Private company marketplaces

Private Company Marketplaces Facebook and Twitter are just the beginning @cardinalrose

Table of Contents Market Overview Deal Mechanics Completing a Transaction Appendix 2

Private Company Marketplaces Private company marketplaces will solvethe liquidity problems for employees andboard members while also providinginexpensive access to growth capital 3

Private Company Secondary Markets “Late stage venture funds are like thesmall cap funds of the „90s and the early2000s.” Lawrence Lenihan, Jr, FirstMark Capital, April 2011 4

My Prediction Private company marketplaces institutionalize changing the industry: • Many companies institute alternative liquidity programs • The majority of these programs are on listed private marketplaces • SEC introduces regulation that strengthens the market • IPOs get pushed out further expanding the late stage market • Stronger companies emerge as a result of longer gestation period • Marketplaces experience rapid growth replacing antiquated private placements The lines blur between late stage venture funds and hedge funds • Late stage funds reduce lockups from 10 years to 5 years to adjust for liquidity • Hedge funds allocate 10-30% to less liquid secondary markets •Balanced with market neutral public markets • Massive amounts of capital flow into this new asset class 5

The IPO – Pros & Cons Pros: • Gain liquidity for shareholders • Gain access to growth capital Cons: • Sarbanes Oxley • Headaches, regulation & compliance • Exposure to class action legal risks • Wall Street disconnect • Short term trader mentality • Algorithmic trading disconnected from fundamentals • Loss of cache 6

The Public Markets – Drivers of Change: • Sarbanes Oxley • Trading decimalization • Separation of investment banking and research • Consolidation of boutique banks • Longer pre-IPO gestation periods 7

Current Late Stage Market Overview:• There is ~$21b invested in late stage deals per year• Traditionally 30-50 funds participate in this market• Private marketplaces completed $500m in 2010• The private marketplace industry will grow to $10bwithin 10 years, possibly sooner 8

Ideal Private Secondary Market Company:• $100-$500m in market cap • Too small to go public• $20m in revenues • Tech and Clean Tech sectors • Could expand to private equity• Approximately 5 years old deals• Don’t have to be profitable• Venture backed• Over 100 shareholders 9

Testimonials: “These companies I‟m buying on the private market are at the same stage as when I used to buy them when they went public. So why not buy them?” Business Insider, January 2011 “We now believe Facebook could be worth more than $200b in 2015” Wedbush, March 2011 10

The 4 Horsemen:Company Date Funding Last Round Val Recent Rumored Val Revs 2011E P/SFacebook Jan-11 $1.5b $50b $75b $4b 19xGroupon Jan-11 $950m $4.8b $15b $2b 8x Zynga Jun-10 $300m $4.5b $10b $2b 5x Twitter Dec-10 $200m $3.7b $7b $140m 50xSource: Company reports and Business Insider 11

Is There A Tech Bubble? Large Cap Blue chip techs are cheap Mid Cap Expansion stage growth, similar to late stage Small Cap Completely ignored, no liquidity, getting worse Late Stage A handful are valuations are extreme, similar to mid caps Mid Stage Total VC AUM shrinkage decreases demand Early Stage Companies seeking $3m+ getting decent valuation Seed Stage Valuations have crept up from $2-3m to $3-4m pre 12

Changing VC Perceptions Old: • No one exits before we exit • A future exit keeps the employees motivated New: • Employee liquidity helps retention & recruitment • Secondary sales are a 3rd exit avenue after IPOs & M&A • Can manage portfolio more efficiently • Alternative liquidity programs must be established 13

Private Markets are Institutionalizing: 2010: 90% of transactions were over-the-counter 2011: ~80% will be listed market transactions • SecondMarket & Xpert Financial will be 100% listed • SharesPost is registering as a broker-dealer • Primary markets will be established 14

What is a “Listed” Private Market? • Company and board approved • Controlled sales • Limited Selling Windows • Market Creation • Right of First Refusal 15

Comparison:SecondMarket SharesPost Xpert Financial• Launched April 2009 • Online Bulletin Board • 2 Years Old• Broker-Dealer • 3rd Party Research • Broker-Dealer & SEC Reg ATS• Over $500m transacted • Registered Specialists • Tim Draper- Chairman• Diverse Alt Assets • 60,000 Members • Licensed Nov 2010• 28 Reported Companies • 16,000 Accredited • Electronic Platforms• 2010: OTC • Min Transaction: $25k • Full Level II Quotes• 2011: Listed • Standardized Contracts • 8-9 Cos in Pipeline• VC: FirstMark • Heavy Technology • RegD Rule 506 –Primary Share • Pursuing BD License Sale License • 2-5% fee both sides • Rule 144A – Qualified Institutional Buyers • Rule 144 – Accredited investors - non-Affiliated sellers - pending • Reverse Inquiry Basis • Company approval 16

Notable Secondary Transactions: Kleiner Perkins $38m in Facebook at $52b, Feb 2011 Andreesen Horowitz $80m in Twitter, Feb 2011 DST indirect secondary participant: Facebook, Zynga, Groupon Accel sold $516m Facebook to TCV (~$200m), Andreesen Horowitz (~$80) and others at $35b, Nov 2010 Chris Sacca $400m in Twitter at $4.5b from Spark, Union Square, and Ev Williams, Feb 2011 17

Deal Mechanics 18

3 Parties in a Secondary Transaction: • Buyer • Seller • Company - Right of First Refusal - Co-Sale Rights 19

Types of Buyers: • Existing VC Investors • VC Funds that lost primary round • Fund-less Sponsors/Special Purpose Vehicles • Participants in Secondary Markets • Endowments, Pension Funds, HNW, Sovereign Wealth, Insurance, Private Equity • Direct Secondary Funds • Late Stage Venture Funds • Mutual Funds & Hedge Funds - Public Market Investors 20

Types of Sellers: 100% 90% 80% 70% 60% 1Q10 50% 2Q10 40% 3Q10 30% 4Q10 20% 10% 0% Ex-Employees Employees Investors/Other Source: SecondMarket 21

Types of Secondary Sales: • Sr. Preferred – indirect for Common Shares • Jr. Preferred – indirect for Common Shares • Outright purchase of Common or Preferred • Upside Sharing – buyer splits proceeds of future sale • Escrowed Shares – earn-out incentive • Loan for Shares – avoids ROFR, Co-Sale & Taxes • Loan to Exercise Options 22

Types of Transactions: • Modified Dutch Auction •Minimum bid, clearing price => lowest bid that clears • Fixed Price Auction •Set price, all bids above minimum • Bulletin Board •Bidders are matched to sellers online 23

Considerations: Transfer Restrictions • Right of First Refusal (ROFR) • Co-Sale • Upfront waiver rights can be granted Workarounds • Loan for Shares avoids ROFR and Co-Sale • Earn-outs deter Co-Sales Contractual Rights • Registration rights and preemptive rights are transferrable • Require separate transfer agreement with the company 24

Risks: 25

Two Primary SEC Regulatory Risks: Special Purpose Vehicles designed to bypass the 500 investor rule • Goldman Sachs’ US Facebook SPV was canceled • Could give rise to parallel market of SPV • Small SPVs charging 8% fees & 20% carried interest •Shares post has completed 5 SPV auctions •3% commission, 5% management fee, 3% distribution fee •Cannot exit until IPO when Units convert to FB shares Lack of Share Count, Cap Table, and Company Financials • Even “sophisticated” investors need financials • Significant amount of 3rd party data but little company data • Listed markets resolve this issue 26

Additional Risks: • Illiquidity • Opacity • Information Asymmetry • Valuation • Behavior of secondary investors • Shift from options to RSUs 27

Future Listed Markets: Companies will waive ROFR in exchange for: • Employees sell no more than 10-15% of vested/owned positions • Only employees with 4+ years can participate Board approved potential investor list • Investors adhere to the board’s guidelines • Investor group receives audited financials • Company has recourse if guidelines are violated 28

Completing the Transaction 29

Private Company Secondary Markets: 30

SharesPost example: 31

Current Active Trades on SharesPost: 32

SharesPost Order Entry: 33

SharesPost Order Confirmation: 34

SharesPost Bid/Ask Page: 35

Yelp! Company Registration: 36

NeXt Up Research: Yelp! Key Metrics: 37

NeXt Up Research: Yelp! Valuation: 38

NeXt Up Research: Yelp! Lead Investors: 39

Appendix 40

Companies Traded on SecondMarket: 41

Facebook Price Chart:$50.00 1/13/2011 $33.00 4/1/2011 $70.00$46.00 1/12/2011 $33.00 4/1/2011$45.00 1/12/2011 $35.00 3/29/2011$50.00 1/11/2011 $35.00 3/17/2011 $60.00$55.00 1/11/2011 $33.00 3/11/2011$50.00 1/11/2011 $33.00 3/11/2011$55.00 1/11/2011 $37.00 2/18/2011$35.00 1/10/2011 $50.00 $30.00 2/14/2011$40.00 1/7/2011 $31.00 2/11/2011$55.00 1/6/2011 $31.00 2/7/2011$25.00 11/30/2010 $40.00 $32.50 2/3/2011$25.00 11/24/2010 $35.00 2/2/2011$20.00 11/22/2010 $35.00 2/2/2011$15.20 11/9/2010 $35.00 1/26/2011 $30.00$20.00 11/4/2010 $35.00 1/19/2011$15.20 11/2/2010 $60.00 1/19/2011$25.00 10/19/2010 $51.00 1/19/2011$14.40 8/31/2010 $20.00$15.00 8/31/2010 $40.00 1/19/2011$15.00 8/30/2010 $27.60 1/19/2011$15.00 8/10/2010 $60.00 1/18/2011 $10.00$15.20 8/5/2010 $40.00 1/18/2011$12.00 7/27/2010 $45.00 1/18/2011$14.00 6/25/2010 $50.00 1/17/2011 $45.00 1/16/2011 $0.00$13.50 6/24/2010$12.60 6/21/2010 $50.00 1/15/2011$10.00 4/26/2010 $45.00 1/14/2011 $5.40 12/4/2009 $48.00 1/14/2011 $2.40 $66.00 1/13/2011 SharesPost 42

3rd Party Research: • Wedbush Securities • NextUp Research • Liquid Scenarios • Arcstone Partners • VC Experts • CB Insights • Research 2.0 • Greencrest Capital • Blueshift Research • PrivCo • GigaOm • Majestic/ITG • Crystal Research Associates 43

Largest VC Backed Deals in 2010: 1 Better Place Clean Tech Expansion $350,000,300 2 Twitter Internet Expansion $200,000,000 3 BrightSource Energy Clean Tech Later Stage $150,000,000 4 Abound Solar Clean Tech Expansion $111,000,000 5 Trilliant Telecommunications Later Stage $105,999,800 6 Elevance Renewable Sciences Clean Tech Expansion $100,000,000 7 HighTower Holdings Financial Services Expansion $99,999,900 8 Casa Systems Internet Infrastructure Later Stage $96,460,000 9 Pierpont Securities Financial Services Expansion $84,999,900 10 Fisker Automotive Clean Tech Later Stage $78,078,900 44

IPO Pipeline: Date Name Ticker Description IPO size 2010 Revs 7/14/2010 AMC Entertainment AMC Movie Theaters $450m $2417m 3/11/2011 HomeAway AWAY Online Real Estate Rentals $230m $168m 3/15/2011 Qihoo 360 QIHO Chinese Online Security $200m $58m 2/27/2011 LinkedIn Business Social Network $175m $161m 9 months 9/29/2009 NewEgg.com EGGZ Electronic Ecommerce $175m $2100m 2008 2/28/2011 Skullcandy SKUL Electronic Accessories $125m $140m estimated 11/9/2010 Tudou TUDO Chinese Online Video $120m $34m 9 months 2/11/2011 Pandora Online Music $100m $55m FYJan11 8/9/2010 Skype Online Telephony $100m $406m 6 months12/23/2010 Responsys MKTG Email Marketing $60m $85m11/17/2010 Kayak KYAK Online Travel $50m $128m 9 months 2/10/2010 Gamefly GFLY Online Video Game Rentals $50m $98m FYMar10 45

Relevant 2010 IPOs: Name Ticker Performance Epocrates EPOC 44% Demand Media DMD 24% Neilson Holdings NLSN 17% Sky-Mobi YSM -33% Dangdang DANG 69% Youku.com YOKU 174% Bitauto BITA -26% Mecox Lane MCOX -33% MakeMyTrip MMYT 86% GreenDot GDOT 20% RealID RLD 49% Tesla TSLA 31% Vringo VRNG -41% Motricity MOTR 55% ReachLocal RLOC 59% TeleNav TNAV 39% Convio CNVO 32% Quinstreet QNST 51% Average 34% 46

VC Market in Graphs 47

The VC industry has lagged the major benchmarks over the past 10 years: 10 years Dow Jones 2.50% S&P 500 -0.40% Nasdaq -4.30% US Venture Capital Index -4.60% Cambridge Associates, Sept 2010 48

Due to “J-Curve” older funds should have higher TVPI but they don’t: Total Value to Paid in Capital (TVPI) 1.4 1.2 1 0.8 0.6 0.4 0.2 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cambridge Associates, Sept 2010 49

As a result VC assets under management are falling: Assets Under Management $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NVCA, Jan 2011 50

And the total # of VC funds are falling: Total # of VC Funds 2000 1800 1600 1400 1200 1000 800 600 400 200 0 NVCA, Jan 2011 51

But the total # of investments is steady: Number of venture investments 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NVCA, Jan 2011 52

And the total amount invested is steady: Total Amount Invested $120.00 $100.00 $80.00 $60.00 $40.00 $20.00 $0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NVCA, Jan 2011 53

There have been so many deals but so few exits: Exits as a % of Total Deals 16% 14% 12% 10% 8% 6% 4% 2% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NVCA, Jan 2011 54

IPOs have dried up: IPO exits 300 250 200 150 100 50 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 NVCA, Jan 2011 55

The median age at IPO has risen from 6 to 10 years: Median Age at IPO 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 NVCA, Jan 2011 56

Private Secondary Markets are a new exit option: Transaction $ Amount $180,000,000 $160,000,000 $140,000,000 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $0 1Q10 2Q10 3Q10 4Q10 SecondMarket, Feb 2011 57

What happens next? Secondary markets institutionalize changing the industry: • Many more companies adopt policies and platforms • SEC introduces regulation that enhances the market • IPOs get pushed out further and bypassed entirely in some instance • Stronger companies emerge as a result of longer gestation period The lines blur between late stage venture funds and hedge funds • Late stage funds reduce lockups from 10 years to 2 years to adjust for liquidity • Hedge funds allocate 20%-40% to less liquid secondary markets •Balanced with market neutral public markets • Massive amounts of capital flow into this new asset class 58

Thank YouJason M. Jonesjjones@highstepcap.com914-315-9751Follow me on Twitter: @cardinalroseProfile on Google: /profiles.google.com/jjones1

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Private company marketplaces

by Jason Jones on Jun 01, 2011

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