Venture Capital Transactions

1. Venture Capital Transactions Due Diligence and Post Closing Matters Columbia Law School February 23rd, 2004

2. Today’s Agenda Due Diligence (DD) Screening DD Management DD Business Opportunity DD DD on Intangibles Legal DD Financial DD Post Closing Matters Debriefing your Deals Monitoring Progress Monitoring Exit Supporting your VC Strategic Investments- Working WITH your Business Unit Records & Files At Exit: M&A and IPO Technology Transaction Consulting qedasi@mac.com

3. What is Due Diligence? Due Diligence (DD) Originally used in public securities offerings context; it was a legal obligation imposed on parties involved with the creation of prospectuses to use DD to ensure that they contained no material misstatements or omissions, so that the purchasers of the securities would be better able to make informed investment decisions. In the VC context, the securities are issued in a private transaction; it is the investors who must inform themselves regarding the companies they consider for investment. Technology Transaction Consulting qedasi@mac.com

4. Due Diligence (DD) involves: Screening DD Management DD Business Opportunity DD DD on Intangibles Legal DD Financial DD Woodside Fund: “the thorough investigation and analysis the investor makes of a prospective investment to see if it meets the investor’s strategy and criteria for funding. It includes an assessment of the industry, market, business concept, management team, the company’s technology, products and markets, and financials.” What’s Involved in DD? Technology Transaction Consulting qedasi@mac.com

5. Targeted Questions for DD Screening DD: quickly getting to core business opportunities Management DD: assessing the quality & potential of management Business Opportunity DD: products, models & competition DD on Intangibles: focus, momentum, buzz and “gut feelings” Legal DD: uncovering and anticipating problems Financial DD: valuation is derived & negotiated through the DD! Technology Transaction Consulting qedasi@mac.com

6. Screening DD Management DD Business Opportunity DD DD on Intangibles Legal DD Financial DD Where did the deal come from? What’s the quality of the biz plan? Who are current & potential investors? Who is their lawyer? Accountant? What’s the origin of the company? Who are their partners and customers? Shopped? Who has rejected it & why? Are you in this market space? Is the company at the right stage? Does the company fit into your web? Does it compete with one in the web? How much does it want? In range? Geographically accessible & strategic? Is there a personal fit with the team? Does the liquidity strategy fit? STRATEGIC INVESTOR CONSIDERATIONS… Screening DD Technology Transaction Consulting qedasi@mac.com

7. Management DD • Top quality management at its disposal? • Top quality managers? Direct & Indirect… • Top quality managers- marketing, finance, business development, operations, etc… • Is management diverse and a team, now & before? • Is it committed to long-term success? • How does the team view you? Your involvement? Technology Transaction Consulting qedasi@mac.com

8. Integrity, Honesty, Brilliance, People Smarts, Intensity, Self-Confidence, Committed Risk Taking, Vision, Ability to Execute, Problem Solve, Adapt & Use Resources Effectively Business Judgment? Background? Motivation(s)? The Peter Principle is that point at which employees reach their capacity, the point at which they cannot and should not advance. CEO/CTO/CFO? Biz Dev/Marketing & Sales/COO/BOD/BOA? Investors? Management: Individuals Technology Transaction Consulting qedasi@mac.com

9. Business Opportunity DD • Is the product evolutionary? Revolutionary? • What is the company’s product? • Stewart Alsop at NEA: companies find success most fundamentally by “designing products that people want.” • “Quality + Innovation + Smarts + Money - Pain, exponent 2 = Success” • “What’s the company asking the customer to go through for their product to work?” Technology Transaction Consulting qedasi@mac.com

10. Does the Biz Model Work? Technology Transaction Consulting qedasi@mac.com

11. Competitive Strategy Technology Transaction Consulting qedasi@mac.com

12. Competitive Advantages • Proprietary Advantages? In technology? Legal? Access? • First-Mover Advantage? • Does the company have a good positioning strategy? • Being better and different is not enough: your customers must perceive this! Technology Transaction Consulting qedasi@mac.com

13. Screening DD Management DD Business Opportunity DD DD on Intangibles Legal DD Financial DD Does the company have focus? Does the company have momentum? Has the company been able to generate any buzz? What’s your Gut Feeling? Focus, Buzz, Momentum??? Technology Transaction Consulting qedasi@mac.com

14. Legal DD Screening DD Management DD Business Opportunity DD DD on Intangibles Legal DD Financial DD After the company has been screened, the management reviewed, the business opportunity clarified, and Your GUT tells you GO… GET A GOOD TRANSACTIONAL LAWYER!!! Technology Transaction Consulting qedasi@mac.com

15. Screening DD Management DD Business Opportunity DD DD on Intangibles Legal DD Financial DD Financial Analysis: historical, pro forma, IS, BS and SCF… Variance Analysis Sensitivity Analysis Practical Analysis… BURN, BURN, BURN… Financial DD: Now thru Exit… Technology Transaction Consulting qedasi@mac.com

16. Financing History • How has the company been financed? • How much is it looking for and why? • How will the proceeds from be used? • Projected capital requirements? • Prospects for future capital requirements? • Cap tables… the current ownership of the company, by type of equity, number and percentages, as well as the option pool. Technology Transaction Consulting qedasi@mac.com

17. Valuation Methods • The Venture Capital Method: applying PE ratios to projected net earnings… • The Comparables Method: what other pre-money valuations are currently being given by VCs to companies with similar characteristics… • The QEDASI Method: negotiated, based on superior DD Technology Transaction Consulting qedasi@mac.com

18. Post Closing Essentially, an investor in venture capital must continue the due diligence process, through exit!!!

19. Post Closing Matters Debriefing your Deals Monitoring Progress Monitoring Exit Supporting your VC Strategic Investments- Working WITH your Business Unit Records & Files At Exit: M&A and IPO Screening DD Management DD Business Opportunity DD DD on Intangibles Legal DD Financial DD Has there been any change since the date of the purchase agreement’s execution? Check the Representations & Warranties of the Company regularly! “Bring-down DD” Technology Transaction Consulting qedasi@mac.com

20. “Back Office” Matters Debriefing your Deals Monitoring Progress Monitoring Exit Supporting your VC Strategic Investments- Working WITH your Business Unit Records & Files At Exit: M&A and IPO Technology Transaction Consulting qedasi@mac.com