About UCI Applied Innovation: UCI Applied Innovation is a dynamic, innovative central platform for the UCI campus, entrepreneurs, inventors, the business community and investors to collaborate and move UCI research from lab to market. About the Cove @ UCI: To accelerate collaboration by better connecting innovation partners in Orange County, UCI Applied Innovation created the Cove, a physical, state-of-the-art hub for entrepreneurs to gather and navigate the resources available both on and off campus. The Cove is headquarters for UCI Applied Innovation, as well as houses several ecosystem partners including incubators, accelerators, angel investors, venture capitalists, mentors and legal experts. Follow us on social media: Facebook: @UCICove Twitter: @UCICove Instagram: @UCICove LinkedIn: @UCIAppliedInnovation For more information: cove@uci.edu http://innovation.uci.edu/

1. CONFIDENTIAL & PROPRIETARY
UNIVERSITY INNOVATION, REALIZED.
VENTURE CAPITAL AND
FOUNDERS’ EQUITY 101
JOHN LEE, PRINCIPAL
KIRSTEN LEUTE, SVP OF UNIVERSITY RELATIONS
OSAGE UNIVERSITY PARTNERS

2. Osage University Partners Proprietary Information 2
TODAY’S PRESENTER
John Lee, Principal, Osage
University Partners
Previously
•- Associate, Lux Capital
•- Manager, Mahindra & Mahindra
•- B.S. from Cornell University

3. Osage University Partners Proprietary Information 3
TODAY’S PRESENTER
Kirsten Leute
Senior Vice President of University
Relations, Osage University Partners
Previously
•- Associate Director, Office of Technology
Licensing at Stanford University
•- Board of Trustees, AUTM (2 terms)
•- Board Member, WiLBA
•- Santa Clara University, M.B.A.
•- Wellesley College, B.A.
•- Patent Agent

4. OUP OVERVIEW

5. Osage University Partners Proprietary Information 5
• Venture fund $315 AUM
• Invests exclusively in startups from 93 partner
institutions
• Institutions share in fund profit and enjoy network
benefits and programs
• Fund I -- $100 M, 39 investments
• Fund II -- $215 M, 47 investments to date, 90%
invested and reserved
• Fund III – targeting $250 M
OSAGE UNIVERSITY PARTNERS (OUP) OVERVIEW

6. Osage University Partners Proprietary Information 6
OUP I & II COMBINED PORTFOLIO
TECH ACTIVE PORTFOLIO
IT / SOFTWARE
LIFE SCIENCES ACTIVE PORTFOLIO
THERAPEUTICS
HARDWARE, MATERIALS, SEMI & ENERGY
EXITS
DEVICES & DIAGNOSTICS

7. Osage University Partners Proprietary Information 7
OUP INVESTS AT ALL STAGES
Exits
Seed 1st Round 2nd Round 3rd Round 4th Round +

8. Osage University Partners Proprietary Information 8
TOP TIER VCS AND CORPORATE CO-INVESTORS

9. Osage University Partners Proprietary Information 9
EUREKA! FINALLY! WE DID IT! YEA! WE’RE GONNA BE
FAMOUS AND RICH!

10. Osage University Partners Proprietary Information 10
GREAT, BUT…IT’S JUST THE BEGINNING…
Beware – it’s a long, long tough road with many unforeseen obstacles.
• Create a clear, concise, and compelling fund raising “pitch”
• Value company and raise money thoughtfully
• Use capital efficiently
• Focus on lead product

11. Osage University Partners Proprietary Information 11
UNIVERSITIES LAUNCH HIGH QUALITY STARTUPS
360
460 450
553 555
595 596
651
671
705
818
914
1012
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

12. VENTURE FIRM ECONOMICS

13. Osage University Partners Proprietary Information 13
VC FUND ORGANIZATION BASICS
GENERAL PARTNERS
Insurance
Company
Endowment
PensionFund
FamilyOffices
HighNet
WorthInd.
LIMITED PARTNERS
VENTURE
CAPITAL FUND
VENTUREFUNDSTRUCTURE
GENERAL PARTNERS (GPs)
• GPs = “Venture Capitalists”
• GPs raise and manage funds
• GPs are assisted by Principals, VCs, Associates,
and Analysts who do the ‘heavy lifting’
VENTURE CAPITAL FUND
• LPs invest based on GPs’ track record, investment
strategy, expertise and track record
LIMITED PARTNERS (LPs)
• Capital “called” as needed
• Typical LPs are insurance Companies,
Endowments, Pensions, and High Net Worth
Individuals
• 5-10% of LP portfolio assets to private equity

14. Osage University Partners Proprietary Information 14
VC COMPENSATION - ECONOMICS
VC
FUND
2 – 2.5%
per year
20/80
SPLIT
OF PROFITS
MANAGEMENT FEES
• GPs call 2-2.5% of fund amount annually
• MANAGEMENT FEES are used for fund administration
(salaries, operations, and everything else)
CARRIED INTEREST
• LPs receive all returns (profits from exits) until 100% of
committed capital, plus interest (often 6-8%), is earned
• Thereafter, 80/20% profit split
• GP’s 20% is called “Carried Interest” or “carry”

15. Osage University Partners Proprietary Information 15
FUND LIFE AND LIFE CYCLE
FUND LIFE
• 10 plus 2
• 4 year investment period
INVESTMENTS
• Reserve $2-3 for every $1 they invest for future rounds
SUBSEQUENT FUNDS
• New funds are launched once 80% of capital is committed and reserved
• Subsequent funds provide additional management fees and potential for additional
carried interest

16. Osage University Partners Proprietary Information 16
WHAT % OF COMPANIES SEEKING VC FUNDING ARE
SUCCESSFUL?
https://www.fundable.com/learn/resources/infographics/startup-funding-infographic
Likelihood of Receiving VC
Funding
Entrepreneurs seeking VC
Entrepreneurs VC-funded
1-2% YES
98-99%
NO

17. Osage University Partners Proprietary Information 17
ACTUAL OUP DEAL FLOW ANNUALIZED
Deals
Considered
Call/Meet
Company
Management
Review
Opportunity
with GPs
Conduct Due
Diligence
Fund Company
Source: “How Do Venture Capitalists Make Decisions?”
2000
500
250
125 15

18. WHAT IS ARE THE MOST IMPORTANT VC DUE DILIGENCE CONSIDERATION FACTORS?

19. Osage University Partners Proprietary Information 19
VC DUE DILIGENCE FACTORS
CEO and Management Team
Market Opportunity
Technology
Data
Competition IP
Capital Structure, Valuation and Exit
Analysis

20. Osage University Partners Proprietary Information 20
• Historical common perception: 1/3, 1/3, 1/3
• Recent analyses
– -65-75% fail / lose investors’ money
do not produce expected returns
– 11% go public (IPO)
– 25% M&A (different valuations)
SUCCESSFUL COMMERCIALIZATION POST-VC
(1) Gage (2012)
(2) Gompers (2016)
TBD IPO Fail
75% Venture backed
companies fail
IPO
TBD
65-75%
11%
M&A

21. PITCHING NEW VENTURES

22. Osage University Partners Proprietary Information 22
Angels and VCs receive many pitches
• Make your initial interaction -- verbal, PPT, narrative –
clear, concise and compelling
VCs triage new opportunities quickly to identify the most potentially
attractive one (getting to “no”)
• Deals of interest will move to a more engaging level
THE CLICHÉ IS TRUE – YOU ONLY GET ONE
CHANCE TO MAKE A FIRST IMPRESSION

23. Osage University Partners Proprietary Information 23
PITCHING GUIDELINES
Don’t Cold Call
Pre-empt any ‘killer’
questions
Make slides visually
interesting; use text
sparingly
Be clear, concise,
compelling
When you do not know
an answer, say so
Do not hide anything
substantive; it won’t
stay hidden for long

24. ELEMENTS OF A GREAT PITCH DECK
Competition and Barriers to
Entry (1-2 slides)
• Academic and corporate researchers are
working on the problem and status
• Why/how will the product create a monopoly?
• What’s your competitive (unfair) advantage
Financing Strategy (1 slide)
• Requested funds and expected progress
• Financing history – grants, FFF, angels
• Value inflection point with funding
Summary and Vision (1 slide)
• What will the company be in 5/10 years?
5
6
7
Introduction – Problem and
Solution -- (1 slide)
• GRAB ATTENTION
Leadership (1-2 slides)
• Background of executives, founders and
advisors, including prior product development
and commercialization successes
• Be specific – numbers matter
• Identify specific new hires contemplated
Technology / Product / Data (3-10)
• Experimental results prompting the “eureka” moment
• SEEING IS BELIEVING!!!
• Exactly where you are at in the product/service
development process
• Next steps in the program once you secure financing
• ADDRESS KILLER QUESTIONS
1
2
3
4
Operational Plan /
Milestones (1-2 slides)
• Next steps in the R&D process, timeline for
deliverables and future steps
5
6
7
8
Market Opportunity (2-3 slides)
• Scope and scale of problem you’re solving
• Don’t confuse market size, addressable market and
revenues being generated by existing solutions

25. WHAT IS THE MOST IMPORTANT FACTOR FOR A VC INVESTMENT DECISION AND EVENTUAL
SUCCESS OR FAILURE OF AN ENTERPRISE?

26. Osage University Partners Proprietary Information 26
MOST IMPORTANT FACTORS
0
10
20
30
40
50
60
Team Product Business
model
Market Fit Industry Valuation Ability to add
value
All Early Stage IT Healthcare
Source: “How Do Venture Capitalists Make
Decisions?”

27. FOUNDING TEAM EQUITY

28. Osage University Partners Proprietary Information 28
MOST FOUNDERS THINK THIS WILL HAPPEN…
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
$30.0
$35.0
$40.0
2008 2009 2010 2011 2012 2013 2014
$Bn
Zuckerberg's Net Worth

29. Osage University Partners Proprietary Information 29
BUT NOT THIS

30. Osage University Partners Proprietary Information 30
CONSEQUENCES OF POOR EQUITY ALLOCATION
Parasitic Founders
• Once equity is granted, it cannot be taken back
• This can result in founders that are no longer incentivized to offer value to a startup
and sit along for the ride on the cap table
Lack of Equity for Compensation
• Once options have been issued out, the company must expand their option pool to
compensate future employees
• Each subsequent expansion of an option pool dilutes existing shareholders
Recapitalization
• To remove a shareholder, sometimes companies go through a recapitalization
• These are highly challenging for investors, who will typically pass on a deal rather
than deal with cleaning up a capitalization table
(Un)Incentivized Employees
• Where there is not enough equity options to compensate existing and new employees,
it can lead to low moral or employee exodus

31. Osage University Partners Proprietary Information 31
SAME CONSEQUENCES APPLY FOR BAD INVESTORS
Bad Venture Investors can sometimes
mean:
• Parasitic investors
• Lack of equity for compensation
• Recapitalization
• Poor culture around board meetings
• Obstructive behavior

32. Osage University Partners Proprietary Information 32
SCENARIO: TYPICAL OWNERSHIP THROUGH ROUNDS
40.0%
29.0%
19.7% 15.6% 11.3%
40.0%
29.0%
19.7%
15.6%
11.3%
20.0%
14.5%
20.0% 20.0% 20.0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Founding Series A Series B Series C Series D
Series Ownership by Round
Option Pool Series D Lead - VC Series A Lead - VC
Co-Founders/Employees Lead Founder/CEO
• The average successful startup raises $41M across 4 rounds of financing, exiting around $240M
• Most lead founders exit with around 11% ownership of their companies
• Substantial dilution every round from refreshing the option pool and new capital for salaries

33. Osage University Partners Proprietary Information 33
INITIAL FOUNDER SPLIT
40.0%
40.0%
20.0%
Example Initial Cap Table
Lead Founder/CEO
Co-Founders/Employees
Option Pool
• Initial CEOs/Lead Founders typically get the
largest chunk of ownership
• These Founders are day-to-day
• Initial Equity ranges from 30-60% of the
company
• Co-Founders and key employees includes
founding scientists, C-level execs, VP, and any
initial employee
• Investors will typically like to see an initial team
in place before investing in a company
• Initial option pools are set up to incentivize new
hires
• A company typically refreshes their option pool
at every financing round and targets 15-25%

34. Osage University Partners Proprietary Information 34
TYPICAL PRE-FINANCING EQUITY
Position Range %
Founding CEO 30-60%
Active Founding Scientist 20-25%
Passive Founding Scientist 1-5%
CEO 10-20%
C-Level 4-10%
VP 2-4%
Director 1-2.5%
Lead Engineer 1-2%
Engineer (5+ years) 0.66-1.25%
Engineer (Junior) 0.2-0.66%
Ind. Board Member/Advisor 1%
• Titles range from CTOs, CEOs, and Chief
Scientist
• Many are part time, but spend at least 30% of
time at startup
• Get 20% median and 25% mean initial equity
• The most highly compensated are founding
scientist CEOs, which is rare
• Active founding scientist are more typical in
tech companies
• Titles range from nothing, Advisor, Scientific
Advisory Board and Chief Scientist
• Spending very little time at startup and some
are not in touch with their companies at all
• Get less than 5% initial equity

35. Osage University Partners Proprietary Information 35
VALUE OF SCIENTIFIC FOUNDERS
• In Tech, some professors spend 1-2
years of leave at founding, but will often
return to the university
• Once returning to the university its very
challenging to stay up-to-date with a fast
moving startup, therefore, their
contributions inevitably diminishes
REASONS FOR ISSUING OPTIONS TO A PART TIME SCIENTIFIC FOUNDER
• Continued research contributions from lab – pipeline of innovation
• Pipeline for hiring students
• High level research connections with major companies – research collaborations and
acquisitions
• Raising profile of company
• Cutting-edge outside view

36. Osage University Partners Proprietary Information 36
WHY ARE OPTION POOLS IMPORTANT?
THIS Pays For
HOW CAN STARTUPS COMPETE?????

37. Osage University Partners Proprietary Information 37
TURNOVER
1. Product
Development
2. Product Market Fit 3.
Scale
3 Phases/Teams of a Startup
• At each stage, the startup will require a different set of skills, and ultimately, people
• Most startups turnover their teams 3 times throughout the process of getting to
scale
• Continuously refreshed option pools are important in bringing in new talent

38. Osage University Partners Proprietary Information 38
BE GREEDY WHEN APPROPRIATE
Yes, you will be diluted
But without your..
You will get…

39. Osage University Partners Proprietary Information 39
EXAMPLE: EQUITY DISTRIBUTION PLAN
Annual Equity Grant Chart by Position
New Hires
Grants are issued to
new employees at
market levels
according to annual
equity grant chart
Promotion
Promotion grants are
given additional
options to bring
employee to the level
as if you were to hire
her/him today
Outstanding
Performance
Once a year grants
for 10 to 20% of
employees, which
are 50% of what you
would hire that
person for today
Evergreen
Starting at 2.5 year
anniversary for every
year, provide
employee ¼ of what
person would be
hired for today
* Wealthfront, “https://blog.wealthfront.com/the-right-way-to-grant-equity-to-your-employees/”

40. Osage University Partners Proprietary Information 40
OPTION OPTIONS
Restricted Stock Units (RSUs)
• Commitment to give stock based on vesting
• Taxable at vesting – good for founding equity as a “zero” value can be assigned
• Employee becomes a true shareholder in the company
Incentive Stock Options (ISOs)
• Does not trigger federal income tax
• ISOs receive long term capital gains treatment (must be held two years from grant
and one year following exercise)
• In the case of early acquisition, may be taxed as income
• Can only be granted to employees (no advisors, consultants, or service providers)
• Require 409a valuation to avoid mispricing stock
Non-qualified Stock Options (NSOs)
• Taxes upon exercise (difference of strike price of option and fair market value of stock
at time of exercise)
• Taxed at ordinary income rate
• Require 409a valuation to avoid mispricing stock

41. Osage University Partners Proprietary Information 41
CAPITAL NEEDS BY INDUSTRY
Time between development and market
• Hard technical development may extend product development timeframes
• Regulatory barriers may delay product launch
Costs
• Capex
• Product Development Head Count
• Sales/Marketing Head Count
Opportunity
• Different companies/sectors have different exit outcomes
Product Market Fit
• Selecting a market
• Selecting a go-to-market strategy

42. Osage University Partners Proprietary Information 42
NOT ALL STARTUPS ARE EQUAL

43. Thank You
Contact Us
Kirsten Leute
kleute@osagepartners.com
John Lee
jlee@osagepartners.com
50 Monument Rd, 201
Bala Cynwyd, PA 19004
484.434.2255
www.osageuniversitypartners.com