1. Company Capitalization Scenario Raising Capital and Ownership Value

2. The Founders Founders: you and partners – Have a concept for an exciting new business – Have sketched a general business model – Prospects for success appear promising – Need financing to pursue your dream

3. Round #1 Financing Start-up financing or seed capital needed: – To produce persuasive and professional BP – To do some research on market and competition – For travel expenses to raise working capital Round #1 Friends & Family – Objective: Raise minimum $100,000 to cover expenses above.

4. Round #1 Financing - Friends & Family You decide to seek $100,000 from F&F. You negotiate with F&F and give them 10% ownership (equity). – Ten percent of the shares of the companys stock. Company has imputed value of $1 million. – F&F own 10% of company, invest $100,000. Founders own 90% -- no cash investment (Sweat Equity).

5. Round #2 Financing (A Round) Seek venture capital from VC firms. – Must decide how much $ needed. – With interested VCs, founders must negotiate the company valuation and percent of VC ownership. – Pre-money ValuationCompany Value Before VC InvestmentAssume $2 million. Assume successful in raising $2 million at $2m pre-money valuation. – Post-money Valuation: $4 million – New VC investor: VC owns 50% of company.

6. Post Round #2 Ownership New ownership valuation: Cap Table. – VC owns 50% of company -- $2m of $4m– company valuation. Value of original owners = $2m. – F&F now own 5% (diluted from 10%) -- 5% x $4m. Value of F&F ownership: $200,000. – Founders now own 45% (remaining after VC s 50% and F&F s 5%). Value of founders ownership = $1.8m.

7. Round #3 Financing (B Round) Company now 2-3 years in business. Revenue growing; profits foreseeable. Seek larger VC or strategic investor. Successful in raising $4m at pre-money valuation of $10m. Company valuation now $14m, but still no liquid market for private company shares. New investor is a large VC firm (LVC)

8. Post Round #3 Ownership LVC now owns 28.6% ($4m/$14m=28.57%). Value of LVCs ownership = $4m. VC owns 35.7% -- 50% of the remaining 71.43%. Value of VCs ownership = $5m. F&F own 3.57% -- 5% of remaining 71.43%. Value of ownership = $.5m ($500,000) Founders own 32.14% -- 45% of remaining 71.43%. Value of founders ownership = $4.5m

9. Round #4 Ownership Liquidity Assume: – Company now 5+ years in business – Annual revenues: $50m – Operating income for that year = $10m – Shareholders want liquidity -- to be able to sell some of their shares for cash.

10. Three Liquidity Options 1. Borrow money from bank (debt). Banks reluctant to loan for shareholder liquidity. 2. Sell to strategic buyer (another company, such as Yahoo). Strategic buyers often bargain tough on price and usually want control. 3. Sell shares to public: IPO Public usually pays premium price, driven by Wall Street bankers and brokers, and shareholders would have liquidity -- a market in which to sell their shares.

11. IPO IPO Steps: – Valuation of company investment bankers participate – Your company: $50m revenues and $10m operating income. – Media companies values today range from 1.5-2.5x revenues- and 8-12x operating income. – Assume 2x revenues and 10x operating income: $100 million valuation -- pre-money and pre-IPO – Company raises $25M in shares sold to public for a 20% share in the company (25/125=20%).

12. Post-IPO Company Value & Ownership Company now valued at $125 million – $100m Pre-IPO + $25m Post-IPO Ownership: (Cap Table): – Public: 20% -- $25/$125m = $25m – LVC: 22.88%--80% x 28.6% = $28.6m – VC: 28.56%--80% x 35.7% = $35.7m – F&F: 2.86%--80% x 3.57% = $3.57m – Founders: 25.7% -- 80% x 32.14% = $32.14m

13. Return on Investment: IPO Day Valuation of each investor at close of IPO (Assuming price of all stock sold is the same as offered) and ROI: – Founders: Invested $0 cash. Current value = $32.14m – F&F: Invested $100,00. Current value = $3.57m (3470% ROI) $3,570,000-100,000=$3,470,000/100,000=34.7 or 3470% – VC: Invested $2m. Current value = $35.7m (1685% ROI) – LVC: Invested $4m. Current value = $28.6m (612.5% ROI) – Public: Invested $25 m. Current value: $25m (0 ROI) Obviously, current investors are gambling that current growth pattern continues. In 2004 Googles IPO stock price was $85. It now at about $900, or an ROI of what?