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BUILD A COMPANY FOR THE LONG TERMCONTROL YOUR OWN DESTINY
JUSTIN FISHNER-WOLFSON
COMPANIES ARE BEING FUNDEDDespite the tough environment
$0M
$325M
$650M
$975M
$1,300M
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
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Source: Cooley Godward Kronish LLP
VALUATIONS ARE LOWERMedian Series A pre-money valuations
$0M
$2M
$5M
$7M
$9M
Q1 2008 Q2 2008 Q3 2008 Q4 2008 2009 YTD
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Source: Cooley Godward Kronish LLP
TYPES OF EQUITY
• Common
• Preferred
• Series FF
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LIQUIDATION PREFERENCES ARE BECOMING MORE COMMON
0%
10%
20%
30%
40%
50%
60%
70%
Q1 2008 Q2 2008 Q3 2008 Q4 2008 2009 YTD
Percentage of Deals with Fully Participating Preferred
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Source: Cooley Godward Kronish LLP
• Options
• Warrants
• Fully Diluted Ownership (FDO)
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UNDERSTAND THE TERMINOLOGY
• $1M Financing
• $4M Pre-money valuation
• 20% option pool
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PROPOSED SERIES A FUNDING
HOW TO CALCULATE DILUTION
Step 1:
Determine post money valuation
Money investedPre-Money+
Post-Money Value
Step 2:
Determine investor ownership
Money investedPost-Money÷
Investor Ownership
Step 3:
negotiate employee option pool
= Dilution
Investor OwnershipOption Pool+
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WHAT DO THE FOUNDERS HAVE LEFT?
• Before: • 2 equal co-founders
• After: • 30% for each co-founder
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Investment Option PoolBrian Robert
• $500K note
• 10% warrant per month
• This converts at the next financing round
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Debt
Equity
Try a convertible noteAVOID DILUTION
FIND A COMPROMISE ON PRICEConvertible 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
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THE COST OF CONVERTIBLE DEBT
• $1M Series A
• Pre-money valuation of $4M
• 20% option Pool
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After 6 months:
Series A $1MPre-Money $4M
+Post-Money Value
Notes $500KWarrants $300K
$5.8M
THE COST OF CONVERTIBLE DEBT
• The note cost 13.8% of the company
• This is an addition 11% vs the original series A termsheet
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After 6 months:
Brian24.5%
Robert24.5%
Series A 17.2%
Warrants5.2%
Note 8.6%
Option Pool 20%
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
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TERMSHEET: OPTION 13x liquidation preference• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool
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How it works:
First $3M goes to investors
LIQUIDATION PREFERENCE EVENTUALLY GOES AWAY$1M Series A at $4M Pre with 3X liquidation pref
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Acquisition Price
Founders and Employees get:
@ $3M $0
@ $5M $2M (40%, not 80%)
@ $15M $12M (80% - inflection pt)
TERMSHEET: OPTION 2Fully participating preferred• $1M Series A Financing
• $4M Pre-money valuation
• 20% option pool
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How it works:
Take $1M off the top then take 20% of what’s left
Acquisition Price
Founders and Employees get:
@ $3M $1.6M (53%)
PARTICIPATION IS NOT AN ISSUE AT LARGE EXITS$1M Series A at $4M Pre with participating preferred
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@ $5M $3.2M (64%)
@ $15M $11.2M (75%)
THIS IS WHAT YOU WANT1x liquidation preference• $1M Series A Financing• $4M Pre-money valuation• 20% option pool
Align Incentives • The investor interests are
very similar to yours
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Common Investor
Interests
Acquisition Price
Founders and Employees get:
@ $3M $2M (66%)
@ $5M $4M (80%)
@ $15M $12M (80%)
SINGLE LIQUIDATION PREFERENCE$1M Series A at $4M Pre with 1X liquidation pref
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YOUR COMPANY$1 M$5 M
$20 M
$100 M
DON’T OVER-OPTIMIZE
• Lower the valuation
• Last money in is the first money out
• Terms only get worse over time
RAISE ENOUGH MONEY TO REACH YOUR MILESTONESFlat rounds & down rounds are now common
• Understand the effects of anti-dilution
0%
18%
35%
53%
70%
Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009
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Source: Cooley Godward Kronish LLP
CONTROL YOUR OWN DESTINY
• Board composition
• Voting rights/thresholds
Visualization: Board room table – removing founders, removing board members
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Would need to purchase.
FoundersInvestors
01 Do the math01
KNOW WHAT YOU ARE AGREEING TO
Think about incentives at various outcomes02
Know who has control in important situations03
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GET GOOD COUNSELPAY SOMEONE TO WATCH YOUR BACK
Q&A
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