How Venture Capital Works by Bob Zider

TL;DR - Comprehensive and helpful review of the structure of funds, deals, and the industry, although a bit dated (1998).

Helpfulness - 5

Tags - fund structure, law, deal structure, useful diagrams

Questions addressed:

  • What void does venture capital fill in capital markets?
  • How do VC funds invest?
  • How are deals structured?
  • How are funds structured?
  • What should entrepreneurs consider when interacting with VCs?

Summary:

  • Venture capital firms offer funding for innovation and growth to startups that are too risky to be backed by traditional banks (and lack the material assets for collateral).
  • VC funds invest in growing markets — the middle part of the classic industry “S” curve.
  • Deals are structured to give VCs downside protection through preferred equity and antidilution clauses, as well as upside benefits such as investing more at a set price.
  • Incentives for VC partners are aligned with their investors through profit sharing.

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