WELCOME! 2012 uVCIC Team Lineup

Zephyr Associates — Tara, Akhil, Shalini, Saurav, Nancy and Andrew

Maverick Capital — Wilson, Jacob, Robert, Patrick, Tommy, Evans

Firestone Venture Partners—Neel, Ken, Chase, Zach, Haroon, Felix

Azure Capital Management—Ian, Jordan, Kevin, Si, Josh

Polaris Capital—Devin, Adam, Eric, Burke, Chenming, Everardo

Sequoia Ventures—Forrest, Jackson, Zachary, Junying (Julie), Daniel, Jordan

Prep Session II Agenda

General QuestionsVC Key Terms (Additional clarification)What to Look For (short exercise)Competition TimelineTerm Sheet DetailsNegotiation (General Guidelines)

TOMMORROW:Business Plans Emailed

• First look at the companies• No need to make a decision on which one to invest in yet– Your opinion may very well change

• Once business plans go, you’re not allowed to seek outside help and/or advice– Professors, industry professionals, friends, or the

entrepreneurs

5:00pm

WHAT TO LOOK FOR(evaluating a venture)

What to look for:

OPPORTUNITY- Value Proposition- Market Size- Return Potential

- Team- Competitive Advantage- Business Model- Customer Pain

RISK

What to look for

• Solve a problem? A real need for this?• Growing Market? Fast?• Well implemented product?• Team?• Analyze competition. What makes this one different?• Solid business model?• Promising customer base?• Plans for additional capital?• Market comps• Paths to exit

If there are holes in the plan or questions from the business plan

write them down to address in due diligence

Resources

• NVCA• PWC MoneyTree• TechCrunch.com• VentureBeat.com• Industry Reports• Initiating coverage reports• Yahoo.com/finance• Triple Tree

COMPETITION TIMELINE

Team & Judge Orientation

• “Calm before the storm”• Get settled into a study room• Grab a bagel and coffee• Regroup w/team to cover due diligence items– Questions will likely change after seeing pitches

8:30am

Kick-Off & Pitches

• Live road-show by entrepreneurs– 10 minutes each to pitch

9:00am

Due Diligence Sessions

• Each team will have 15 min with each entrepreneur• Establish rapport with entrepreneur• Address holes in business plan or pitch• Important that YOU control due diligence– This is your time to get questions answered

10:00am

Due Diligence Sessions

• What judges are looking for:– Did you ask the “right” questions?– Rapport with the entrepreneur– Clear view of where you were headed with line of questioning– Team participation

• Things to avoid:– Reading questions off the page– Aggressive questioning– Lack of clear direction

10:00am

Tips:- Briefly introduce your team-Learn what motivates the entrepreneurs -Use entrepreneur’s leads to dig deeper- Use all of your time

Team Working Lunch

• Organize and condense all information from business plan, pitch and due diligence

• Determine which company you wish to invest– You must choose one

• Complete team deliverables and email to uVCIC host

11:45am

- There is no “correct” choice- Decide quickly to utilize time- Don’t feel confined to investment – free to change- MUST send deliverables by deadline

TIPS

TERM SHEET DETAILS

Executive Summary

Deal Snapshot

Pre-Money Valuation $3MTeam’s Investment $2MSyndicate Investment ____% Ownership by Team 40%

Top 5 Reservations:Top 5 Reservations We are Investing:

Company BOpportunities and Strengths:Reasons for Not Investing:

Your Overall Investment Decision:

Brief Explanation:

Executive SummaryKFBS Ventures

Investing in:Company A

Valuation:

Due Diligence:

Term Sheet

Deal Snapshot

Pre-Money Valuation $3MTeam’s Investment $2MSyndicate Investment ____% Ownership by Team 40%

Executive SummaryKFBS Ventures

Investing in:Company A

Pre-Money

Series Investment

Option Pool

Board Structure

Closing Conditions

Liquidation Preference

Anti-Dilution

Dividends

Key DatesOther KeyTerms

Voting Class

Tranches

Pre-Money Valuation

• Value of the company today (before the VC’s investment)– Pre-$ in negotiated between entrepreneur and VC– Three main factors: % ownership, experience and competition

• You can work backwards to determine implied pre-$ based on investment and desired ownership

I want to invest $2M for 40% ownership

Investment

Pre-$ + InvestmentEquity

Ownership

$2M

Pre-$ + $2M40%

$2M 40% * (Pre-$ + $2M)

$1.2M 40% * Pre-$$1.2M

40%Pre-$

$3MPre-$

Series “uVCIC”Investment

• VC’s investment in this round

Investment

Pre-$ + InvestmentEquity

Ownership

I want to invest $2M for 40% ownership

$2M

Pre-$ + $2M40%

$2M 40% * (Pre-$ + $2M)

$1.2M 40% * Pre-$$1.2M

40%Pre-$

$3M

Option Pool

• Unallocated options to incentivize and/or attract key hires in the future

• Negotiated, but the norm is to take it out of the founders’ side

$5M Post-$

$2M Inv

$3M Pre-$

VC40%

Founder(s)60%

No Option Pool

$5M Post-$

$2M Inv

Founder(s)

VC40%

Founder(s)50%

10% Option Pool

$3M Pre-$

Option Pool10%

Board Structure

• Board of directors controls the venture (unlike board of advisors)

• Small ventures have small boards that meet often (quarterly), 3-7 members

• Odd number to prevent ties• % ownership should be reflected on board, majority

controls

Liquidation Preference

• A multiple of the invested amount that is returned at the time of an exit

$2M

$4M

$8M

Original Inv. 2x Pref. 4x Pref.

Dividends

• Extension of liquidation preference– Generally paid at time of exit for early-stage deals

• Can be cumulative or non-cumulative• Paid before distributions to common stockholders

Investment: $4,000,000Dividend Rate: 8.0%

CumulativeYear 1 Year 2 Year 3 Year 4

$320,000 $640,000 $960,000 $1,280,000

Non-CumulativeYear 1 Year 2 Year 3 Year 4

$320,000 $320,000 $320,000 $320,000

Anti-Dilution

• Protects investors in the event of a future financing at a lower valuation

• 3 Types:– Broad-based weighted average– Narrow-based weighted average– Full Ratchet

Anti-Dilution

Broad-based weighted average• Looks at ALL equity issued prior to the new round

(4,000,000 + ($500,000 / $1.00)) / (4,000,000 + ($500,000 / $0.50)) = $0.90/share

Source: VCHub.com

Anti-Dilution

Narrow-based weighted average• Looks at a pre-determined number of shares prior to the

new round (i.e. Series A shares prior to Series B)

(1,000,000 + ($500,000 / $1.00)) / (1,000,000 + ($500,000 / $0.50)) = $0.75/share

Source: VCHub.com

Anti-Dilution

• Protects investors in the event of a future financing at a lower valuation

• 3 Types:– Broad-based weighted average – Narrow-based weighted average– Full Ratchet

VC Friendly

Founder Unfriendly

Founder Friendly

Dilution

Original Shares Original SharesTotal Shares

New Shares

Same quantity of original. Lower percentage.

Every 1% you lose of a 20X Exit

is going to hurt20 times more

Original Shares

Why Dilution is Bad!

Key Dates

• Outline any key dates with regards to the deal, i.e.:– Anticipated closing– Tranche schedule– Key Milestones– Etc.

Other Key Terms

• Information rights• Right of first refusal• Drag along rights• Piggyback registration rights• Voting Rights• Founders’ Stock

Deliverables Begin

• Rolling schedule• Make sure that you get information in early or on time• Teams are allowed to submit (up to) 3 additional pages of

Appendices/ Exhibits

1:00pm

NEGOTIATIONS

Negotiation and Q&A

• Teams have 15 minutes to negotiate with the entrepreneur they presented with a term sheet– Entrepreneurs are not given a copy of term sheet

• Judged on how you negotiate and progress towards deal– Not judged on being able to finalize deal

• 10 minute Q&A with panel of judges– Questions span the whole event so be prepared for

anything they throw at you

1:00pm

Tips for Negotiation

• Introduce yourselves; establish and build rapport• If you’d like, add in relevant expertise (your background)• Why you are here today? Why this venture?• Start slow; Don’t be aggressive• Explain your terms (allow the entrepreneur to ask questions)• Very carefully ask tough questions• Don’t wait too long for the “real stuff” (time runs out

quickly!)• Golden Rule- you can’t go wrong with this mentality

1:00pm

Judges Vote 4:30pm

Awards Ceremony

• 1st Place - $500• 2nd Place• Entrepreneurs’ Choice

Winner moves on to uVCIC Regional Competition on March 24!

4:45pm

VC Round Robin

• Opportunity to receive feedback from all the judges• Spend one-on-one time with each judge• Opportunity to clarify questions and pick their brains• Not the forum for complaints

4:50pm

FINAL QUESTIONS?