VENTURE CAPITAL BOOT CAMP June 3, 2009 Internet Week New York

Thank You!

Who is DFJ Gotham Ventures? Founding Date Est. 1999 Focus Sectors Digital Media Financial Technologies E-Commerce Mobile Technologies Network Infrastructure Early Stage First institutional round Nominal or no revenue Demonstrable technology Global Presence Leverage DFJ Network Danny Schultz Mark Davis Ross Goldstein Thatcher Bell

Est. 1999

Digital Media

Financial Technologies

E-Commerce

Mobile Technologies

Network Infrastructure

First institutional round

Nominal or no revenue

Demonstrable technology

Leverage DFJ Network

Powerful and Growing DFJ Network 23 funds, >$6 billion in capital 150 professionals, 600 portfolio companies Unique access, insight and deal flow

MarkPeterDavis.com VC Overview Developing A Fundraising Strategy Picking The VCs Preparing Your Materials The Pre-Fundraising Process Getting The Meeting The First Meeting After The First Meeting The Due Diligence Phase Doing The Deal CHAPTERS

VC Overview

Developing A Fundraising Strategy

Picking The VCs

Preparing Your Materials

The Pre-Fundraising Process

Getting The Meeting

The First Meeting

After The First Meeting

The Due Diligence Phase

Doing The Deal

Who is Wilson Sonsini Goodrich & Rosati? Premier provider of value-added legal services to growth business enterprises worldwide, as well as the public and private capital markets that finance them Represent multi-billion dollar global enterprises as well as venture-backed start-up companies Our track record: Represent more companies that receive venture financing than any other law firm Advise more U.S. companies on their initial public offerings than any other law firm Represent more technology companies in mergers and acquisitions than any other U.S. law firm Advise more than 300 public and 3,000 private enterprises on issues of corporate law, securities, and corporate governance Most frequently hired securities litigation firm in the country* Over 100 patent infringement lawsuits successfully litigated throughout the U.S. over the last five years

Premier provider of value-added legal services to growth business enterprises worldwide, as well as the public and private capital markets that finance them

Represent multi-billion dollar global enterprises as well as venture-backed start-up companies

Our track record:

Represent more companies that receive venture financing than any other law firm

Advise more U.S. companies on their initial public offerings than any other law firm

Represent more technology companies in mergers and acquisitions than any other U.S. law firm

Advise more than 300 public and 3,000 private enterprises on issues of corporate law, securities, and corporate governance

Most frequently hired securities litigation firm in the country*

Over 100 patent infringement lawsuits successfully litigated throughout the U.S. over the last five years

WSGR Business Model

Founded in 1961 Approximately 650 attorneys San Francisco Palo Alto San Diego Seattle Austin New York D.C. Shanghai WSGR Footprint = Wilson Sonsini Goodrich & Rosati offices

Founded in 1961

Approximately 650 attorneys

Select WSGR Clients

Agenda What is VC? Is VC Right for You? Forming the VC Backed Company Engaging with the VC The Term Sheet More Q&A

What is VC?

Is VC Right for You?

Forming the VC Backed Company

Engaging with the VC

The Term Sheet

More Q&A

What is VC?

What is VC?

VCs Make Investments in Startups

VCs Backed by Institutional Limited Partners Endowments Insurance companies Pension funds Banks Fund of funds Family offices High net worth

Endowments

Insurance companies

Pension funds

Banks

Fund of funds

Family offices

High net worth

Limited Partners Require Risk-Adjusted Returns

Returns are Generated Through Exits: M&A or IPO

Is VC Right for You?

Is VC Right for You?

Is Your Company “Fundable” by a VC? Strong management team Large and growing market Viable model Competitive advantage/ barriers Realistic exit opportunities

Strong management team

Large and growing market

Viable model

Competitive advantage/ barriers

Realistic exit opportunities

“ Great for entrepreneurs to own 80%, not great for investors to own 20%”

Build standalone companies, exit along the way

Other Sources of Risk Capital

Why is VC helpful?

Capital

Action Plan & Attack

Connections

Credibility

Governance

It’s a Marriage…

Reach for the Big Win

Shared Control – Shared Destiny

Fit

1%

Forming the VC Backed Company

Forming the VC Backed Company

Form of Legal Entity Sole proprietorship Partnership Limited partnership Limited liability company Corporation

Sole proprietorship

Partnership

Limited partnership

Limited liability company

Corporation

The Corporation: Advantages “ Separate legal entity” Perpetual life Separation of ownership from management Fringe benefits (incentive stock options) Familiarity Limited liability Limited liability can be lost (“piercing the corporate veil”) Failure to observe corporate formalities Commingling of assets and affairs Undercapitalization Deception Personal guarantees

“ Separate legal entity”

Perpetual life

Separation of ownership from management

Fringe benefits (incentive stock options)

Familiarity

Limited liability

Limited liability can be lost (“piercing the corporate veil”)

Failure to observe corporate formalities

Commingling of assets and affairs

Undercapitalization

Deception

Personal guarantees

The Corporation: Disadvantages Separate tax payer – the “double tax” LLCs, S-corps and partnerships avoid the double tax, but have other limitations No stock options Limits type/number of stockholders Legal complexities; higher legal costs No IPOs

Separate tax payer – the “double tax”

LLCs, S-corps and partnerships avoid the double tax, but have other limitations

No stock options

Limits type/number of stockholders

Legal complexities; higher legal costs

No IPOs

Things to Consider When Incorporating Timing Jurisdiction of incorporation Board of Directors and Board of Advisors Stock issuance to founders Vesting; acceleration Rights of first refusal/co-sale Consideration to be paid/tax implications Assignment of IP Nominal cash payment

Timing

Jurisdiction of incorporation

Board of Directors and Board of Advisors

Stock issuance to founders

Vesting; acceleration

Rights of first refusal/co-sale

Consideration to be paid/tax implications

Assignment of IP

Nominal cash payment

Engaging the VC

Engaging the VC

Getting the Meeting Mutual Contact LinkedIn Cold Email Spam Most Effective Least Effective Direct Introduction

What is the objective of the first meeting?

Cross Chasm from Pitch to Conversation

What’s After the First Meeting? The Due Diligence Phase Meet The Team Company Materials Experts References Facilitate proactively!

Presentation Materials Executive Summary PowerPoint presentation Financial projections Get the meeting Create interest Explain how

Executive Summary

PowerPoint presentation

Financial projections

What Should be Included in an Executive Summary? Geographic location Mission statement Product overview & pain point Addressable market Competitive landscape Barriers to entry Achievements to date Projections Capital needs & use of capital Team bios 1-2 Page Executive Summary

Geographic location

Mission statement

Product overview & pain point

Addressable market

Competitive landscape

Barriers to entry

Achievements to date

Projections

Capital needs & use of capital

Team bios

Explain what your company does (in plain English)

Why is this needed? Why now?

Market Size Addressable Market

Why are you better than your competition?

Be thoughtful about barriers

Being the first mover is not a barrier, it’s an opportunity to create barriers

Common Barriers Scale Customer Captivity Information Technology IT Barriers

Don’t forget the jockey

What Should be Included in a Presentation? Geographic location Mission statement Product overview & pain point Addressable market Competitive landscape Barriers to entry Achievements to date Projections Capital needs & use of capital Team bios 15-20 Slide Presentation How

Geographic location

Mission statement

Product overview & pain point

Addressable market

Competitive landscape

Barriers to entry

Achievements to date

Projections

Capital needs & use of capital

Team bios

Answer First: Start with an Investment Overview Slide Geographic location Mission statement Product overview & pain point Addressable market Competitive landscape Barriers to entry Achievements to date Projections Capital needs & use of capital Team bios How Based in New York Seeking to revolutionize… Customers lose $X per year $X billion addressable market Unique tech = better service Strong network effect barrier Live & generating revenue Projections: $XXXM in X years Seek: $X-XM for new market Thought leaders, 3 rd startup Detailed strategy

Geographic location

Mission statement

Product overview & pain point

Addressable market

Competitive landscape

Barriers to entry

Achievements to date

Projections

Capital needs & use of capital

Team bios

How

Describe your place in the ecosystem

Describe the path to success

Don’t forget the jockey

Be Ready with Back-Up Materials Market background Technology background Risk assessment Competitive landscape References Potential industry/other experts Other diligence materials

Market background

Technology background

Risk assessment

Competitive landscape

References

Potential industry/other experts

Other diligence materials

Identify the Right VC

Embrace Pinball Effect

Summary Get in the door Have a clear, simple pitch Back it up with detailed strategy and tactics Describe the path to success Convince us that you are the one

Get in the door

Have a clear, simple pitch

Back it up with detailed strategy and tactics

Describe the path to success

Convince us that you are the one

The Term Sheet

The Term Sheet

Principles of Valuation Valuation: how much the company is “worth” Pre-money valuation Post-money valuation Valuation is the #1 issue in the negotiation between the founder and the investor Valuation influenced by market conditions and competition for the deal, amongst other factors

Valuation: how much the company is “worth”

Pre-money valuation

Post-money valuation

Valuation is the #1 issue in the negotiation between the founder and the investor

Valuation influenced by market conditions and competition for the deal, amongst other factors

The Employee Option Pool What is an option and an option pool? The reserve amount is typically based on anticipated headcount growth This time horizon is usually about as far as the CEO and the investors can reasonably foresee the future The reserve amount is usually assessed and replenished with each financing

What is an option and an option pool?

The reserve amount is typically based on anticipated headcount growth

This time horizon is usually about as far as the CEO and the investors can reasonably foresee the future

The reserve amount is usually assessed and replenished with each financing

Typical Option Grants A very general rule of thumb for a “mid-stage” technology start-up (i.e., post-Series A) The median range for option pools is around 15-25% for early stage companies, depending on their headcount requirements. Position No. of Ees % of Capital Aggregate Equity CEO (1): 5 - 10% 7% CFO (1): 1 - 2% 1% VPs (2): 1 - 3% 8% Dir - level (6): < 1/2% 3% Others (?): < 1/4% 6% Total 25%

A very general rule of thumb for a “mid-stage” technology start-up (i.e., post-Series A)

The median range for option pools is around 15-25% for early stage companies, depending on their headcount requirements.

Startup Company Valuation Model Example – Incorporation Founders A and B each purchase 2,000,000 shares of common stock at a purchase price of $0.001 per share Person # Shares % of Shares Value A 2,000,000 50% $2,000 B 2,000,000 50% $2,000 Total 4,000,000 100% $4,000

Founders A and B each purchase 2,000,000 shares of common stock at a purchase price of $0.001 per share

Startup Company Valuation Model Example – Establishment of Option Plan In order to attract employees, the company establishes an option plan and reserves 1,000,000 shares for issuance under the plan Person # Shares % of Shares Value A 2,000,000 40% $2,000 B 2,000,000 40% $2,000 Option plan 1,000,000 20% $1,000 Total 5,000,000 100% $5,000

In order to attract employees, the company establishes an option plan and reserves 1,000,000 shares for issuance under the plan

Startup Company Valuation Model Example – Initial Financing Round The company completes a $4,000,000 venture capital financing round of Series A Preferred Stock at a purchase price of $1.00 per share, representing a $6,000,000 pre-money valuation. Option pool is increased to reflect 20% of the fully diluted capitalization. Person # Shares % of Shares Value A 2,000,000 20% $2,000,000 B 2,000,000 20% $2,000,000 Option plan 2,000,000 20% $2,000,000 Series A 4,000,000 40% $4,000,000 Total 10,000,000 100% $10,000,000

The company completes a $4,000,000 venture capital financing round of Series A Preferred Stock at a purchase price of $1.00 per share, representing a $6,000,000 pre-money valuation. Option pool is increased to reflect 20% of the fully diluted capitalization.

Startup Company Valuation Model Example – Series B Financing Round The company completes a $10,000,000 Series B financing at a $30,000,000 pre-money valuation, at a purchase price of $2.75 per share. The option pool is set at 20% post financing. Person # Shares % of Shares Value A 2,000,000 13.75% $5,500,000 B 2,000,000 13.75% $5,500,000 Option plan 2,909,090 20% $8,000,000 Series A 4,000,000 27.5% $11,000,000 Series B 3,636,363 25% $10,000,000 Total 14,545,454 100% $40,000,000

The company completes a $10,000,000 Series B financing at a $30,000,000 pre-money valuation, at a purchase price of $2.75 per share. The option pool is set at 20% post financing.

Typical Dilution Metrics Financing stage Amount Raised Dilution Seed – develop beta product, develop plan $50k - $1m 15-30% A – complete initial product, build initial team $1m-$5m 40-60% B – bring product to market, complete team $5m-$15m 25-35% C – expand sales and marketing, working capital for liquidity event $10m-$25m <20%

Seed Financing Through Bridge Notes In seed round financings, the first investment is frequently done as a convertible bridge loan WSGR Entrepreneurs Report : 41% of seed financings were completed through the issuance of convertible bridge notes One clear advantage of bridge note financing: no need to set valuation for the company Bridge loan terms Principal and interest automatically convert into the Series A Preferred Will typically include warrant coverage in 10-30% range -or- a discount to the Series A Preferred price on conversion in the same range Frequently provide for a cap or floor on conversion price

In seed round financings, the first investment is frequently done as a convertible bridge loan

WSGR Entrepreneurs Report : 41% of seed financings were completed through the issuance of convertible bridge notes

One clear advantage of bridge note financing: no need to set valuation for the company

Bridge loan terms

Principal and interest automatically convert into the Series A Preferred

Will typically include warrant coverage in 10-30% range -or- a discount to the Series A Preferred price on conversion in the same range

Frequently provide for a cap or floor on conversion price

Preferred Stock Term Sheet Preferred stock Valuation/option pool Liquidation preference Dividends Conversion features Antidilution protection (stock splits, price-based) Voting rights Board composition Redemption Registration rights ROFR/Co-sale Preemptive rights Pay to play Founder/employee vesting Non-competes Exclusivity Expenses Confidentiality

Preferred stock

Valuation/option pool

Liquidation preference

Dividends

Conversion features

Antidilution protection (stock splits, price-based)

Voting rights

Board composition

Redemption

Registration rights

ROFR/Co-sale

Preemptive rights

Pay to play

Founder/employee vesting

Non-competes

Exclusivity

Expenses

Confidentiality

Two class stock structure Preferred and common stock Common stock is generally used for compensatory purposes (i.e., as a form of payment to employees, board members, consultants, advisors and other service providers) and issued to founders at incorporation Preferred stock is generally used for investment purposes and has many more rights, preferences and privileges than common stock Common stock is typically “priced” at a lower price than preferred stock (i.e., for option granting purposes)

Preferred and common stock

Common stock is generally used for compensatory purposes (i.e., as a form of payment to employees, board members, consultants, advisors and other service providers) and issued to founders at incorporation

Preferred stock is generally used for investment purposes and has many more rights, preferences and privileges than common stock

Common stock is typically “priced” at a lower price than preferred stock (i.e., for option granting purposes)

Liquidation Preference Investors get a “Liquidation Preference” in the event of a liquidity event of the company “ Liquidity events” include M&A transactions A typical liquidation preference would provide the investors their money back before any other stockholders receive any proceeds A “participating” liquidation preference entitles investors to their money back, plus the right to participate in the remaining amounts Caps are often negotiated

Investors get a “Liquidation Preference” in the event of a liquidity event of the company

“ Liquidity events” include M&A transactions

A typical liquidation preference would provide the investors their money back before any other stockholders receive any proceeds

A “participating” liquidation preference entitles investors to their money back, plus the right to participate in the remaining amounts

Caps are often negotiated

Liquidation Preference Example of Fully Participating Preferred (assumes $100m sale price and $25m invested) Shares % o/s Liquidation preference Payment of remainder Total proceeds A 3,500,000 23.33% $3,000,000 $17,500,000 $20,500,000 B 4,000,000 26.66% $7,000,000 $20,000,000 $27,000,000 C 3,000,000 20.00% $15,000,000 $15,000,000 $30,000,000 Common (founders) 2,500,000 16.66% N/A $12,500,000 $12,500,000 Option pool 2,000,000 13.33% N/A $10,000,000 $10,000,000 Total 15,000,000 100.00% $25,000,000 $75,000,000 $100,000,000

Dividends Accruing/non-accruing Compounding/non-compounding Payable on specified dates/payable “if, as and when” declared Participating/non-participating

Accruing/non-accruing

Compounding/non-compounding

Payable on specified dates/payable “if, as and when” declared

Participating/non-participating

Conversion Preferred stock convertible into common stock at option of holder, initially on one for one basis Automatically convert upon an IPO Typically size of deal and share price must exceed certain levels Automatically convert upon the vote of the particular series

Preferred stock convertible into common stock at option of holder, initially on one for one basis

Automatically convert upon an IPO

Typically size of deal and share price must exceed certain levels

Automatically convert upon the vote of the particular series

Antidilution protection Conversion rate adjusts on certain events Proportionate in the event of stock splits Price based antidilution upon a “down round” financing Weighted average protection: Conversion price is adjusted based on a formula that considers the number of new shares being issued compared to the shares outstanding and the price at which the new shares are issued Full ratchet protection: Conversion price is adjusted so that the price per share is reset to the price per share in the new financing, regardless of the number of shares issued and the price at which they are issued. Provide for appropriate carveouts to antidilution protection (i.e., for option issuances, strategic warrants, etc.)

Conversion rate adjusts on certain events

Proportionate in the event of stock splits

Price based antidilution upon a “down round” financing

Weighted average protection: Conversion price is adjusted based on a formula that considers the number of new shares being issued compared to the shares outstanding and the price at which the new shares are issued

Full ratchet protection: Conversion price is adjusted so that the price per share is reset to the price per share in the new financing, regardless of the number of shares issued and the price at which they are issued.

Provide for appropriate carveouts to antidilution protection (i.e., for option issuances, strategic warrants, etc.)

Board composition/Voting rights Companies are controlled by the board of directors Control over the board means control over the company Typical board composition post Series A investment is two founders, two Series A investor representatives and one industry expert/independent Even if board approves, “protective provisions” require preferred holders to approve certain events, including: Change of control transactions Amendments to charter/bylaws Hiring/firing senior management Issuing senior securities Increasing size of the option pool Incurring debt

Companies are controlled by the board of directors

Control over the board means control over the company

Typical board composition post Series A investment is two founders, two Series A investor representatives and one industry expert/independent

Even if board approves, “protective provisions” require preferred holders to approve certain events, including:

Change of control transactions

Amendments to charter/bylaws

Hiring/firing senior management

Issuing senior securities

Increasing size of the option pool

Incurring debt

Other terms Redemption Registration rights ROFR/Co-Sale Preemptive rights Last but not least, legal expenses!

Redemption

Registration rights

ROFR/Co-Sale

Preemptive rights

Last but not least, legal expenses!

Q&A