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 business plan – To do some research on market and competition – For travel expenses to raise working capital Round #1 Friends and 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 company’s 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 venture capital (VC) firms. – Must decide how much money is needed. – With interested VCs, founders must negotiate the company valuation and percent of VC ownership. – Pre-money Valuation—Company Value Before VC Investment Assume $2 million. Assume you are successful in raising $2 million at $2m pre- money valuation. – Post-money Valuation: $4 million ($2m pre-money valuation + $2m put in by VC. The new VC investor owns 50% of company.

6. Post Round #2 Ownership New ownership valuation: Capitalization Table – Referred to as 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 = $1.8 million.

7. Round #3 Financing (B Round) Your company has been in business 2-3 years. Revenue is growing; profits are foreseeable. Seek larger VC or a strategic investor to accelerate growth You are successful in raising $4m at a pre-money valuation of $10m. – The new investor is a large VC firm (LVC) Company valuation now $14m after the B Round, but still no liquid market for private company shares.

8. Post Round #3 Ownership LVC now owns 28.6% ($4m/$14m=28.57%). Value of LVC’s ownership = $4m. Original VC owns 35.7%, or 50% of the remaining 71.43%. Value of original VC’s ownership = $5m. F&F own 3.57%, or 5% of the remaining 71.43%. Value of F&F ownership = $.5m ($500,000) Founders own 32.14%, or 45% of remaining 71.43%. Value of founder’s 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 or Google). Strategic buyers often bargain tough on price and usually want control. 3. Sell shares to public: IPO Public usually pays a premium price, driven by Wall Street bankers and brokers, and all shareholders would now 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 Google’s IPO stock price was $85. It is now at about $565 after a 2-for-1 stock split in April, 2014, or an ROI of what?