TheFunded exposes deal terms, including dreaded liquidation preference

updatedTheFunded, the site that lets entrepreneurs rate venture capitalists, has just unveiled a new feature that could bring a whole new level of transparency to the cloaked world of financing deals.

It now lets entrepreneurs submit the terms (subscription required) of their funding deals to the site, so that other entrepreneurs can see them — and make sure they’re not getting a raw deal for their own company. Until now, this sort of resource hasn’t been made available. VentureBeat got an early look at the new feature yesterday.

The new feature lets entrepreneurs post things like the amount they raised and the valuations that venture capitalists have agreed to place on the company before investing. The latter, called “pre-money” valuations, are important because they determine how much of a company an investor gets to own in return for his investment — and how much an entrepreneur is left owning after the process.

To access the information, you have to be a member of the site. Membership is free for entrepreneurs. TheFunded doesn’t allow VCs to become members. Others, including limited partners or industry consultants, have to pay $250 a year for membership. Another requirement: Entrepreneurs must submit their own termsheets before they can view others.

adeoressi.jpgThe feature is the second effort by TheFunded’s founder, Adeo Ressi (left), to turn the tables in the investing world by giving more information to entrepreneurs. TheFunded has already helped change behavior in the VC industry, Ressi claims, by exposing to VCs to a public flogging in the forums if they are disliked (though some investors gripe they’ve been treated unfairly by entrepreneurs miffed at not getting funding; the site remains highly controversial). We’ve covered some of this. But by making deal terms available, Ressi says he hopes to help entrepreneurs on the economic front, too.

TheFunded’s new feature lets entrepreneurs post details on long list of other clauses that have crept into deals over the last few years. These terms can make the negotiation process extended and painful for entrepreneurs, who are likely to have far less information at their disposal than experienced investors. To collect the information, TheFunded uses a survey matching the format of a standard “termsheet,” a list of terms that venture capitalists provide entrepreneurs when they make an offer to invest. Entrepreneurs go down the list of their own terms, and input them into the appropriate fields provided by TheFunded. This makes the terms easily comparable for others wanting to view them.

For example, there’s entry field for the dreaded “liquidation preference.” This preference maintains that an investor gets his money out first if there is a sale, and only then does the entrepreneur get his money. While liquidation preferences have become normal, some investors demand a “3x liquidation preference,” which means they get three times their invested money out before the entrepreneur sees a dime.

Ressi says he’s seeing termsheets with a 3x liquidation preference, with participation, being offered to companies, even in today’s relatively favorable market. “That’s as abusive as not showing up to meet a CEO after he flies across the country,” he said.

He predicts that within 18 months, the new feature will lead to a standardization of deal terms.

One challenge is to get people to submit the data. When we looked at it yesterday, right after Ressi released the feature, there was a single term sheet in the database. A second floated in this morning. Ressi says he’s expecting a few more shortly. Ressi has taken some of the fear out of submitting terms, by making the submissions anonymous. Names of investor and companies are removed. Moreover, exact wording of the termsheets is removed. This way, termsheet can not be traced back to a particular investors who may use specific wording. TheFunded’s survey forms require entrepreneurs to manually enter information about terms in pull down menus (see screenshot below). All this, says Ressi, helps avoid legal problems stemming from the non-disclosure agreements contained in most termsheets. The flip side, though, is that it forces an entrepreneur to sit down and type in the terms, not the first thing a stressed entrepreneur wants to to do. Here, Ressi says he’s taken months to interview CEOs, and research the main terms — by consulting with start-up oriented law firms like Fenwick & West — to boil down the survey to request only the essential terms. Ressi says it should take about 10 to 20 minutes to fill out a survey.

However, here’s one more reason why TheFunded may attract termsheets: the requirement that you must load your own termsheet before viewing the others.

The feature is still being improved. For now, though, you can search for termsheets by stage of financing, geography and industry. So, for example, you can search for all Series A termsheets, on the West Coast, and in internet B2C companies.

I’ve been covering the venture industry for seven years, and entrepreneurs have talked about the need for such a database of terms the entire time I’ve been doing this. Many VCs I know dislike what Ressi has done so far. There’s no doubt, in many cases, VCs are being unfairly treated or praised in public comments at TheFunded because almost everyone has an agenda — and that’s a shame. I’d take the VC ratings with a serious dose of skepticism. But one thing is for sure, Ressi is winning fans among entrepreneurs, and this latest “term” feature has far fewer problems with it than the sites VC rating feature. In this fast-paced, fend-for-yourself world, few incentives exist for entrepreneurs to take time to band together for their own good. In this case, I’d encourage entrepreneurs to try it out themselves. This is one of those times where 15 minutes could help remove a lot of pain for lots of founders.

Disclosure: VentureBeat has a relationship with TheFunded, which includes cross-linking to each other’s sites.thefunded-terms.jpg

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