April, FINANCE 101 FOR START-UPs April 18, 2008 Robert S. Smith Principal – Bridgepoint Consulting, LLC

April, AGENDA Potholes to Avoid When Building Your Company Relying on advice from neighbors and college buddies Relying on advice from neighbors and college buddies Take money from just anyone Take money from just anyone No need to understand differences in equity transactions No need to understand differences in equity transactions Accounting/finance is not important to an early-stage company Accounting/finance is not important to an early-stage company Financial Section of Investor Pitch is not important Financial Section of Investor Pitch is not important Deal Terms Are Not Important Deal Terms Are Not Important

April, Potholes to Avoid When Building Your Company  Relying on advice from neighbors and college buddies (unless you live next door to John Thornton or went to college with Jimmy Treybig!) Get quality advice on all aspects of your business Get quality advice on all aspects of your business LegalLegal FinancialFinancial Seek advice from someone other than your Seek advice from someone other than your investor to structure your investment Find a mentor who can help you Find a mentor who can help you

April, Potholes to Avoid When Building Your Company  Take money from just anyone Different investors have different motivations, Different investors have different motivations, know what your investors are looking for! Early-stage financing options Early-stage financing options Friends & Family PROS Less valuation sensitive Can be more reliable CONS Not as much business help May want to be more involved Can be less reliable funding source Can be uncomfortable at Thanksgiving if investment does not work out

April, Potholes to Avoid When Building Your Company  Take money from just anyone Different investors have different motivations, Different investors have different motivations, know what your investors are looking for! Early-stage financing options Early-stage financing optionsAngels PROS Can provide business help Can intro to follow-on investors CONS Pockets aren’t as deep Rolodexes may be limited Can be emotional investors

April, Potholes to Avoid When Building Your Company  Take money from just anyone Different investors have different motivations, Different investors have different motivations, know what your investors are looking for Early-stage financing options Early-stage financing options Venture Capital PROS Significant business help Professional investors, so they can stick with you thru the difficult times Extensive rolodexes CONS Valuation sensitive They have high expectations so management must deliver Their only goal is to make money

April, Potholes to Avoid When Building Your Company  Take money from just anyone Different investors have different motivations, Different investors have different motivations, know what your investors are looking for Early-stage financing options Early-stage financing options Corporate investors PROS Can provide strategic help Can be less valuation sensitive Can bring credibility in market CONS Can influence product direction from broader market to their application Often investment is tied to an individual within corporation and if something happens to that champion enthusiasm can wane

April, Potholes to Avoid When Building Your Company  Take money from just anyone Different investors have different motivations, Different investors have different motivations, know what your investors are looking for Early-stage financing options Early-stage financing options Boot Strap PROS Hold onto ownership until more value is created Less time spent on money raising activities Obtain potential customer input during product development CONS Growth can be much slower due to cash constraints Miss advice from “smart” investors

April, Potholes to Avoid When Building Your Company  No need to understand differences in equity transactions Common stock vs. Preferred stock Common stock vs. Preferred stock Authorized shares vs. outstanding shares Authorized shares vs. outstanding shares Founders’ stock Founders’ stock Right of first refusal Right of first refusal Keep good documentation of all equity transactions

April, Potholes to Avoid When Building Your Company  Accounting/finance is not important to an early-stage company Business model is very important to investors Business model is very important to investors Budget should be conservative Budget should be conservative Budget should be based upon timing future fundings at appropriate inflection points Budget should be based upon timing future fundings at appropriate inflection points Keep accurate accounting records Keep accurate accounting records

April, Potholes to Avoid When Building Your Company  Finance Section of Investor Pitch is not important Don’t inundate with information (Executive Summary and PowerPoint to start with) – they won’t read the full plan until much later Don’t inundate with information (Executive Summary and PowerPoint to start with) – they won’t read the full plan until much later One slide addressing funding history, current headcount and cash burn, and current cash balance One slide addressing funding history, current headcount and cash burn, and current cash balance One slide address forecasted P&L, cash flows – preferred format is Q1’07, Q2’07, Q3’07, Q4’07, FY’07 total, FY’08 total, FY’09 total – nothing more than 3 years out One slide address forecasted P&L, cash flows – preferred format is Q1’07, Q2’07, Q3’07, Q4’07, FY’07 total, FY’08 total, FY’09 total – nothing more than 3 years out Always have backup detail available supporting market size, statistics, competition, etc. Always have backup detail available supporting market size, statistics, competition, etc. Don’t be overly optimistic – don’t over-promise and under- deliver. Don’t be overly optimistic – don’t over-promise and under- deliver.

April, Potholes to Avoid When Building Your Company  Deal terms are not important Avoid setting valuation too early in your history – use convertible bridge debt and warrants Avoid setting valuation too early in your history – use convertible bridge debt and warrants Set option pool percentage high enough to attract team gaps – be honest about gaps in team Set option pool percentage high enough to attract team gaps – be honest about gaps in team Try to avoid liquidation preference above 1x Try to avoid liquidation preference above 1x You don’t have to surrender control on Series A round, but that shouldn’t be the driving factor You don’t have to surrender control on Series A round, but that shouldn’t be the driving factor Anti-dilution protection unavoidable, but aim for pro rata rather than full ratchet Anti-dilution protection unavoidable, but aim for pro rata rather than full ratchet Founders’ stock will typically vest over 3-4 years Founders’ stock will typically vest over 3-4 years

April, Potholes to Avoid When Building Your Company Thank you for your attention