Business 16 Stanford Department of Continuing Education Class # 5, 10/26/09

1. Business 16Stanford Department of Continuing EducationClass # 5, 10/26/09 Fundraising: Strategy, Termsheets, Dilution

2. When do I fundraise? • When I have a strategy • When I understand the effects • When it makes sense for the company and for new investors • When investors are likely to be interested • When I have hit relevant milestones • When I can answer “who cares?”

3. Fundraising Strategy • When do I ask? • Who do I ask? • Do my current investors help or hurt? • Do my investors do my road show with me? • How much do I ask for? • Do I get it all at once, or in tranches? • How does this fundraising affect future investment in my company? • How does this investment force me to raise additional rounds, what milestones will I will need to hit to improve valuations? • Will the increase in company value (or my share of company value) be greater than our dilution from this investment?

4. Fundraising Strategy • You will need to fund to the next value inflection point • At least 18 months of capital • Less than that and you spend all of your time fundraising • More than that, and you are suffering unnecessary dilution • Calander timing • Expect at least a 6 month process

5. Fundraising Strategy • Understand that as a founder/CEO, your main job is to raise money, so stop whining about how hard it is/how much time it takes/how you can’t manage the company and raise money/how investors are too stupid/risk averse/near-term oriented/etc.,etc. • Welcome to the NFL

6. Fundraising Strategy • You need to make each new round make sense for each new group of investors • You need to create enough value that every round can make a multiple on their money • Series A needs 10x, Series B needs 5x, Series C needs 3x • You need to answer “Why don’t I just wait until the next round?”

7. Fundraising: Effects • Everybody will get diluted • Investors protect themselves by putting in their “pro-rata” • Employees don’t • You will probably need to refresh the employee pool • Watch the cost of those options

8. Fundraising: Effects • Post-money • Savvy investors are obsessed with it • If your last post money was too high for the milestones achieved, your investors are gonna get whacked • Investor pain=Common shareholder pain • Preferences • Eat away at common • Price per share is not everything; understand everything that can affect your payout

9. Fundraising: Milestones • Make them real • Significant risk reduction • Sales, Management Hires, Reg. Approvals • Don’t get trapped into raising money before you hit a big milestone • Investors may just want to wait • Don’t get trapped into setting a valuation just before you reach a liquidity event • New investors will not want to pay much more than your investors just did

10. Fundraising: Who Do I Ask? • Look in www.nvca.com under NVCA members • Not firms that have funded competitive deals • Ask explicitly • Make sure they invest amounts and at stages and in technology that matches your company’s needs • Talk to decision makers • Get your attorney or any of your advisors to make introductions

11. Fundraising: Bridge financing • Useful, crippling or necessary, depending on circumstances • Useful when you don’t want to set a price that is too high or too low • Punts the pricing decision to the next round investors • Crippling when no outsider is interested • Terms can get tough • Necessary when you have to hit a milestone and were not smart enough to raise enough money • Be careful of what the terms imply to new investors • Tough terms imply investors think there is a lot of risk • Investors may not understand what they are really gaining