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BUILD A COMPANY FOR THE LONG TERMCONTROL YOUR OWN DESTINY

JUSTIN FISHNER-WOLFSON

COMPANIES ARE BEING FUNDEDDespite the tough environment

$0M

$325M

$650M

$975M

$1,300M

Q1 2008 Q2 2008 Q3 2008 Q4 2008 2009 YTD

Total Amount Raised $1,078,325,793 $1,196,744,097 $1,227,841,647 $758,107,693 $762,108,423

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Source: Cooley Godward Kronish LLP

VALUATIONS ARE LOWERMedian Series A pre-money valuations

$0M

$2M

$5M

$7M

$9M

Q1 2008 Q2 2008 Q3 2008 Q4 2008 2009 YTD

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TYPES OF EQUITY

• Common

• Preferred

• Series FF

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LIQUIDATION PREFERENCES ARE BECOMING MORE COMMON

0%

10%

20%

30%

40%

50%

60%

70%

Q1 2008 Q2 2008 Q3 2008 Q4 2008 2009 YTD

Percentage of Deals with Fully Participating Preferred

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• Options

• Warrants

• Fully Diluted Ownership (FDO)

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UNDERSTAND THE TERMINOLOGY

• $1M Financing

• $4M Pre-money valuation

• 20% option pool

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PROPOSED SERIES A FUNDING

HOW TO CALCULATE DILUTION

Step 1:

Determine post money valuation

Money investedPre-Money+

Post-Money Value

Step 2:

Determine investor ownership

Money investedPost-Money÷

Investor Ownership

Step 3:

negotiate employee option pool

= Dilution

Investor OwnershipOption Pool+

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WHAT DO THE FOUNDERS HAVE LEFT?

• Before: • 2 equal co-founders

• After: • 30% for each co-founder

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Investment Option PoolBrian Robert

• $500K note

• 10% warrant per month

• This converts at the next financing round

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Debt

Equity

Try a convertible noteAVOID DILUTION

FIND A COMPROMISE ON PRICEConvertible Debt

Other benefit is... less paperwork• Fewer terms to negotiate• Faster

You need to realize...• Investors want a lower price• Creates overhang on next financing round

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THE COST OF CONVERTIBLE DEBT

• $1M Series A

• Pre-money valuation of $4M

• 20% option Pool

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After 6 months:

Series A $1MPre-Money $4M

+Post-Money Value

Notes $500KWarrants $300K

$5.8M

THE COST OF CONVERTIBLE DEBT

• The note cost 13.8% of the company

• This is an addition 11% vs the original series A termsheet

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After 6 months:

Brian24.5%

Robert24.5%

Series A 17.2%

Warrants5.2%

Note 8.6%

Option Pool 20%

EQUITY MEANS EVERYONE IS ON THE SAME TEAM

• Investors and founders want to maximize the value of the company

Be careful of...• Dilution• Have to negotiate a lot of important terms

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TERMSHEET: OPTION 13x liquidation preference• $1M Series A Financing


• 20% option pool

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How it works:

First $3M goes to investors

LIQUIDATION PREFERENCE EVENTUALLY GOES AWAY$1M Series A at $4M Pre with 3X liquidation pref

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Acquisition Price

Founders and Employees get:

@ $3M $0

@ $5M $2M (40%, not 80%)

@ $15M $12M (80% - inflection pt)

TERMSHEET: OPTION 2Fully participating preferred• $1M Series A Financing


• 20% option pool

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How it works:

Take $1M off the top then take 20% of what’s left

Acquisition Price


@ $3M $1.6M (53%)

PARTICIPATION IS NOT AN ISSUE AT LARGE EXITS$1M Series A at $4M Pre with participating preferred

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@ $5M $3.2M (64%)

@ $15M $11.2M (75%)

THIS IS WHAT YOU WANT1x liquidation preference• $1M Series A Financing• $4M Pre-money valuation• 20% option pool

Align Incentives • The investor interests are

very similar to yours

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Common Investor

Interests

Acquisition Price


@ $3M $2M (66%)

@ $5M $4M (80%)

@ $15M $12M (80%)

SINGLE LIQUIDATION PREFERENCE$1M Series A at $4M Pre with 1X liquidation pref

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YOUR COMPANY$1 M$5 M

$20 M

$100 M

DON’T OVER-OPTIMIZE

• Lower the valuation

• Last money in is the first money out

• Terms only get worse over time

RAISE ENOUGH MONEY TO REACH YOUR MILESTONESFlat rounds & down rounds are now common

• Understand the effects of anti-dilution

0%

18%

35%

53%

70%

Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009

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CONTROL YOUR OWN DESTINY

• Board composition

• Voting rights/thresholds

Visualization: Board room table – removing founders, removing board members

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Would need to purchase.

FoundersInvestors

01 Do the math01

KNOW WHAT YOU ARE AGREEING TO

Think about incentives at various outcomes02

Know who has control in important situations03

02

03

GET GOOD COUNSELPAY SOMEONE TO WATCH YOUR BACK

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