. All this talk about the stratospheric valuations of this small group of companies however has investors fundamentally misjudging the chance that their latest investment will do the same. As the chart from Mark’s presentation clearly shows, not only is it the extreme exception for a company to hit the kind of valuations that are getting all of the press attention but even hitting the $100M mark is rare. On some level I think we all know this, but seeing the numbers in black and white really puts a exclamation point on exactly how rare it is. And as Fred points out (as did I in my prior post), investing in early stage companies at the kind of valuations that are prevailing today is a losing bet…

Today’s guest post comes from Ted Rosen, a partner at the law firm Fox Rothschild. How to write an effective company “teaser” is one of the most common topics I’m asked about by entrepreneurs and I think Ted has some excellent thoughts on how to prepare a company summary that hits the right points but isn’t so long that you’ll lose your reader’s attention (or make them abandon the summary before reading the important parts). Ted really nails it in the piece below. I’d especially call out “jargon free” and “keeping it simple” – the inverse of which are probably the two most common traits of poorly formed executive summaries. As always, I welcome comments, ideas, suggestions, etc. You can reach Ted directly at trosen@foxrothschild.com.

PREPARING AN EFFECTIVE EXECUTIVE SUMMARY — OR “TEASER” TO LAND VENTURE CAPITAL FINANCING

By: Ted D. Rosen, Esq., Partner Fox Rothschild, LLP

An effective executive summary — also known as a “teaser” — is a crucial tool that helps entrepreneurs catch the eye of venture capitalists and other sophisticated investors. Those venture capitalists and investors have the money that could make the difference between the success and failure of your fledgling business, but they tend to be bombarded with business plans to the point that they could not possibly read all the information they receive from business owners seeking financing.

A well-written business plan is also crucial, but it is generally premature at the start of the courtship — the right tool at the wrong time. A clear, concise, well-written teaser is an initial sales document and therefore the tool of choice to get a business owner from the start of the process to the point where an investor needs the more specific information that a business plan contains.

As legal counsel to many emerging companies, I have read hundreds of teasers and am all too often taken aback at how poorly they present the companies’ initial case for funding. Owners of such businesses and their advisors must package the business and present its compelling story in such a way that it increases the likelihood of success in a capital raise.

As with most communications, business owners seeking capital should focus at least as heavily on the venture capitalists’ expectations and desires as their own. A well-written teaser describes for a prospective investor the three main benefits that the business offers its customer base, in descending order of importance. From that, a prospective investor can weigh the likelihood of robust sales and revenue — crucial elements in the decision whether to fund. (An effective follow-up document, the business plan, will mirror this format with greater detail of the competitive benefits a company offers.) 

For each benefit to the marketplace, the teaser should describe what customers’ needs are met by the business’ products and services; touch on whether the business model is sustainable and how revenue will be generated; and discuss why customers will pay for what the company offers. Opine on whether the company offers must-have or nice-to-have products and services. Does the company solve some crucial problem for its target customers? Don’t exaggerate on any of these points and generally avoid unsupportable superlatives — the best, the only one of its kind, or self-serving phrases such as game-changing or life-altering — because savvy venture capitalists will see through that gambit quickly. Support your claims by providing supporting research — past performance, for example, or clients’ testimonials and studies that buttress your claims.

MUSTS, AND MUSTS-TO-AVOID

As with any pursuit, there are some rules of the road to follow. I have observed over the years what tactics work and which ones fall short. Many of these suggestions may seem obvious, but they are worth repeating because following them should result in an effective teaser that might catch the eye of your next investor.

In clear, concise, jargon-free language, write a reader-friendly summary that an executive in any industry can grasp. Besides describing the benefits of your goods to your customer base, explain clearly the revenue model and value proposition; include information about your market, its size and demographics so investors can judge the scale of opportunity; pricing issues and competition. Investors know that virtually all companies have competition, so trying to convince them that you don’t will damage your credibility from the outset. You should explain why you have or perceive a competitive advantage over your competitors and why you believe you will maintain that advantage, but avoid puffery and bluster.

Your management team will probably be of great interest to investors, so describe the people, their qualifications and their track records. Make projections, but make them realistic. State how you intend to use the proceeds of the capital raise, but keep that broad and flexible. Finally, state clearly how much you are seeking to raise and how you arrived at that figure.

Employ KISS twice: keep it simple, stupid and keep it short, stupid. Avoid highly technical writing because at this early stage, investors are trying to get a big-picture snapshot of your company, not what kind of alloy you use in your widgets. Technical writing will turn off an investor if he doesn’t understand the teaser, which should appeal to a broad base of venture capitalists, not just those intimately familiar with your industry. So too will excessive verbiage; keep the document to four pages at the most.

Write in an active voice, not the passive. Be realistic, but avoid negativity of any kind. Avoid empty adjectives that carry no substance. And avoid the spell-check land mine; triple-check spelling and formatting. Venture capitalists have so many teasers and business plans — and underlying businesses — to choose from that they are likely to discard those that appear sloppy.

Finally, avoid the temptation to use a power-point display to supplant or accompany a teaser. Power-point presentations tend to be too long and, frankly, too dull for most investors’ patience levels, particularly at the early stages of the relationship.

Paul Graham, founder of Y-Combinator, sent out a tweet on Friday saying: “Convertible notes have won. Every investment so far in this YC batch (and there have been a lot) has been done on a convertible note.”

It’s an interesting data point on Y-Combinator companies, but is this truly a macro trend? Have convertible notes really won?  And if so is that good for start-ups? Good for investors?

I think the answer to these questions are that 1) it’s not at all clear that this trend is as definitive as Graham suggests; 2) it’s a mixed bag for entrepreneurs (more positive in the short run, potentially negative in the long term); and 3) it’s clearly not a positive trend for early-stage investors.

First a quick terminology recap (skip this paragraph if you’re already familiar with convertible debt vs. preferred equity). The most common forms of investment in early stage business are convertible debt and preferred equity. Convertible debt is exactly that – debt which is convertible into equity at some later point in time (or is paid off). Typically this conversion is at a discount to the next equity round (to compensate the debt investors for their risk) and sometimes carries warrants (same rational) or a cap on the equity price that the debt converts into. Historically convertible debt has been easier (and therefore cheaper) to put in place. Preferred equity is stock which carries with it certain rights (preferences) in terms of how and when it gets paid back and a handful of other items that relate to the control of the underlying business.

Also, before I jump into this let me state that I have the view that, like many things involving start-ups, there’s a balance between what’s good for investors and good for entrepreneurs (there’s a symbiotic relationship between the two). I believe in cutting fair deals with entrepreneurs and don’t at all subscribe to the belief that an investor should try to obtain harsh control or preference terms (almost all of our investments at Foundry have a 1-times preference multiple and are non-participating; see this post by my partners Jason and Brad for more details on what these terms mean if you’re unfamiliar with them). Paul himself said in a March 2009 article: “When you hear people talking about a successful angel investor, they’re not saying "He got a 4x liquidation preference." They’re saying "He invested in Google." And I believe that’s true, although as you’ll see below, I also believe there also has to be reasonable compensation for the risk that early stage investors are taking. We should all be so lucky as to find the next Google, but one’s investment strategy needs to be geared to finding the next Mint or del.icio.us.

Has Convertible Debt Won?

I asked this question to a number of angel investors (all with institutional angel funds or running Y-Combinator like programs) and the results were mixed. Interestingly there seems to be  a real split between the coasts. While all of this year’s Y-Combinator investments have apparently been structured as convertible debt, that’s not the case with other programs. While some are clearly seeing a heavier weighting to convertible debt than to equity, one east coast based program I talked to told me that fully 100% of their companies who had received funding had done so in the form of equity.  Of the super-angels I talked to, several reported that “all” or “almost all” of their initial investments were currently being structured as convertible debt with one (again, east coast-based) exception who reported only 5-10% of their deals were structured as debt. It’s hard to say where in the country the line shifts from equity to debt, but it’s clearly a much stronger trend out west than on the east coast (at least the northeast which was where the firms/programs that I spoke to on that side of the country are located). To be clear, any west coast trend by definition is trend, given the skew of investing to that geography (and by far the majority of the so-called super-angel investors are west coast based).

The trend that Paul is pointing out appears to be taking place, but is less than definitive (and much less so than I expected). 

Now on to by far the more important question – Is this trend a good one for entrepreneurs and investors?

Traditionally convertible debt is used for initial funding rounds that are smaller in size, where the financing isn’t substantial enough to cover the greater legal costs of a more traditional seed equity round, where the investor base lacks a “lead” to price and negotiate terms, or where the financing size is such that all parties agree that not enough money is being raised to put a stake in the ground around pricing. As I noted above the conversion terms typically contain a discount to the next financing round and – according to the super-angels I talked with – also almost always contain a cap on the price at which the equity can convert at later. Both these terms are designed to bound the risk that the convertible debt investors are taking in not pricing the round – they’re investing in an debt-like instrument with equity like risks.

Entrepreneurs like convertible debt for some obvious reasons. For starters, it can be much quicker to put together a convertible debt financing, so more of the capital being raised goes to the operations of the business, not to the lawyers (this clearly benefits both the entrepreneur and investors). Importantly it also puts off the valuation question to a later date and tends to shift at least some risk from entrepreneur to investor (I’ll talk about why this is in the next paragraph below). Interestingly however, with the increasing number of seed financings we’ve also seen a decrease in the complexity and cost of equity seed financings such that they more resemble in time and cost convertible debt structures (both Y-Combinator and TechStars have model seed docs up for those wishing to further streamline the process). As a result I believe some of the perceived difference in time and cost are disappearing and less relevant to the debt vs. equity debate.

It’s the question of terms that’s key to the investor side of the equation and where I believe the convertible debt trend starts to fall down. In the investor’s best case scenario, the convert terms reflect the current market value of the business (specifically, the cap appropriately prices the equity value of the business at the time of the debt investment). However the investor hasn’t actually purchased equity and has opened themselves up to an easier renegotiation of their terms by a later investor (who, almost by definition, wields more power at that time than the original angels, assuming the company actually needs to raise capital). More likely, however, the convert cap reflects a premium to the current fair market value of the business. One super-angel I talked to told me that while a year ago these caps “approximated what I’d pay in equity” that they’re now “33% higher than what I’d normally agree to pay now.”

I have no doubt that the convertible debt structure has the effect of raising prices for early stage investing. Within some reasonable range this isn’t a huge problem – early stage valuation ranges move up and down with the markets – but in larger increments (which we’re seeing now) and viewed in the light of angel investing economics, these changes in early stage valuation may be problematic.

Traditional venture investors average up their cost basis in a company and “protect” their ownership over time by investing in subsequent rounds. Often, angel investors don’t participate in future rounds (or if they do, they do so at a much less meaningful percentage of the round) meaning that their initial buy-in forms the basis for the majority of the shares they ultimately own in a company. Ironically, the trend of companies raising less capital actually enhances the importance of the initial round buy-in (both because that initial buy-in becomes less diluted meaning the first round price was that much more important and because even if an angel wants to buy up more in later rounds they’ll have less of a chance to do so; I also believe that along with the trend of companies raising less capital we’re also seeing earlier and somewhat smaller average exits – also enhancing the value of initial round buy-ins as fewer investors are truly swinging for the proverbial fence). I’m a big fan of the rise of the so-called super angels – I think they’ve been great for the overall entrepreneurial ecosystem and I’d like to see them continue to thrive.

So how is this trend bad for entrepreneurs?

Clearly in the short run this trend is positive for entrepreneurs because it has the effect of both deferring an often difficult conversation (around valuation) and ultimately increasing early stage company values and as a result decreasing entrepreneur dilution (by the way it’s also good for Y-Combinator, TechStars and other similar programs since the shares the program gets of each company act as founder shares in this financing equation). And I have no doubt that there will be many entrepreneurs who benefit from this trend. But it’s not clear to me that it’s sustainable (just as it wasn’t a decade ago). Ultimately investors need to be compensated for the risk they take in making their investments. With capital being relatively fluid (and the angel markets being finicky) as companies run into trouble, as valuation caps begin to be disrespected, as overall return profiles decrease because of higher early stage prices, money will flow out of the asset class. And ultimately this doesn’t benefit entrepreneurs either.

Conclusions?

If you’re a long time reader of this blog you’ll know that I don’t like superlatives and I don’t like sweeping generalizations. I don’t think convertible debt is bad and I don’t believe as famous angel investor David Rose has said that “Smart Money’ doesn’t invest in convertible debts. Period.” Different situations call for different capital and financing structures. That said, a broad market trend towards convertible debt has implications that I think are bad for the overall early stage investment ecosystem.

I look forward to a healthy discussion in the comments below!

Quick disclosure note, I’m a personal investor in TechStars and from that end actually benefit (at least short term) from this trend. As an angel investor I’ve participated (this was prior to raising the Foundry Group fun) in convertible debt structures, including several very positive outcomes.  I’m also an investor in several angel funds that are in the middle of this market. Foundry itself rarely (which is to say never to date) structures a first round as convertible debt.  

I had an exchange with an entrepreneur last night that I couldn’t resist posting (I did resist including the guy’s name, however). It started with a relatively typical email. One which I wonder why I still receive but still get regularly. The entrepreneur writes:

Seth…..I’d like to pitch you on a start up. I need the help of someone like you. I haven’t filed any patents yet and I need a nda signed. can we do it?

I respond as I do for all requests like this by saying:

Hi [name redacted]. Like most VCs I don’t sign NDAs (see: http://www.sethlevine.com/wp/2008/01/why-i-dont-sign-ndas). Let me know if you’d still like to show me what you’re up to (totally understand if you feel it’s too sensitive).

Here’s what I received in response:

Seth….I’m reaching out to you here, lets get off this old cookie cutter vc "don’t sign nda’s" attitude, it’s only until the patents are filed. I believe I’ve got one of the biggest deals to come down the pike in years. This isn’t my first rodeo. Just FYI, no matter how hard you crunch the numbers, this is a 20+B per year deal. I already have demo software and I need you to help me put a team together, the money will come as soon as we are able to "show and tell" so to speak. Please reconsider.

Really? That’s how you’re engaging with me? I can’t imagine how you think this is a winning strategy. Am I supposed to be bowled over by how amazing this potential opportunity might be, change a cardinal rule of our business and through this series of emails think that you’d be a competent manager, effective advocate for your business and a good guy to work with?

The initial email is completely casual, full of mixed cases and grammatical errors. Oh, and totally un-researched. But the second response really takes the cake and what caused me to post this for the world to see. Of course you have one of the biggest deals ever. Clearly this isn’t your first rodeo. Certainly you’re playing in a $20BN market. And without question I’m just one of those cookie cutter VCs. Obviously I should change my attitude.

[BTW, in case you were wondering, I didn’t bother responding]

You already know the about the state of the venture capital industry in 2009: venture investing down (32%), exits down (14%; slowest exit year for VC backed companies since 1995), fundraising down (56%), IPO’s almost non-existent (8 venture backed IPOs in 2009). It’s a bleak picture for the industry overall, even if there’s a group of us that continue to believe this is a great market in which to be investing (and it clearly is). These stats got me thinking about the future of the venture industry and I thought I’d offer up some thoughts on where we might be headed.

First, let me frame the conversation by stating that I agree with Fred Wilson’s assumption that somewhere around $15Bn is the right “steady state” investment pace for the venture industry as an asset class. At this investment level the return profile of the industry maps to a reasonable expectation of inputs and outputs (the money invested in start-ups as compared to the exit activity). By that measure, we actually still have a ways to go to reach that equilibrium in the venture markets.

According to VentureSource, $21Bn was invested by the venture capital asset class in 2009, and this amount was the lowest investment total in the 10 years of data that I had access to. The system is still a little bit out of equilibrium, however, as this is a far greater total than the amount of capital raised by venture firms in 2009 ($12Bn). In fact looking back at the past five years $14Bn more has been invested by firms than has been raised. While presumably this will lead (eventually) to fewer dollars invested, the VC fundraising average for the past 5 years has been almost $25Bn, suggesting that we still have a ways to go to get to Fred’s $15Bn bogy. 

What’s even more interesting to me is to consider the nature of this fundraising and the ramifications it has on the industry as a whole. I believe what we’re going to see in the venture industry is a bifurcation of fundraising– basically a barbell on the graph of fund sizes. Large, well known, multi-sector and multi-stage “mega-funds” will be able to raise $750MM or greater at one end of the scale, and smaller, more focused funds will raise $250MM or less on the other end – with a relatively small number of funds in the middle.

Looking at the 2009 fundraising data shows that this trend is already taking shape, three well known funds in the former category closed on over $3Bn in commitments

– NEA ($1.24Bn), Norwest ($1.2Bn) and Khosla Ventures ($800MM). At the bottom end of the scale there were numerous funds that raised money in the $25MM – $250MM range).  And while there were certainly a few funds raised in the middle (notably Greylock, Matrix, DCM, CRV and Andressen Horowitz) my hypothesis is that fundraising in this size range will diminish over time as LPs move their money either to a smaller number of diversified, extremely large funds or the larger number of smaller, more focused funds (Foundry is clearly in the latter category).

Thoughts?

At the risk of opening myself up to a landslide of snide comments expressing sympathy for the "difficult" job a VC has saying no to so many potential investments, but in the interest of being open about the experience of venture capital from the inside I offer up the following thoughts:

Sometimes it’s very easy to decide to decline a company’s request for financing (and we see literally thousands of plans a year, so we’re pretty well practiced at it).  Many times the company simply isn’t a fit for our investment focus (we get a few "invest in our [pick one] manufacturing/car wash/custom painting/etc business" requests ever year).  Or the business plan is clearly off base (my personal favorite from this genre was the company that planned to colonize the moon for the purpose of reducing the cost of launching satellites – which they were going to build from materials they were to mine from the moon).  Lots of others are potentially interesting but for one reason or another just don’t make the cut.  The ones that pique our interest we start a dialogue with, which typically involves several meetings, background due diligence, etc.  Some of these businesses we will relatively quickly decide are not a good fit and they fall off the list.  Then there are the ones that we really dig into.  While we pride ourselves on moving quickly through our investment process, being quick doesn’t mean not being thorough – we do a lot of work looking into investment opportunities before we make our final decision to invest. 

As we’re moving through this process there continue to be a meaningful percentage of companies that we ultimately decide not to pursue an investment in.  I like to think our process is a pretty open one (specifically that we’re very clear with the entrepreneurs that we’re working with what our outstanding questions/areas of concern are).  But even when it’s clear that we’re just not "there" on a deal it can be difficult to turn down an investment late in the game.  I’m not talking about reaching the decision to say no – we have a well exercised process and a very open patter of communication at Foundry that I think allows us to make very good decisions throughout our deal process. I’m talking about actually making the phone call to someone you’ve been working with for months, who has been answering your questions, putting up with your requests for more data and with whom you’ve likely been engaged in pretty detailed business planning.

I had a particularly challenging example of this about a month ago when I turned down an investment in a company that I was really close to saying yes to.  In this case I particularly liked the founder (we had both a great personal and professional connection) and the business was in an area that I know extremely well.  I did a ton of work on the opportunity and as a partnership we had many conversations about the business (while I had been leading the work all of my partners had spent real time looking into the business and had met the founder several times).  Ultimately I couldn’t get over a handful of concerns about where the market (and in this case specifically competition) was moving and as a result turned down the chance to invest.  Probably the hardest "no" that I’ve ever had to give . . . .

Note: the company in question had another source of funds and is off and running on executing against their plan.

An entrepreneur started a meeting with me a few days ago by asking me to sign a non-disclosure agreement.  I politely declined and thought I’d back that up with a post on the subject (I recall reading a few other VC blogger’s views on NDAs in past years – there’s certainly no lack of thought on the subject, although it does seem to consistently come up every year).

VC’s, as a general rule, won’t sign NDAs. No – we’re not trying to steal ideas from entrepreneurs or pass confidential information along.  We’re just not in a position to review, negotiate and keep track of literally thousands of NDAs that would result if we started signing them on a regular basis.  Here are a few specifics from my point of view:

• VC’s have little but their reputation.  I can think of few industries where individual reputation plays such a large and transparent role as it does in venture capital.  As a VC, I have little more to trade on than the reputation I’ve built up with entrepreneurs, my investors, other VC’s, etc.  Destroying this by sharing confidential information would just be plain stupid.

• I can’t manage that many NDAs.  It’s hard to imagine the challenge of managing a few thousand or a few tens of thousand of NDAs if we started signing them for every company meeting or business plan that we received.  Even if I put them all on my own form (so that they were in theory all uniform in their requirements) it would be impossible to keep track of what information was presented and for what purpose. 

• I meet with competing companies. In the course of a year I see hundreds of business plans and take meetings with maybe 100 companies.  In some cases these companies have similar ideas for products, are in similar markets or occasionally are direct competitors with one another.  While I don’t trade information across companies, it could appear that way if I’ve met with two competitors or if one of the companies I’ve met with changes direction and starts to look like another company I met with at.  I’d hate to get caught in the middle of a legal mess, exacerbated because I had NDAs in place with both companies.

• I don’t know who my partners are meeting with.  At Foundry, we tend to take a team approach to looking at deals and we have pretty advanced systems for tracking what deals we’re looking closely at.  That said, I don’t know every company that my partners have reviewed a business plan for or have taken a meeting with.  Not only can I not manage that many NDA’s from bullet 2, but as a firm, we can’t manage the added complexity of who has seen what from what company in what context.