Financing the Entrepreneur’s Business:

1. Financing the Entrepreneur’s Business: Steve Leese John Snow David Vogel January 18, 2011

2. Financing the Entrepreneur’s Business Introductions • David Vogel, Velocity Equity Partners • Steve Leese, Quabbin Capital • John Snow, Quabbin Capital

3. Agenda • Sources of Financing • Friends and Family • Angels • Venture Capital • Terms of Venture Capital Financing • Questions – don’t wait until the end!

4. Sources of Financing • Friends and Family • Angels • Venture Capital • Commercial Loans • Government Loans • Corporate or Strategic Partners • Grants from foundations

5. Sources of Financing

6. Venture Capital • Advantages • More Cash • Access to Additional Capital • Value Added Expertise • Management Experience • Industry Experience • Access to Strategic Partners • Access to Personnel • Enhance Credibility in Marketplace • Facilitate Liquidity Event

7. Venture Capital (continued) • Disadvantages • Months Long Process • Dilution of Equity Ownership • Sacrifice Control • Replacement of Management • Forced Liquidity Event • V.C. Imposed Business Objectives • Your New “Partner”/“Boss”

8. Employee Matters • Employment Agreements • Non-Competition Agreements • Confidentiality Agreements • Assignment of inventions and proprietary information • Key Man Life Insurance • Shares reserved for employees • Stock option pool: 10 – 20% of fully diluted • Vesting provisions for stock options • Restrict transfer of shares by Founders and Employees • Reverse vesting (often opposed by Founders) • Vesting 25% per year • Buy-back of unvested shares upon termination of employment

9. Additional Rights • Information Rights • Annual, quarterly and monthly financial statements • Budgets and business plans • Inspection rights • Registration Rights • Contractual right to register or participate in registration of shares for resale to public • Liquidity for investors

10. Private Equity-beyond venture • Used for more advanced cases: • Company has sustainable earnings or is approaching earnings stage rapidly • Buyouts • Control (50% +) passes to investor group • Growth equity, mezzanine loans: • Used for acquisitions, expansion, hiring, partial sale of company • Capital passes from investors to company

11. Why private equity? • Can accelerate company’s growth • Experience of capital providers • Better governance • Board of directors • Debt structure requires discipline, planning • Growth strategy-the game changes

12. Risk-not a four letter word • Management-can they grow the company? • Markets-will they remain favorable? • Economy-recent downturn as example. • Obsolescence • Commodity like product or service • Investor group, lenders-leadership

13. Is it worth it? • Capital is expensive • Investment/purchase process a huge distraction to a business • Managements can be discouraged • Many companies good to own • Only a few are worth investing in • Growth is always key-creates value

14. Example-NE Patriots • A $172 million buyout in 1994 • Now worth $1.4 billion (source: Forbes) • Breakeven business-potential earnings • Markets-Patriots became a great product • Economy-fans have persevered, grown • Obsolescence-shrewd personnel moves • Leadership-the Kraft’s, Belichick, Brady, Wilfork; creates a professional culture

15. Private equity realizations • Exits: • Sell to a strategic investor (a competitor)-usually most desirable • Sell to another financial buyer • IPO-currently limited to large companies • $1 billion plus buyouts • Downside scenarios • Distressed sales-debt driven-result in losses • Bankruptcy

16. Questions, comments? • We are available anytime to respond to questions • It has been our privilege to be here tonight.

17. Steve Leese and John Snow Quabbin Capital Phone: 617 330-9041 Email: steve.leese@quabbincapital.com john.snow@quabbincapital.com David Vogel Velocity Equity Partners Phone: 617-338-2545 Email: dvogel@velocityep.com