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WELCOME! 2012 uVCIC Team Lineup Zephyr Associates — Tara, Akhil, Shalini, Saurav, Nancy and Andrew

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

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WELCOME! 2012 uVCIC Team Lineup Zephyr Associates — Tara, Akhil, Shalini, Saurav, Nancy and Andrew

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  1. 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

  2. Prep Session II Agenda • General Questions • VC Key Terms (Additional clarification) • What to Look For (short exercise) • Competition Timeline • Term Sheet Details • Negotiation (General Guidelines)

  3. TOMMORROW:Business Plans Emailed 5:00pm • 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

  4. WHAT TO LOOK FOR (evaluating a venture)

  5. What to look for: RISK - Team - Competitive Advantage - Business Model - Customer Pain OPPORTUNITY - Value Proposition - Market Size - Return Potential

  6. 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

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

  8. COMPETITION TIMELINE

  9. Team & Judge Orientation 8:30am • “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

  10. Kick-Off & Pitches 9:00am • Live road-show by entrepreneurs • 10 minutes each to pitch

  11. Due Diligence Sessions 10:00am • 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

  12. Due Diligence Sessions 10:00am • 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 • Tips: • - Briefly introduce your team • Learn what motivates the entrepreneurs • -Use entrepreneur’s leads to dig deeper • - Use all of your time

  13. Team Working Lunch 11:45am • 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 TIPS - There is no “correct” choice - Decide quickly to utilize time - Don’t feel confined to investment – free to change - MUST send deliverables by deadline

  14. TERM SHEET DETAILS

  15. Executive Summary Deal Snapshot Pre-Money Valuation $3M Team’s Investment $2M Syndicate Investment ____ % Ownership by Team 40% Executive Summary KFBS Ventures Investing in: Company A Top 5 Reservations We are Investing: Top 5 Reservations: Your Overall Investment Decision: Valuation: Due Diligence: Company B Opportunities and Strengths: Reasons for Not Investing: Brief Explanation:

  16. Term Sheet Deal Snapshot Pre-Money Valuation $3M Team’s Investment $2M Syndicate Investment ____ % Ownership by Team 40% Executive Summary KFBS Ventures Investing in: Company A Pre-Money Series Investment Option Pool Tranches Board Structure Closing Conditions Voting Class Liquidation Preference Dividends Anti-Dilution Key Dates Other Key Terms

  17. Pre-Money Valuation Investment Equity Ownership Pre-$ + Investment • 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 $1.2M $2M 40% * (Pre-$ + $2M) 40% * Pre-$ $1.2M $2M 40% Pre-$ Pre-$ + $2M 40% I want to invest $2M for 40% ownership $3M Pre-$

  18. Series “uVCIC”Investment Investment Equity Ownership Pre-$ + Investment • VC’s investment in this round $1.2M $2M 40% * (Pre-$ + $2M) 40% * Pre-$ $1.2M $2M 40% Pre-$ Pre-$ + $2M 40% I want to invest $2M for 40% ownership $3M

  19. 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 $5M Post-$ $5M Post-$ $2M Inv $2M Inv VC 40% VC 40% $3M Pre-$ Founder(s) 60% $3M Pre-$ Founder(s) 50% Founder(s) Option Pool 10% No Option Pool 10% Option Pool

  20. 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

  21. Liquidation Preference • A multiple of the invested amount that is returned at the time of an exit $8M $4M $2M Original Inv. 2x Pref. 4x Pref.

  22. 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

  23. 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

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

  25. (4,000,000 + ($500,000 / $1.00)) / (4,000,000 + ($500,000 / $0.50)) = $0.90/share Source: VCHub.com

  26. 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)

  27. (1,000,000 + ($500,000 / $1.00)) / (1,000,000 + ($500,000 / $0.50)) = $0.75/share Source: VCHub.com

  28. 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 Founder Friendly VC Friendly Founder Unfriendly

  29. Dilution New Shares Total Shares Original Shares Original Shares Same quantity of original. Lower percentage.

  30. Why Dilution is Bad! Every 1% you lose of a 20X Exit is going to hurt 20 times more Original Shares

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

  32. Other Key Terms • Information rights • Right of first refusal • Drag along rights • Piggyback registration rights • Voting Rights • Founders’ Stock

  33. Deliverables Begin 1:00pm • 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

  34. NEGOTIATIONS

  35. Negotiation and Q&A 1:00pm • 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

  36. Tips for Negotiation 1:00pm • 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

  37. Judges Vote 4:30pm

  38. Awards Ceremony 4:45pm • 1stPlace - $500 • 2nd Place • Entrepreneurs’ Choice Winner moves on to uVCIC Regional Competition on March 24!

  39. VC Round Robin 4:50pm • 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

  40. FINAL QUESTIONS?

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