The document provides information and advice about fundraising for startups. It discusses trends in funding amounts and valuations in 2008-2009. It also explains key terms related to equity financing like preferred stock, liquidation preferences, and dilution. The document advises founders to control their own destiny by negotiating board composition and voting rights. It emphasizes doing the math to understand dilution, incentives, and who has control in different situations. The overall message is to build a company for the long term by raising sustainable funding on terms that align incentives between founders and investors.

2. BUILD A COMPANY
FOR THE LONG TERM
CONTROL YOUR OWN DESTINY
JUSTIN FISHNER-WOLFSON

3. 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

4. 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

5. TYPES OF EQUITY
• Common
• Preferred
• Series FF
5

6. 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

7. UNDERSTAND THE TERMINOLOGY
• Options
• Warrants
• Fully Diluted
Ownership (FDO)
7

8. PROPOSED SERIES A FUNDING
• $1M Financing
• $4M Pre-money valuation
• 20% option pool
8

9. HOW TO CALCULATE DILUTION
Step 1:
Determine post
money valuation
9

10. HOW TO CALCULATE DILUTION
Step 1:
Determine post
money valuation
Money invested
+ Pre-Money
Post-Money Value
9

11. HOW TO CALCULATE DILUTION
Step 1: Step 2:
Determine post Determine investor
money valuation ownership
Money invested
+ Pre-Money
Post-Money Value
9

12. HOW TO CALCULATE DILUTION
Step 1: Step 2:
Determine post Determine investor
money valuation ownership
Money invested Money invested
+ Pre-Money
÷ Post-Money
Post-Money Value Investor Ownership
9

13. 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
9

14. 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

15. WHAT DO THE
FOUNDERS HAVE LEFT?
Brian Robert
• Before:
• 2 equal co-founders
• After:
• 30% for each co-founder
10

16. WHAT DO THE
FOUNDERS HAVE LEFT?
Brian Robert
Investment
• Before:
• 2 equal co-founders
• After:
• 30% for each co-founder
10

17. WHAT DO THE
FOUNDERS HAVE LEFT?
Brian Robert
Investment Option Pool
• Before:
• 2 equal co-founders
• After:
• 30% for each co-founder
10

18. AVOID DILUTION
Try a convertible note
• $500K note
Equity
• 10% warrant per month
Debt
11

19. AVOID DILUTION
Try a convertible note
• $500K note
Equity
• 10% warrant per month
• This converts at the
next financing round
Debt
11

20. 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

21. THE COST OF CONVERTIBLE DEBT
After 6 months:
• $1M Series A
• Pre-money valuation of $4M
• 20% option Pool
Post-Money Value
13

22. THE COST OF CONVERTIBLE DEBT
After 6 months:
• $1M Series A
Pre-Money $4M
• Pre-money valuation of $4M
• 20% option Pool
Post-Money Value
13

23. 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
+
Post-Money Value
13

24. 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
+
Post-Money Value
13

25. 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
13

26. 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

27. 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

28. 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

29. TERMSHEET: OPTION 1
3x liquidation preference
• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool
16

30. LIQUIDATION PREFERENCE
EVENTUALLY GOES AWAY
$1M Series A at $4M Pre with 3X liquidation pref
How it works:
First $3M goes to investors
17

31. 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
17

32. 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

33. 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

34. TERMSHEET: OPTION 2
Fully participating preferred
• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool
18

35. PARTICIPATION IS NOT
AN ISSUE AT LARGE EXITS
$1M Series A at $4M Pre with participating preferred
How it works:
Take $1M off the top then take 20% of what’s left
19

36. 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%)
19

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get
worse over time
YOUR COMPANY

44. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get
worse over time
$1 M
YOUR COMPANY

45. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get
worse over time
$5 M
$1 M
YOUR COMPANY

46. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get $20 M
worse over time
$5 M
$1 M
YOUR COMPANY

47. 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

48. DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first
money out
• Terms only get
worse over time
$100M
$20 M
YOUR COMPANY
$5 M
$1

49. 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

50. 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

51. KNOW WHAT YOU
ARE AGREEING TO
01
02
03

52. KNOW WHAT YOU
ARE AGREEING TO
01 Do the math
02
03

53. KNOW WHAT YOU
ARE AGREEING TO
01 Do the math
Think about incentives
02
at various outcomes
03

54. 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

55. GET GOOD COUNSEL
PAY SOMEONE TO
WATCH YOUR BACK

56. Q&A

57. © 2009 Founders Fund All right reserved