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BUILD A COMPANY
FOR THE LONG TERM
CONTROL YOUR OWN DESTINY

JUSTIN FISHNER-WOLFSON
COMPANIES ARE BEING FUNDED
Despite the tough environment


     $1,300M

        $975M

        $650M

        $325M

    ...
VALUATIONS ARE LOWER
Median Series A pre-money valuations

  $9M


  $7M


  $5M


  $2M


  $0M
                  Q1 2008...
TYPES OF EQUITY

• Common
• Preferred
• Series FF




                  5
LIQUIDATION PREFERENCES ARE
BECOMING MORE COMMON
            Percentage of Deals with Fully Participating Preferred
  70%
...
UNDERSTAND THE TERMINOLOGY
• Options
• Warrants
• Fully Diluted
  Ownership (FDO)




                             7
PROPOSED SERIES A FUNDING

• $1M Financing
• $4M Pre-money valuation
• 20% option pool




                            8
HOW TO CALCULATE DILUTION

Step 1:               Step 2:                Step 3:

Determine post        Determine investor ...
WHAT DO THE
FOUNDERS HAVE LEFT?
                              Brian        Robert
                              Investment...
AVOID DILUTION
Try a convertible note


• $500K note
                                 Equity
• 10% warrant per month
• Thi...
FIND A COMPROMISE ON PRICE
Convertible Debt

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


 ...
THE COST OF CONVERTIBLE DEBT
                               After 6 months:
• $1M Series A
                               ...
THE COST OF CONVERTIBLE DEBT
                                   After 6 months:
• The note cost 13.8%
  of the company    ...
EQUITY MEANS EVERYONE
IS ON THE SAME TEAM

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

 Be caref...
TERMSHEET: OPTION 1
3x liquidation preference
• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool




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

 Acquisition   Founders and
...
TERMSHEET: OPTION 2
Fully participating preferred
• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool



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

 Acquisition   Founders...
THIS IS WHAT YOU WANT
1x liquidation preference
• $1M Series A Financing
• $4M Pre-money valuation
                       ...
SINGLE LIQUIDATION PREFERENCE
$1M Series A at $4M Pre with 1X liquidation pref


 Acquisition   Founders and
 Price       ...
DON’T OVER-OPTIMIZE

• Lower the valuation
• Last money in is the first      $100 M
  money out
• Terms only get          ...
RAISE ENOUGH MONEY
TO REACH YOUR MILESTONES
Flat rounds & down rounds are now common
  70%

  53%

  35%

  18%

    0%
  ...
CONTROL YOUR OWN DESTINY

• Board composition
                             Investors              Founders
• Voting rights...
KNOW WHAT YOU
ARE AGREEING TO

 01 Do the math

     Think about incentives
02
     at various outcomes

03 Know who has c...
GET GOOD COUNSEL
PAY SOMEONE TO
WATCH YOUR BACK
Q&A
© 2009 Founders Fund All right reserved
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  1. 1. BUILD A COMPANY FOR THE LONG TERM CONTROL YOUR OWN DESTINY JUSTIN FISHNER-WOLFSON
  2. 2. COMPANIES ARE BEING FUNDED Despite the tough environment $1,300M $975M $650M $325M $0M 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 Source: Cooley Godward Kronish LLP 3
  3. 3. VALUATIONS ARE LOWER Median Series A pre-money valuations $9M $7M $5M $2M $0M Q1 2008 Q2 2008 Q3 2008 Q4 2008 2009 YTD Source: Cooley Godward Kronish LLP 4
  4. 4. TYPES OF EQUITY • Common • Preferred • Series FF 5
  5. 5. LIQUIDATION PREFERENCES ARE BECOMING MORE COMMON Percentage of Deals with Fully Participating Preferred 70% 60% 50% 40% 30% 20% 10% 0% Q1 2008 Q2 2008 Q3 2008 Q4 2008 2009 YTD Source: Cooley Godward Kronish LLP 6
  6. 6. UNDERSTAND THE TERMINOLOGY • Options • Warrants • Fully Diluted Ownership (FDO) 7
  7. 7. PROPOSED SERIES A FUNDING • $1M Financing • $4M Pre-money valuation • 20% option pool 8
  8. 8. HOW TO CALCULATE DILUTION Step 1: Step 2: Step 3: Determine post Determine investor negotiate money valuation ownership employee option pool Money invested Money invested + Pre-Money ÷ Post-Money Post-Money Value Investor Ownership Investor Ownership + Option Pool = Dilution 9
  9. 9. WHAT DO THE FOUNDERS HAVE LEFT? Brian Robert Investment Option Pool • Before: • 2 equal co-founders • After: • 30% for each co-founder 10
  10. 10. AVOID DILUTION Try a convertible note • $500K note Equity • 10% warrant per month • This converts at the next financing round Debt 11
  11. 11. FIND A COMPROMISE ON PRICE Convertible 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 12
  12. 12. THE COST OF CONVERTIBLE DEBT After 6 months: • $1M Series A Pre-Money $4M • Pre-money valuation of $4M Series A $1M • 20% option Pool Notes $500K + Warrants $300K Post-Money Value $5.8M 13
  13. 13. THE COST OF CONVERTIBLE DEBT After 6 months: • The note cost 13.8% of the company Option Pool 20% Robert • This is an addition 11% vs the Note 24.5% 8.6% original series A termsheet Warrants 5.2% Brian 24.5% Series A 17.2% 14
  14. 14. 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 15
  15. 15. TERMSHEET: OPTION 1 3x liquidation preference • $1M Series A Financing • $4M Pre-money valuation • 20% option pool 16
  16. 16. LIQUIDATION PREFERENCE EVENTUALLY GOES AWAY $1M Series A at $4M Pre with 3X liquidation pref Acquisition Founders and Price it works: How Employees get: @ $3M$3M First goes to investors $0 @ $5M $2M (40%, not 80%) @ $15M $12M (80% - inflection pt) 17
  17. 17. TERMSHEET: OPTION 2 Fully participating preferred • $1M Series A Financing • $4M Pre-money valuation • 20% option pool 18
  18. 18. PARTICIPATION IS NOT AN ISSUE AT LARGE EXITS $1M Series A at $4M Pre with participating preferred Acquisition Founders and Price it works: How Employees get: @ $3M$1M Take off $1.6Mtop then take 20% of what’s left the (53%) @ $5M $3.2M (64%) @ $15M $11.2M (75%) 19
  19. 19. THIS IS WHAT YOU WANT 1x liquidation preference • $1M Series A Financing • $4M Pre-money valuation Interests • 20% option pool Align Incentives • The investor interests are very similar to yours Common Investor 20
  20. 20. SINGLE LIQUIDATION PREFERENCE $1M Series A at $4M Pre with 1X liquidation pref Acquisition Founders and Price Employees get: @ $3M $2M (66%) @ $5M $4M (80%) @ $15M $12M (80%) 21
  21. 21. DON’T OVER-OPTIMIZE • Lower the valuation • Last money in is the first $100 M money out • Terms only get $20 M worse over time $5 M $1 M YOUR COMPANY
  22. 22. RAISE ENOUGH MONEY TO REACH YOUR MILESTONES Flat rounds & down rounds are now common 70% 53% 35% 18% 0% Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Source: Cooley Godward Kronish LLP • Understand the effects of anti-dilution 23
  23. 23. CONTROL YOUR OWN DESTINY • Board composition Investors Founders • Voting rights/thresholds Visualization: Board room table –Would need to purchase. removing founders, removing board members 24
  24. 24. KNOW WHAT YOU ARE AGREEING TO 01 Do the math Think about incentives 02 at various outcomes 03 Know who has control in important situations
  25. 25. GET GOOD COUNSEL PAY SOMEONE TO WATCH YOUR BACK
  26. 26. Q&A
  27. 27. © 2009 Founders Fund All right reserved
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