Butterfly SESSION THREE WORKBOOKDecisions and Notes for Modules 1 – 6

BSMARTer Business Simulation Management and Relationship Training

Fundamentals of Equity

MODULE ONE

Changes in Equity

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Anticipated changes in equity in next 5-10 years• Expand ownership participation in Firm via Equity purchases to qualified

individualso Craig & Robin initially targeted for equity purchases.o Darren to follow in the future.o Will develop a more transparent path/process to ownership to help

attract/retain quality talent and future firm leaders.

• Current owners equity transitionso James/Richard will each surrender 5% of their shares to “fund” an equity

pool from which new owners can purchase shares.o Tami wants to keep her 10%, then sell all at retirement in 5 years.

Steps/Planning• Identify employees who have earned equity participation.• Identify next generation firm leaders/owners.• Determine what existing owners prefer for equity sales & exit strategies.• Early-stage succession planning & schedules to transition equity to next

generation leaders-owners.

Valuation Principles and Experience

MODULE TWO

Firm Value

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Positive Valuation Factors• Robust Growth: Consistent growth in AUM (+14% in ‘14, +26% in ‘15) and revenue

(+7% in ‘14, +20% in ‘15). • Solid Profitability: Focus on expense management leading to continually reduced

Overhead (25.8% in ‘13, 25.4% in ‘14, 22.4% in ‘15) and consistent increase in Operating profit (28.7% in ‘13, +31.8% in ‘14, +40.9% in ‘15).

• Healthy Infrastructure/Firm Culture: New performance incentive & asset bonus program/career path opportunities generating high internal enthusiasm leading to increase in asset flow and decrease in client losses.

• Productive Client segmentation/client service structure: well-defined service design creates more ‘client to firm’ experience as opposed to “client to individual’ experience leading to happier clients, stickier assets. Design also leads to easier control of client service costs.

• Effective Marketing efforts: Successful program led to 12% growth in new assets. • Unique niche in market – focused on high-tech clienteleAdverse Valuation factors• Key costs increasing - Compensation expenses growing (up 3.4% in ‘15)• Lack of diversity in offering - minimal business lines• Focused business model - Asset Management model leads to higher attrition risk

(judged on performance).• Unique niche in market – focused on high-tech clienteleValuation calculation• Industry standards show firms our size tend to value 5-8X Cash Flow (EBTIDA)• All factors considered, we consider the value our firm @ 7X Cash Flow - Current value = approximately $17M.• This valuation is reference point for internal discussion/planning purposes.• To accommodate equity purchases/retirement buybacks, Butterfly will hire an

expert valuation firm to perform an objective appraisal of firm value and will obtain a professional valuation of the Firm every 2 years hence.

• Internal discount: We will apply a 20% discount to all internal purchases to reward employees for contributions as well as continue the positive mood brought about by recent cultural adjustments.

New Partnership Admission

MODULE THREE

Criteria for New Partners

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Owner Criteria @ Butterfly Capital

• Contributes to the overall growth and development of Butterfly Capital (revenue, profits, clear leader in critical areas such as marketing, investments, business development, operations).

• Visionary, forward-thinker.

• Goal-driven, Ambitious.

• Entrepreneurial spirit.

• Strategic planner, helps establish and “owns” firm goals, initiatives, projects/tactics.

• Effective leader & mentor, motivator, team player.

• Steward of firm. Proven commitment & passion to ‘smartly’ growing the firm. • Commitment to personal/professional growth and development.

• Strong Community involvement.

• Industry expertise and credentials that serve and complement the firm.

• Ability to introduce new potential partners to Butterfly Capital.

Partnership Agreements

MODULE FOUR

Partnership Agreements

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SEE ACCOMPANYING DOCUMENTS FOR BUTTERFLY CAPITAL’S TERM SHEET

Founder Succession

MODULE FIVE

Succession Plan

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Tami, CIO, 10% Owner• Will retire in 5 years.• Per Term Agreement, Tami must sell 100% of her equity at retirement

Succession PlanEquity transition: • Update firm valuation just prior to retirement date• Identify who will buy Tami out. Ideally, it will be firm employee/minority owner(s)

seeking to increase their equity stake. Otherwise the Firm will buy back Tami’s equity.

• If individual employee(s) buy her equity, preferably external financing will be secured to fund purchase of Tami’s interest. If not, then Firm will purchase Tami’s equity through a longer term buy-back plan (see below).

• If Firm buys her out, Term Agreement allows up to a 7-year payout. The Firm will determine what schedule they can/will commit to, potentially arranging outside financing. If the buy-back plan is greater than 1 year, then the payment/valuation process will be structured to allow Tami to participate in upside yet have no downside based on value at time of retirement.

Leadership/Function transition:• Matt is currently identified as Tami’s successor, and, as such, Tami will continue to

groom Matt as CIO.• 2 years before Tami’s formal retirement date, the Owners will determine/confirm

if Matt is capable of assuming Tami’s duties as CIO. If not, an external search for CIO will begin.

• If Matt is confirmed as Tami’s successor, a new Investment Analyst will be named to replace Matt in his current role. It is likely that by then there will have been add to Investment staff so this is hopefully an internal promotion.

• No later than within one year of Tami’s retirement, Matt, as CIO, will be presented to Owners’ Group as replacement for Tami on Executive Managing Committee.

Other Initiatives

MODULE SIX

Other Initiatives

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Describe any other initiatives your firm will undertake.

Notes

Initiative Explanation

1. Valuation/Succession guidance

Research/Interview consultants who specialize in Internal successions & can advise/coordinate all components (valuation, deal structures, financing, legal documentation)

2. Butterfly Capital Ownership Program

Create a practical path & process to participate in ownership. Could include things like formal mentoring program, required activities, etc.

3.

4.

5.

6.