You are on page 1of 16

THE ENTREPRENEURS REPORT

:
Private Company Financing Trends
Fall 2008

Taking Advantage of the Downturn In This Issue
By Greg Gottesman, Managing Director, Madrona Venture Group
Feature Articles
Unless you have been avoiding your in-box • In this market, what is our value Taking Advantage of the Downturn
in the past month or so, you probably got the proposition? By Greg Gottesman,
widely circulated email containing “the Madrona Venture Group ........................Page 1
world is coming to an end” slide deck from a • In this market, what is our business
major venture capital firm. The essence of model/how do we make money?
A Price on Carbon: Managing Risks and
the presentation is that if you survive the • In this market, who are our Opportunities
current economic meltdown, you win. That competitors? By Aleka Seville, First Climate ..............Page 1
means cutting heads and getting to cash-
flow break-even as soon as possible. The • In this market, what is our
advice is well timed and important, but competitive advantage? From the WSGR Database:
incomplete. The winners will not just survive Financing Trends ................................Page 2
• In this market, how do we
this recession—they’ll need to take full differentiate our product?
advantage of it, strategically and tactically. Control: The Critical Issue in Negotiating
• In this market, what are our core Financing Terms..................................Page 9
On the strategic front, companies should assets?
revisit the basic questions they answered Navigating Down-Round and Dilutive
when drafting their initial business plans, The answers to all of the above (and many Financings..........................................Page 11
this time with the words “in this market” at more) questions may have shifted in the last
the beginning: three months. If your customers were small The Do’s and Don’ts of
start-ups, you may need to adjust your focus Compensation for Early-Stage
• In this market, who are our to a customer base that has money to spend. Company Employees ........................Page 13
customers?
continued on page 5 . . .

A Price on Carbon: Managing Risks and Opportunities
By Aleka Seville, Manager, First Climate LLC

The results of the recent U.S. election percent below that by the year 2050. These successfully respond to the challenges posed
acknowledged the need for federal leadership are incredibly ambitious goals that will not be by future climate legislation, as they have the
on many issues. This includes climate change, achieved without opportunity to build rather
as an overwhelming majority of Americans translating the than refine processes to
voted for a candidate who pledged not only to cost of a changing function in a low-carbon
President-elect Obama’s
take decisive action to curb the country’s climate into a economy. While running
greenhouse-gas (GHG) emissions, but also to price on carbon incredibly ambitious goals lean is a benefit for most
support clean technology, ensure energy emissions. will not be achieved without businesses, it is nothing
security, and create millions of new jobs. translating the cost of a less than an imperative for
President-elect Barack Obama has promised to Early-stage changing climate into a the early-stage
implement federal legislation that ultimately companies are entrepreneur. Emission-
price on carbon emissions.
would reduce GHG emissions generated in the particularly well reduction measures,
United States to 1990 levels by 2020, and 80 positioned to combined with a strategic

continued on page 7. . .
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

From the WSGR Database: Financing Trends
For this report, we continue to evaluate 140
128
relevant trends in activity and valuation levels 121
120 Comparison of the Number of Financings,
for the U.S. venture capital industry. During
Q3 2007 vs. Q3 2008
this period of extreme volatility in the public

Number of Financings
trading markets and continuing instability in 100
all sectors of the economy, activity levels in
80
the U.S. venture capital industry through the Q3 2007
Q3 2008
third quarter of the year have been relatively
60
stable in comparison with prior periods.
40 35
This is not to say that the venture capital 29 31 30 27 26
industry has been immune from the financial 20 17 19
storms. Reports are appearing in the financial 11 8
press of institutional investors quietly 0
engaging in the secondary sale of their Total Number Angel Series A Series B Series C & Later Bridges
existing portfolio investments at highly Round
discounted prices, or even defaulting on their
capital commitments to venture firms. In sequence 144 transactions, 134 transactions, transactions are for substantially smaller
addition, with the virtually complete shutdown and 121 transactions, confirming a gradual amounts, even for Series C and later rounds
of the public equity markets as a source of downward trend in financing transactions (i.e., mezzanine rounds). It is too soon to know
capital over the first three quarters of 2008, it in general. whether the closure of the IPO market for
currently appears that any reasonable venture-backed companies, the extended
prospect of an IPO as an exit for most VC- In terms of dollar amounts, the aggregate period of time required to achieve an exit, and
backed companies has been eliminated for the level for all financing transactions in the third the prevailing uncertainty in the economy
foreseeable term. And the time horizon for the quarter of 2008 was $1.115 billion, down only were influential factors behind the decisions
start-up company from first funding to exit 2% from the comparable figure of $1.143 of these companies and their investors to
continues to grow, with the average exit now billion in 2007. The nine-month figures for raise such large amounts of capital in a single
at 8.3 years, as reported by Dow Jones aggregate dollars raised comparing 2008 with round of financing.
VentureSource—a trend that potentially 2007 actually showed an increase in 2008:
impacts the return on investment for investors $3.553 billion for the current nine months, If these unusual transactions are eliminated
evaluating venture capital as an asset class. compared with $3.255 billion for 2007. from the data for aggregate dollar amounts
raised for all financings, the third-quarter and
However, the indications within our database However, it should be noted that there were nine-month 2008 totals fall to $793 million
of financing transactions for the third quarter four sizable financings—each $100 million or and $2.931 billion, respectively—reflecting
of 2008, as well as for the first nine months of more—in the first nine months of 2008 that declines of 31% and 10% from 2007. In
this year, support the conclusion that venture had a significant impact on the totals. These evaluating the data with unusually large
capital activity continues at substantial levels four transactions are unusual for their financings excluded, this pattern of decline
and, for the most part, compares favorably magnitude in terms of dollars raised by private may portend a period of contraction in venture
with the same periods in 2007. venture-backed companies; most financing capital investments in general.

For the third quarter and the first nine months
of 2008, there were a total of 121 and 399
financing transactions, respectively, compared For purposes of the statistics and charts in this report, our database includes all
to 128 and 388 in 2007. The quarter-to-quarter venture financing transactions in which Wilson Sonsini Goodrich & Rosati
comparison, reflecting a modest decline of 5% represented either the company or one or more of the investors (although we do
between the two years, may be an indicator of not include venture debt or venture leasing transactions, or facilities involving
increasing stress in the sector that has yet to venture debt firms). In some cases, for data involving averages, we use a
be fully realized. In looking at each of the truncated average, discarding the two or three highest and lowest figures to
completed quarters for 2008, we reported in exclude the effect of transactions that are, in our judgment, unusual.

2
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

As illustrated by the chart on the right, there $1,400
are other trends and observations that may be Aggregate Amounts Raised by Series,
relevant to entrepreneurs and managers $1,200 $1,143
$1,115 Q3 2007 vs. Q3 2008
evaluating the current climate in venture
$1,000
financing transactions.
$800 Q3 2007
Although the number of angel financings in
($M)
Q3 2008
the third quarter of 2008 fell compared with $600 $573
$527
the same quarter of last year, it is a hopeful
sign that the number of Series A financing $400 $363
transactions—which, in almost all cases,
$217
involve institutional venture firms—have $200 $139 $133 $169
remained at very stable levels, both on a $28 $18 $28
quarter-to-quarter and a nine-month-to-nine- $0
month comparison. Since Series A financings Total Amount Angel Series A Series B Series C & Later Bridges
Raised
frequently represent the first infusion of Round
institutional investment capital in a start-up
company, this stability is one of the key decline of 43%—in the quarter-to-quarter than a preferred choice of financing structure;
indicators of the continuing rate of innovation comparison between 2008 and 2007, with an this form of financing temporarily obviates the
in the sector, and clearly a positive sign in the equally marked decline in the aggregate need to establish a company valuation as the
face of the ongoing economic turmoil amount of dollars raised, from $363 million to basis for the investment. For a later-stage
impacting world markets. The aggregate $217 million. The declines for the nine-month company, however, a bridge financing is
amounts raised for Series A financings also data for Series B financings are more muted. usually a form of debt financing funded by
remained relatively flat in comparing the third existing investors when a new lead investor
quarter of 2008 with 2007—$133 million and Similar observations can be made for Series C cannot readily be brought in to establish
$139 million, respectively. It is also interesting and later financings for the current periods. valuation and other investment terms.
to note that the average dollar amount raised This phase of financing transactions—which
in a Series A financing transaction (i.e., the includes mezzanine-stage financings—is As shown on the chart on the next page, for
first financing involving the investment of intended to support companies that the third quarter of 2008, the number of bridge
institutional venture capital) continues to be in successfully have introduced products to transactions increased from 19 to 26; for the
the neighborhood of $4-6 million, whether market and are looking for growth capital to nine-month period, the number increased from
looking at the third-quarter or the nine-month ramp revenues and market share. The number 64 to 96. The dollar amounts for each bridge
data for 2008 and 2007. of Series C and later financing transactions for financing transaction averaged for all periods
the third quarter of 2008 declined to 27, with between $1.5 million and $2.0 million, but
The number and dollar amounts invested in an aggregate of $527 million invested, down with a wide deviation from transaction to
Series B financings have declined noticeably from 35 financings, with an aggregate transaction. We believe that the increase in
in the current periods. Series B financings investment of $573 million in the same quarter the number of bridge transactions, coupled
typically represent the second round of of 2007. If two financing transactions with with the data that reflects a decline in the
institutional financing, frequently in support of unusually large investment amounts—each in number of Series B and Series C and later
companies making the transition from product excess of $100 million—are removed from equity financings, may be indicative for later-
development to first product sales. The current this category for the third quarter of 2008, the stage companies of the increasing difficulty in
trend in this stage of financing transactions aggregate amount invested for this period finding new investors willing to invest in these
may indicate that venture investors are drops from $573 million in the third quarter of later rounds. It also may signal increasing
moving cautiously in supporting their portfolio 2007 to $324 million in 2008, a decline of 43%. competition among companies for new
companies and taking every opportunity to investors at a time when venture funds are
conserve cash in existing funds, thus ensuring Finally, the data relating to the number of becoming more conservative in their
the adequacy of future capital for their more bridge transactions for the three- and nine- investments. In some cases, the decision to
successful portfolio companies. The number of month periods in 2008 compared with 2007 is proceed with a bridge financing may result
Series B financings declined from 30 to 17—a revealing. Bridge financing transactions for from a determination to forego another round
raw start-up companies may be nothing more of equity financing (and the resulting

3
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

From the WSGR Database: Financing Trends (continued from page 3)

Amount Raised in 2007
20
Comparison of Amounts Raised in Bridge Financings Amount Raised in 2008
First 9 Months of 2007 vs. First 9 Months of 2008

15
Amount Raised ($M)

10

5

Average Amount Raised*

0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100

Transactions Ordered by Size
*This line represents the average amount raised in bridge financings in both 2007 and 2008. More precisely, for the first nine months of 2007, the average was
$1.86 million; for the first nine months of 2008, the truncated average was $1.89 million. (This excludes a $119 million mezzanine financing in the third
quarter of 2008.)

shareholder dilution) in the interest of closing $70
on a near-term exit through a sale or merger Average Pre-Money
$60 $59
of the company. Valuation and Amount $57
Raised, Q3 2007 vs. Q3 2008 Q3 2007
$50 Q3 2008
The chart on the right suggests that pre-
money valuations and average amounts raised $40
($M)

changed little during the third quarter of 2008 $32
$30
as compared with the prior year. Pre-money $25
valuations for Series B financings have $20 $16
increased the most. $12 $13 $14
$10 $6 $6 $5 $4
In light of the current state of uncertainty in $1 $2
$0
our financial markets and the general Average Average Average Average Average Average Average
economy, many entrepreneurs express Pre-Money Amount Pre-Money Amount Pre-Money Amount Raised Amount
Series A Raised Series A Series B Raised Series C Series C Raised Bridges
concerns about the “right” timing in starting a Series B & Later & Later
company or the availability of funding to take
their new business to the next phase of For purposes of normalizing the data, four transactions in 2008 involving investments in excess of
$100 million have been excluded.
growth. However, even in difficult times when
venture activity levels are below historical
norms, venture investors are more eager than Venture investors also recognize recessionary Although it is clear that the challenges to the
ever to invest in great management teams periods as a time of opportunity. According to entrepreneur in the current environment can
with great ideas; entrepreneurs are finding a a recent survey, the predominant view among be significant, it is equally clear that the
larger pool of talented managers and venture capital firms—close to 80% of those investment climate for the start-up company
consultants as candidates for hire; and new responding—is that the turmoil in the capital with a compelling business model offers
companies are able to command greater markets and national economy is not expected significant opportunities.
resources and mindshare from vendors and to slow their pace of investment.
suppliers.

4
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

Taking Advantage of the Downturn (continued from page 1)

Are there certain companies that might find should scrutinize every expense item and try it could spend to acquire that
your value proposition more compelling to renegotiate every contract. That said, cost- customer. The team at Classmates.com
because of the downturn? Should you refocus cutting is only one of many tactics that was maniacal about tracking
your value proposition and messaging around companies should consider. Tactical conversion rates and focused on
helping customers cut costs? If your business opportunities exist on the buying display media
model was based on certain advertising CPM upside in this market as only if it met
(cost per thousand impressions) rates, those well. Financing in this market will company goals for
may no longer apply. Your list of competitors be much tougher, so conversion. Does
may have shrunk or changed, so rethinking your business model
• Hiring. There will increasing your runway is
what you need (and don’t need) in your enable you to take
competitive feature set is now relevant. Is the never be a better essential for survival. CEOs advantage of less-
opportunity to
next version of your product really what your should scrutinize every expensive media?
existing customers want, or is it what upgrade the Publishers with
quality of your expense item and try to
potential customers wanted but no longer can undifferentiated
afford to buy? Your existing customer base team. Start-ups renegotiate every contract. inventory should
now may be your core asset, rather than your that are well have an especially
intellectual property. funded and well difficult time selling
positioned should have the pick of the inventory. Look for screaming deals!
To win, your strategy needs to be appropriate litter when it comes to new hires and
for the new market dynamics. Big companies upgrading talent. Employees may be
cannot be as nimble as small ones, so smart more flexible on compensation • Tying Expenses to Performance. In
entrepreneurs should be able to take packages than they were several a down market, you may have the
advantage of thoughtful, but swift, changes in months ago. opportunity to link your cost structure
strategy. specifically to performance. Tying
employee compensation to
• Marketing. Media always gets performance criteria is the obvious
Tactics are also critically important, but cheaper in a downturn, which presents
shouldn’t be confused with strategy. Cutting example. On the marketing side, as
a unique opportunity to publishers lose leverage, they, too, are
your burn rate is a acquire customers
tactic in a downturn, more willing to sign performance-
profitably. If the lifetime based or CPA (cost per action) deals,
but it doesn’t lead to The companies that came value of your customers
success unless the instead of CPM deals. No publisher is
roaring out of the last has remained stable going to announce it, but companies
company also has the and now you are able to
right strategy to go
technology downturn not should be persistent in asking for it.
acquire customers for
along with it. The only had exceptional less than their lifetime
companies that came survival skills but, more value (through • Pricing. Aggressive pricing can be an
roaring out of the last inexpensive media), you important weapon against weaker
technology downturn
important, they had a
can make a killing in a competitors who cannot match your
not only had superior product focus and difficult economy. prices or will eat into their cash
exceptional survival business model. Classmates.com is a balances if they do.
skills but, more wonderful case study.
important, they had a When the technology
superior product focus and business model. bubble burst in 2000, Classmates.com • Mergers and Acquisitions. Even
was able to buy Internet display some attractive companies with strong
On the tactical front, the much-circulated VC inventory for a fraction of what it had IP or a large customer base will
presentation mentioned earlier pinpointed the cost earlier. The company knew what a struggle to make it in this environment.
major one: cost-cutting. Financing in this customer was worth (more specifically, Banks are not the only ones who will
market will be much tougher, so increasing what a customer would pay for a be looking for good M&A deals. As a
your runway is essential for survival. CEOs subscription) and, therefore, how much buyer, some questions that you might
ask include: Would an acquisition be

5
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

Taking Advantage of the Downturn (continued from page 5)

relevant to your new strategic focus, or realities and creatively consider the tactics management. Greg joined Madrona in
would it dilute your focus? How long they employ will be in the best position to win 1997 and currently serves on the boards
will it take this acquisition to get to when the economy starts moving again. of AdReady, Bocada, BuddyTV, Intrepid
positive cash flow? Are you buying Learning Systems, Physware,
people, technology, revenue, or Greg Gottesman is a managing director SchemaLogic, SourceLabs, ThinkFire,
customers? How hard have you of Madrona Venture Group, a leading and WildTangent. He graduated Phi Beta
scrubbed the projections? How will venture capital firm based in Seattle, Kappa with honors and distinction from
you finance an acquisition in this Washington. Founded in 1995, Madrona Stanford University, with honors and
market? funds start-ups based in the Pacific distinction from Harvard Business
Northwest in the consumer Internet, School, and with honors from Harvard
No doubt the current market presents added commercial software and services, Law School, where he was an editor of
challenges, but it also offers new digital media and advertising, the Harvard Law Review.
opportunities for those companies looking to networking and infrastructure, and
do more than just survive. The companies that wireless industries. The firm currently Greg can be reached at (206) 674-3016 or
refocus their strategies in light of market has more than $650 million under greg@madrona.com.

Venture Capital at a Glance

• In the last 35 years, venture capitalists invested more than $441 billion in over
57,000 companies in the United States.
• For every $25,000 of venture capital invested between 1970 and 2006, one new
job was created in the United States.
• In 2007, more than 1,400 seed and early-stage companies received venture
capital investments.
• Among all sectors for investment, clean technology has seen the most venture
investment growth in the last five years.
• There are approximately 800 venture capital firms in the United States.
• The majority of venture capitalists had prior experience in their careers as
entrepreneurs, scientists, or engineers.

Source: National Venture Capital Association, http://www.nvca.org/index.html

6
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

A Price on Carbon: Managing Risks and Opportunities (continued from page 1)

carbon-offset investment strategy, will enable many differences between these proposals, all implementing AB 32, is working to ensure that
early-stage companies to capitalize on their propose mandatory emission caps designed to the state’s strategy aligns with other
size and agility while hedging against the risks decrease allowed emissions over time as the complementary regional efforts such as the
posed by climate change. key policy mechanism to achieve GHG Western Climate Initiative (WCI). Currently,
reductions (the so-called cap-and-trade WCI is comprised of seven western U.S.
The investment community already is approach). The momentum created by these states (including California) and four Canadian
demanding that businesses factor in more proposals, regional and state leadership, and provinces committed to launching a
sophisticated risk analysis taking into account a supportive federal multisector cap-and-
the regulatory, litigation, reputational, and administration trade system by January
physical risks associated with climate change. ultimately will 2012, with an overall
In September 2007, a broad coalition of translate into the Early-stage companies are goal of reducing regional
respected investors filed a petition asking for introduction of similar particularly well positioned to GHG emissions 15
interpretive guidance on climate-risk legislation and, successfully respond to the percent below 2005
disclosure. The petition states that “climate effectively, a price on challenges posed by future levels by 2020.
change now has material financial carbon in the U.S. It is
consequences” for many businesses and critical for businesses
climate legislation. According to a recent
highlights that “companies’ financial condition operating in this report by The Climate
increasingly depends upon their ability to country to understand Group, a statewide cap-
avoid climate risk and to capitalize on new potential policy implications not only to and-trade program under AB 32 will create
business opportunities by responding to the develop an effective carbon-reduction plan, price signals that “will increase the wholesale
changing physical and regulatory but to ensure that this strategy is integrated price of fossil-fuel-fired electricity, petroleum-
environment.” into the overall business planning process by based transportation fuels and natural gas,
outlining implications related to risk and would therefore affect [businesses]
The success and popularity of the Carbon management, the ability to raise capital, and investment decisions, energy use and fuel
Disclosure Project (CDP), an independent shareholder value. choices.” The AB 32 scoping plan recommends
nonprofit organization based in the U.K. that that GHG emissions from the following sectors
gathers and discloses GHG emission data from Development of state and regional programs be capped to achieve emissions-reduction
the world’s largest corporations, illustrates designed to meet aggressive GHG reduction goals: electricity, transportation fuels, natural
both this increasing concern and the benefit of targets already is underway and most likely gas, and large industrial sectors. The first step
addressing these issues for businesses in any will play a large role in shaping the in reaching this conclusion was a
stage of development. A recent CDP report development and design of federal policy. comprehensive evaluation aimed at identifying
included responses from 321 of the S&P 500’s California specifically leads in this area with the exact sources of the state’s GHG
U.S.-headquartered companies and concluded the passage of Assembly Bill (AB) 32: the emissions. Establishing this baseline enabled
that “more companies are viewing climate California Global Warming Solutions Act of lawmakers to set concrete goals and outline
change risk not simply as an environmental or 2006, which requires the state to aggressively strategies to meet targets.
public relations issue, but as a game-changing reduce greenhouse-gas emissions to 1990
set of business imperatives.” levels by 2020, approximately 30 percent In a similar manner, every early-stage
below projected levels for that year. The company should establish a baseline that will
Climate-Change Legislation and scoping plan focuses on identifying the state’s allow it to set organizational boundaries
Your Business Plan largest sources of GHG emissions and outlining its emission sources, reduction
detailing comprehensive reduction solutions to targets based on this data, potential policy
Since January 2007, nine legislative proposals meet targets through various market implications, and sustainability goals. A
that would require reductions in the amount of mechanisms, including a statewide cap-and- company’s ability to translate these findings
GHG emissions created nationally have been trade program. The California Air Resources into emission-reduction opportunities should
introduced in the Senate. While there are Board (CARB), the lead agency tasked with be a key focus of its GHG reporting and clearly

7
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

A Price on Carbon: Managing Risks and Opportunities (continued from page 7)

outlined for potential investors. These way to reach emission-reduction targets, GHG emissions. Early-stage companies and
reduction initiatives should be centered on support clean technologies, and gain valuable entrepreneurs should capitalize on the
goals based on a company’s initial baseline experience navigating carbon markets. These opportunity to incorporate a comprehensive
numbers and, like California’s plan, should benefits are derived from exercising due GHG calculation and reporting process as an
target its largest sources of emissions first diligence in the selection of offsets to ensure essential element of their overall growth
while detailing the risk and value of each that a company meets internationally strategy. Without this level of disclosure,
initiative (e.g., cost of implementation vs. total accepted standards that guard against double- early-stage companies will find themselves
reductions achieved over time). Depending counting and guarantee that its purchase increasingly disadvantaged when
upon the scope of each initiative, businesses resulted in emission reductions beyond communicating with investors looking to make
can expect to see real cost savings both “business as usual.” both short- and long-term commitments.
before and then increasingly after Concurrently, absent this disclosure, potential
implementation of a legislated price on Opportunities for the Early-Stage carbon-policy implications cannot be
carbon. It is only once they have calculated Entrepreneur accurately anticipated or prepared for—a
their emissions and implemented strategic huge red flag for the savvy investor. Finally, a
reduction efforts to decrease emissions Emission-reduction measures mandated by AB solid GHG reporting system will enable an
wherever possible that they then should look 32 will be in full effect by January 1, 2012, early-stage organization to set ambitious yet
to carbon offsets to reduce or eliminate the which means that companies that prepare for tangible GHG reduction goals that will
unavoidable emissions that result from these policy implications now will be in much demonstrate its sophisticated risk-assessment
business operations. better shape than competitors who simply modeling and assure potential investors of the
wait for legislation to require a value of its brand and longevity in a carbon-
Carbon offsets play a role in virtually all of the reconfiguration of their business model. constrained economy.
recently proposed national cap-and-trade Anticipating price fluctuations in a carbon-
proposals, as well as constrained economy is Aleka Seville manages communications
current international key to gaining the top- and marketing activities for First Climate
cap-and-trade systems Early-stage companies and level support needed to LLC and has extensive experience
such as the European assign the necessary collaborating with businesses to
Union Emissions entrepreneurs should capital and resources to incorporate and effectively communicate
Trading Scheme. Both capitalize on the opportunity implement an effective sustainable corporate processes. As a
the WCI and AB 32 to incorporate a corporate carbon- global leader in carbon asset
look to offsets as one management strategy. management with offices on four
of the tools to be used
comprehensive GHG However, the scope of continents and more than ten years of
to reach emission- calculation and reporting the problem demands experience in international carbon
reduction goals and process as an essential innovation and a markets, First Climate is one of the few
will require that these willingness to think intermediaries to cover the entire
reduction credits meet
element of their overall “outside the box.” This carbon-credit value chain. First Climate’s
strict, internationally growth strategy. challenge will not be carbon-reduction project portfolio
recognized standards met without the consists of high-quality emission-
of environmental leadership of the reduction credits that are verified by
integrity. When purchasing offsets, it is entrepreneurial business community and a international carbon market standards.
imperative that a company demand this same commitment to changing the way it defines This objective third-party quality
level of integrity from its suppliers by success in business. assurance creates the transparency that
supporting clean technology projects that are safeguards First Climate credibility as
independently verified and meet high-quality Responses to the CDP’s most recent well as the integrity of their clients’
standards, such as the Voluntary Carbon questionnaire demonstrate that successful environmental engagement.
Standard (VCS) or the Gold Standard. communication with stakeholders is
Incorporating carbon offsets into a corporate increasingly dependent upon a business’ Aleka may be reached at (415) 829-4426
carbon-management strategy is an effective ability to accurately calculate and disclose its or aleka.seville@firstclimate.com.

8
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

Control: The Critical Issue in Negotiating Financing Terms
By Caine Moss, Partner (Palo Alto Office)

It is not an overstatement to say that the stockholder approval, including authorizing financing round. Beyond a handful of generally
critical issue in a financing round is the issue financings or approving M&A exits, can be accepted core protective provisions, much of
of control. When negotiating the terms of a approved by 50 percent of the outstanding the negotiation of these provisions in term
financing, both entrepreneurs and investors share capital. Accordingly, founders who sheets involves determinations of what
are focused on how much control over the retain 50 percent ownership control may have corporate actions are purely within the
company they will have post-financing, how a block on these actions even if they lose purview of management (and therefore
long they can maintain that level of control, control at the board level. Ownership control shouldn’t be subject to protective voting) as
and in what circumstances they can exercise often carries strong emotional significance for compared to those properly subject to a veto
control. It is often the give and take between founders. However, founders need to be by the preferred stockholders in circumstances
entrepreneurs and investors around the issue realistic about their ownership levels, because in which they disagree with management.
of control that determines how deals are if they require outside funding to grow their
structured. business, they should expect to give up Board Composition
majority control of the company over the
While virtually every deal term could at some course of one or more financing rounds. Board composition also can be heavily
level be reduced to a control issue, generally negotiated in term sheets, and the outcome of
speaking, there are five principal control Protective Voting Provisions these negotiations often is dictated by the
issues: (1) ownership, (2) protective voting perceived leverage of the parties. If there are
provisions, (3) board composition, (4) “drag- Protective voting provisions are contained in multiple parties interested in investing in the
along” rights, and (5) founders’ stock vesting almost every venture capital term sheet. company or if the company is in a “hot” space,
provisions. Protective voting rights give the holders of investors typically are more willing to
preferred stock (i.e., the investors) the right to compromise on the level of board control they
Ownership approve specified acts require. While it is
undertaken by the hard to speak in broad
The most basic control issue is the percentage company, and represent terms on this subject,
of the company the investor(s) will own post- a set of blocking rights Ownership control often when negotiating
financing. The language of ownership in for investors. First-time carries strong emotional board composition
financings is expressed in terms of the entrepreneurs may be significance for founders. there are a couple of
company’s pre-money enterprise valuation and disappointed to learn rules of thumb
the size of the investment. Rational that the corporate However, founders need to entrepreneurs should
entrepreneurs in normal economic actions over which they be realistic about their bear in mind. First, try
environments seek to maximize valuation and desire the most ownership levels, because if to keep the board size
to raise only the amount of money they need control—such as as small as practically
to minimize the dilution they suffer. raising future financing
they require outside funding possible in the early
Conversely, investors want to take as much rounds, M&A events, or to grow their business, they funding stages (e.g.,
ownership as they can by investing at low changing the size of the should expect to give up three to five directors).
valuations and putting more money to work. board or the identity of majority control of the At each subsequent
The size of the unallocated option pool plays the CEO—are round of financing,
into these negotiations as well, because customarily subject to company over the course of chances are good that
financings usually are structured such that approval by the holders one or more financing one or more directors
increases in the size of the option pool dilute of preferred stock. In rounds. will be added, and
the existing owners (e.g., the founders) but not practical terms for large boards can be
the new investors. Ownership-based control is founders, it means that unwieldy and
principally a business issue, but it does have they need to get their unproductive. Second,
other non-economic implications. Under investors (or lead investor) to agree with them try to maintain board control or neutrality for
Delaware law and absent any contractual that it is a good idea to sell the company, as long as possible by having at least as many
voting rights, any action that requires incur large amounts of debt, or raise a new common directors as preferred directors, and

9
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

Control: The Critical Issue in Negotiating Financing Terms (continued from page 9)

by having any mutual or independent directors to be applicable only after several years so Moreover, to protect founders from being fired
subject to the approval of the common that it isn’t triggered for any near-term exit; to or marginalized after a sale of the company, it
stockholders (voting a separate class). Board be subject to a “return ceiling” so that it is common for the vesting on their stock to
control is important because every material doesn’t apply to exits above a specified return accelerate in the event that the founder is
corporate action requires board approval, as for investors; or to require founder approval in terminated or his or her duties are materially
do more mundane yet important matters such order to be triggered (approval may apply only and detrimentally changed within a specified
as option grants, annual budgets and if the founders are still employed with the time period after the sale (so-called “double-
forecasts, executive compensation, and company). Drag-alongs aren’t ideal for the trigger” vesting acceleration). In addition,
venture loan transactions. entrepreneur from a control standpoint, but some investors will agree to limited but
there are strategies to employ to make them immediate vesting acceleration upon the sale
Drag-Along Rights manageable. of the company; full acceleration at the time
of a sale can be perceived as an acquisition
“Drag-along” rights come in a variety of Founder Vesting deterrent for a potential acquirer, however,
flavors, but in their strongest form, they are and is therefore uncommon. Severance-based
rights given to major investors to force a vote Most investors make it a condition to their acceleration measures also can be introduced
by the holders of common stock and minority investment that founders subject their stock to for employment terminations that occur during
investors in favor of an M&A transaction that time-based vesting. For many founders, this the vesting cycle, although these can be more
has been approved by the investors. Drag- can feel uncomfortable because they worry difficult to negotiate.
along provisions strip entrepreneurs of the about getting fired
right to block an M&A transaction they might and having their Control issues relating
otherwise have by statute or by virtue of their company-ownership Over the years, the market to ownership, voting,
ownership of the company. It should be noted stake taken away from board composition,
that although Delaware courts seem to have them. On the other has evolved to include drag-along rights, and
upheld drag-along agreements among hand, investors view vesting provisions that founder vesting are
shareholders, questions remain as to the vesting as the most optimize founder packages critical to virtually
enforceability of contractual rights such as effective means to every venture financing.
those that purport to force shareholders to sell align founders’ and protect founder shares Much of what we as
their shares without any ability to exercise interests with theirs in termination scenarios. lawyers do in these
their statutory dissenters’ rights. in order to maximize transactions, whether
shareholder value. on the company or
Fairness issues aside, drag-alongs are investor side, involves negotiating control
common in deals in which the company has Over the years, the market has evolved for issues. An entrepreneur’s ability to “win” on
limited leverage, in later-stage deals in which founder vesting provisions such that the these points with an investor usually will
investors anticipate friction with possible range of packages is fairly limited. help determine whether or not he or she
entrepreneurs (or earlier investors) over However, within the range, levers can be regrets taking money from that investor. It is
possible future exit valuations, or in East pulled to optimize founder packages and important that entrepreneurs calibrate these
Coast deals in which investors often demand a protect founder shares in termination control issues properly at the outset, because
higher level of control. Entrepreneurs should scenarios. Examples include eliminating cliff it becomes increasingly difficult with each
reject drag-alongs whenever possible. vesting for founders, having a portion of successive round of financing to alter these
However, negotiations over drag-alongs don’t founders’ shares vested up front as “credit for key deal terms.
always have to be binary. For example, time served,” or negotiating a vesting term
entrepreneurs can negotiate for a drag-along shorter than the standard four years.

10
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

Navigating Down-Round and Dilutive Financings
By Yokum Taku, Partner (Palo Alto Office)

When raising money becomes more difficult, senior secured convertible debt over equity $100 million in aggregate liquidation preferences.
as it is in these challenging economic times, securities in the event the company has to file However, the company may realistically have
deal terms typically become more favorable to for bankruptcy. These financings may involve a problem getting sold for greater than $100
investors. In many cases, existing investors the issuance of secured convertible debt million in poor economic conditions in which
are left to fund the company if new investors (sometimes coupled with warrants) senior to company valuations are low.
cannot be identified. other debt with a payment of a multiple of the
principal amount on a sale of the company (or Pay to play. Many dilutive financings
The structures and terms of down-round conversion into equity securities at a multiple implement a pay-to-play mechanism through
financings are highly variable, unlike up-round of the principal amount). Three-to-five-time which stockholders not participating in the
financings, which have a fairly predictable multiples were not financing are penalized
range of terms. In a down-round financing, a uncommon during by being forced to
company issues securities to investors at a the post-dot-com convert to common stock
purchase price less than that paid by prior
The structures and terms of or losing certain rights
era. In these
investors. Absent anti-dilution protection, a situations, voting down-round financings are such as anti-dilution
down-round financing will dilute both the control, as reflected highly variable, unlike up- protection. Absent a
economic and voting interests of the prior by percentage round financings, which have pay-to-play mechanism,
stockholders. A “washout,” or highly dilutive ownership and stockholders may not
financing, is an extreme form of down-round affected by
a fairly predictable range have an incentive to risk
financing that significantly reduces the valuation, is a of terms. additional investment
percentage ownership of prior stockholders. secondary concern into a company.
to the financial
Here are some of the features of down-round return on a sale of a company and protection Enhanced rights for participating investors. In
and highly dilutive financings: in bankruptcy. some down-round financings, existing
stockholders who participate in the financing
Liquidation preference. Liquidation Milestone-based or tranched financings. may receive additional benefits over non-
preferences are typically more favorable to Investors may be reluctant to invest large participating stockholders. This is similar to
investors than in previous rounds. These amounts of money in a risky pay-to-play provisions that penalize existing
financings may involve the issuance of financing. Instead, they may provide enough stockholders for not participating in the
participating preferred stock, with senior money for a company to complete a merger or financing. For example, existing stockholders
liquidation preferences at multiples of the an asset sale or achieve a particular milestone who participate in a financing may have their
purchase price. Please keep in mind that the to raise additional funds. These financings preferred stock repriced via an adjustment to
liquidation preference may be the most may provide up to a few months of operating the conversion ratio, which would effectively
important right of the preferred stock, as the cash. give them the benefit of a lower valuation for
percentage ownership that the preferred stock their original investment. Alternatively,
represents upon conversion into common Conversion of preferred stock and participating stockholders may have the
stock may become meaningless from a recapitalizations. Some financings involve a opportunity to exchange their existing
practical perspective if the common stock is conversion of a previous series of preferred preferred stock for new preferred stock with
worthless. stock into common stock in order to decrease more favorable rights, such as a senior
the aggregate liquidation preference. In some liquidation preference.
Full-ratchet anti-dilution protection. Investors companies, previous financings may have
in risky financings may request “full-ratchet” resulted in an aggregate amount of liquidation Expanded investor protections. Some investors
anti-dilution protection to protect against preferences that may render the common may request more extensive representations
future down-round financings. stock worthless. For example, due to investor- and warranties, broader indemnification
friendly liquidation preferences or raising protection, D&O insurance, and other similar
Aggressive convertible debt terms. Many investor-favorable protections.
multiple rounds of financing, a company that
investors in highly risky financings will prefer
has raised $50 million in financing may have

11
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

Navigating Down-Round and Dilutive Financings (continued from page 11)

Drag-along rights. Investors may require drag- when faced with a dilutive financing driven by Earn approval from disinterested stockholders.
along provisions that require existing investors inside investors: Down-round financing structures typically
to vote in favor of a future sale of the require stockholder approval. Securing the
company or an amendment of the certificate Keep a compelling board record. Board approval of the stockholders who are
of incorporation to create a new series of minutes reflecting the board’s thinking and disinterested helps the company defend
preferred stock to facilitate a future financing analysis are important. Board members against an attempt to void the transaction by
(even before the terms of the preferred stock typically should meet in person or by disenchanted stockholders.
have been established). telephone conference call as opposed to
taking action by written consent, and should Fully disclose the terms. Complete disclosure
Employee-retention plans. Some financings devote more than a single meeting to decide of financing terms is essential in a down
may involve large stock-option grants to offset whether to proceed with a down-round round, with particular consideration of the
the dilutive effects of the financing for financing. The minutes should reflect the benefits of the financing terms to the inside
employees. In some companies, aggregate board’s rationale for considering a down-round investors, the likelihood of replenishment of
liquidation preferences or returns of multiple financing and its efforts to recruit potential equity incentives to management and
principal amounts on convertible debt may third-party investors. employees following completion of the
render the common stock worthless. In these financing, and factors that would adversely
situations, stock options may not be adequate Diligently assess the alternatives. The board impact non-participating stockholders.
to hire and retain employees. Instead, should attempt to demonstrate that it has
companies may implement retention plans in considered all reasonable alternatives to the Offer rights as appropriate. Perhaps one of
which employees receive a certain percentage insider-led round. Although actual contacts the most important steps in an insider-led
of proceeds upon a sale of the company. and presentations with possible new investors down-round financing is a rights offering that
are not legally required, if the company has accompanies or follows the financing. All
The role of the participating inside investors, not attempted to engage with new investors, stockholders of the company, frequently
who have the ability both to set the there should be a plausible reason in the including employees with vested options and
investment terms and make the investment, record for the board’s decision. warrant holders with “in the money” rights,
creates tension between management and should be permitted the right to participate in
minority stockholders on one hand, and the Secure approval by independent directors. the financing on substantially the same terms
participating inside investors on the other. In Approval of the financing terms by as the inside investors. The disclosure or
addition, former founders or early investors independent directors, or by a special information statement provided to all
not participating in the financing may perceive independent committee of the board stockholders of the company can serve to
the participating inside investors as empowered to authorize the financing, may summarize the financing terms while soliciting
attempting to secure control of the company allow the board to take advantage of the the interest of potential investors. The rights
by diluting their equity position. business judgment rule. This rule creates a offering should be structured in a manner to
presumption that business decisions made by comply with applicable state and federal
Furthermore, the directors affiliated with the a board of directors will be given deference by securities laws and should allow sufficient
participating inside investors are often the courts if the board’s judgment is exercised time for potential investors to respond to
regarded as having a conflict of interest with diligently and in good faith. Where the board’s the offer.
regard to their approval of the down-round decision may be influenced by conflicting
financing. This conflict of interest creates a financial interests of the directors (a so-called Unfortunately, there is no single step, or even
difficult legal environment surrounding the interested transaction), as in a down-round combination of steps, that can completely
actions of the board members and the financing, the favorable presumption of the remove the risk of legal exposure in a down-
company. In this situation, there are a number business judgment rule falls away. round financing. Board members may be faced
of steps that a board of directors and the Independent director approval may not be with the difficult decision of proceeding with a
company may consider to reduce the risk of practical, however, in many circumstances. financing that may result in litigation or
litigation from disenchanted stockholders shutting down the company.

12
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

The Do’s and Don’ts of Compensation for Early-Stage
Company Employees
By Kristen Garcia Dumont, Partner (San Francisco Office), and Jennifer Martinez, Associate (Palo Alto Office)

For more than 10 years, Steve Jobs has taken 2. DO NOT Offer Stock in Lieu of Wages 4. DO NOT Misclassify Workers as
a $1 annual salary at Apple, Inc. Of course, Independent Contractors
Jobs didn’t begin this practice until he In an effort to keep costs under control, many
returned to Apple in 1997, long after it had start-ups with large upside potential try to set One of the most common wage-and-hour
outgrown its humble beginnings in the Jobs’ up arrangements in which early-stage mistakes that companies make is the
family garage. Still, Jobs’ compensation employees are paid in equity instead of misclassification of workers as “independent
package has become popular lore among wages. Such strategies are not permissible in contractors” or “consultants” rather than as
early-stage companies. The result has been a California. While employees may receive “employees.” Under both federal and
misperception that paychecks are optional incentive compensation in the form of stock California law, independent contractors and
when a company is just starting out, options, their “wages” may not be paid in consultants are exempt from minimum wage
particularly for the founders themselves. This stock. California law requires that employees and overtime laws; thus, it is tempting for
article will outline some cardinal “do’s and be paid at least the minimum wage, in cash. companies to label workers as independent
don’ts” that start-ups should follow when Since employees must contractors in an
trying to balance the need for legal receive at least effort to avoid the
compliance with the need for preserving minimum wage, they There has been a cost of complying with
precious cash flow. cannot be compensated these laws. However,
solely in stock; however, misperception that simply paying a
The Don’ts an alternative approach paychecks are optional worker a consulting or
of offering employees a when a company is just project fee rather than
Start-ups are often comprised of a small group combination of wages hourly compensation
of workers dedicated to the ideas and cause and stock and/or
starting out, particularly for or entering into a
of the company. As such, there is often a bonuses is discussed the founders themselves. contract designating
desire on the part of both the company and its below. the worker as a
employees to either defer or not pay the consultant is not
wages of early-stage employees as a way of 3. DO NOT Defer Wages enough. Courts always will look beyond such
cutting costs. Mutual wishes aside, California arrangements and independently apply a
law is very clear—and very strict—with Because of the unique dynamic between start- multifactor analysis to determine the true
respect to the forms of employee up personnel, quite often employees (and status of any individual worker, as discussed
compensation that are and are not executives in particular) will agree to forego a further below.
permissible. Not running afoul of these laws is salary for a certain time period pending a
crucial for start-up companies, as violations financing, acquisition, or other transaction. In misclassification scenarios, the back pay
can create significant liability in the form of Generally speaking, deferred wages are and penalties owed to misclassified
class action lawsuits, wage audits, and even simply not permissible in California. Under employees can be significant, and employers
criminal charges. California law, nonexempt employees must be also can be found liable for engaging in unfair
paid at least semimonthly and exempt business practices. For example, in the recent
1. DO NOT Have Workers Volunteer Their Time employees must be paid at least once case of Cappa v. CrossTest, Inc., a disgruntled
or Labor monthly. Employers who do not pay wages on employee brought suit against his former
time can be subject to misdemeanor criminal employer, a start-up, for failure to pay
Many start-ups have the founders and their charges in addition to the wage liability. overtime wages, violation of minimum-wage
initial employees work for some temporary Furthermore, there can be personal liability for laws, and unfair business practices, among
period on a voluntary basis. This is penalties. For those employers who want to other issues. When he began working for the
impermissible in California. Regardless of how defer wages for a select group of top employer, the employee signed an agreement
willing they are, employees simply are not executives, there are formal benefit programs that expressly stated he would be working as
permitted to volunteer their time unless they that can be put into place. However, these an independent contractor; as such, the
are doing so for a public agency or private plans are highly technical and the assistance agreement dictated that his only
nonprofit company. of able legal counsel is a must. compensation would be in the form of stock

13
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

The Do’s and Don’ts of Compensation (continued from page 13)

options to vest on the achievement of certain stock option awards when the employee or the 2. DO Classify Workers as Independent
milestones. The appellate court ignored the company hits certain time or task milestones. Contractors if They Truly Meet the Test
parties’ contract altogether, finding that the
employer exercised sufficient control over the In the Cappa v. CrossTest, Inc. case mentioned Classifying workers as independent
employee’s work for him to be considered an above, for instance, the employer paid the contractors or consultants is particularly
employee, not an independent contractor. As a computer programmer in stock options that tempting for start-ups seeking to cut costs and
result, the appellate court also found the would vest quarterly after he began working, bootstrap their way forward, since
employer liable for engaging in unfair plus additional stock options to vest on the independent contractors and consultants are
business practices by failing to pay wages and achievement of three mutually agreed-upon exempt from minimum-wage and overtime
misrepresenting the employment status of the product milestones. Beyond the stock option laws. Having independent contractors and
employee. awards, however, the consultants on the payroll is, of course,
employer did not permissible, but because of the potential
The Do’s Classifying workers as compensate the liability associated with misclassification,
programmer in any start-ups should take care to ensure that
It is easy to see why
independent contractors or other way. The court workers truly meet the test for independent
all of the “don’ts” can consultants is particularly held that, because the contractors.
be frustrating for start- tempting for start-ups programmer was an
up companies and seeking to cut costs and employee and not an Whether a worker is an independent
their employees. It is independent contractor or an employee is determined by a
often the case that the bootstrap their way forward, contractor, this multifactored analysis. A worker’s job title and
employees truly want but start-ups should take compensation the worker’s and the employer’s intent in
to work for equity or care to ensure that workers arrangement violated creating the employment relationship are only
for free, for the sake California’s wage two of several factors to consider. Other
of the company. truly meet the test for laws. However, it was factors that courts will look at in determining
However, the above independent contractors. not the compensation employment status include whether the
discussion is not to with stock options employment relationship may be terminated at
say that start-ups have itself that was illegal, will; the skill required to perform the work;
no flexibility when it comes to compensating but the fact that the company stock was the who provides the instrumentalities and place
early-stage employees—this section will programmer’s sole form of compensation. As of work; whether payment is by time, piece,
outline some creative approaches companies mentioned above, employers may not rate, or job; and whether the services are part
can use while still keeping costs low. compensate workers with stock in lieu of of the employer’s regular business. The most
wages. If, however, the employer also had important factor, however, is the extent of the
1. You DO Have the Option to Pay Minimum provided the programmer with cash payment employer’s right to control the “manner and
Wage plus Bonuses and/or Stock at a minimum-wage rate for his hours worked means” of the worker’s performance.
(including overtime), the arrangement likely
As discussed above, California law requires could have been upheld. For example, Desimone v. Allstate Insurance
that all employees receive at least a minimum Co. addressed whether insurance agents at
wage, which must be paid in cash. Thus, start- Keep in mind, however, that hourly employees Allstate’s branch offices were employees or
up companies can legally structure employee in California must be paid overtime wages for independent contractors. Although Allstate set
compensation to be a combination of the more than 8 hours of work in a day or 40 in a certain business hours for branch offices,
minimum wage, in cash, in addition to bonuses week. So, it is imperative that employers keep required attendance at certain meetings,
or stock. For example, an employer could give a track of all hours worked and comply with required participation in training, established a
full-time employee a semimonthly paycheck for California’s meal-and-rest-time requirements dress code, and conducted annual evaluations
$640.00 ($8.00 per hour minimum wage for hourly employees. Counsel can assist start- of branch offices, the court held that the
multiplied by 40 hours per week, for two up clients in understanding these agents were independent contractors. The
weeks) and then provide a bonus or additional requirements to ensure full compliance. court based this determination on the fact that

14
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

Allstate could not unilaterally change agents’ look far beyond the words of an consulting Getting creative with compensation is
hiring agreements, agents had the power to agreement, the existence of salary vs. hourly certainly a way for such companies to cut
hire and fire their own subordinates and had compensation, or the parties’ intent in forming costs in their early stages. However, in
sole responsibility for their compensation, the relationship. structuring uncommon compensation
agents chose their own office locations and packages, start-ups must be aware of the
negotiated their own lease terms, and the Conclusion various ways they unwittingly can expose
agents had substantial control over the time, themselves to liability. Following the do’s and
place, and manner in which they performed It can be comforting to know that most start- don’ts outlined in this article is a good starting
their work. The Desimone case turned on the up companies face a similar dilemma— point to make sure that a company keeps its
factual circumstances of the agents’ day-to- namely, they have good ideas and good precious resources devoted to the enterprise,
day work activities, illustrating that courts will people, but they don’t have much money. rather than to defense costs.

Events
ENTREPRENEURS COLLEGE
In 2006, Wilson Sonsini Goodrich & Rosati launched its Entrepreneurs College seminar series. Presented by our firm’s attorneys, the seminars in each
session address a wide range of topics designed to help entrepreneurs focus their ideas and business strategies, build relationships, and access capital. In
response to attendee demand, there also are occasional additional sections that address issues of concern to particular industries.

Currently offered every spring, the sessions are held at our Palo Alto campus and are webcast live to our national offices. These events are available
exclusively to entrepreneurs and start-up company executives in the Wilson Sonsini Goodrich & Rosati network, which includes leaders in entrepreneurship,
venture capital, angel organizations, and other finance and advisory firms.

As part of our services to attendees and other entrepreneurs, we offer archived webcasts of the seminars, as well as a collection of PowerPoint
presentations and supporting materials. For more information about our Entrepreneurs College and other programs, please contact Tni Newhoff (email:
tnewhoff@wsgr.com).

SPRING 2009 SESSION
The Spring 2009 session of the Entrepreneurs College will begin in mid-April. Proposed seminars include the following (dates and presenters to be
announced at a later date):

Overview & Valuation regarding the allocation of founders stock and the composition of the
An overview of the start-up process and the financing of new board of directors.
entrepreneurial ventures, including methods commonly used to value
companies and how investors apply these methods to early-stage Compensation & Equity Incentives
companies and technology projects. An overview of the compensation and equity incentive structures available
to founders to attract and retain new talent. Discusses the general
Business Plans & Fundraising mechanics of creating and issuing these awards, as well as the legal and
Practical guidance for organizing a business plan as a critical planning tool tax consequences involved in the execution of compensation and equity
and preparing executive summaries, including financial projections and programs.
budgets. Also includes strategies for approaching the investment
community and exploring alternative sources of funding. Intellectual Property
A discussion of the importance of developing an IP strategy tailored to
Forming & Organizing the Start-Up & Founders Stock your particular business and the relationship between IP protection and
An exploration of the decision-making process in forming a start-up, the commercialization objectives of your business. Also covers the
including timing, documents, and the issues involved in determining the available forms of IP protection and their benefits and liabilities.
capital structure of the business organization. Also covers strategies

15
THE ENTREPRENEURS REPORT:
Private Company Financing Trends
Fall 2008

Events (continued from page 15)

Term Sheets Exits & Liquidity
An overview of term sheets and the due diligence necessary before A discussion of recent developments in exit events, including the IPO
signing. Helps provide an understanding of investor expectations, process and M&A trends. Provides an understanding of the expectations
including board seats, liquidity, registration rights, and non-compete of investors and the public capital markets and covers the recent
agreements. Discusses key provisions to include in term sheets and corporate governance and regulatory issues involved in liquidity events.
negotiation strategies for achieving the best-case investment scenario.
Biotech Session: Acquiring a Core Technology
Clean Tech Session An in-depth discussion of the issues that biotech entrepreneurs should
An in-depth discussion of the important issues that entrepreneurs need to consider when starting their ventures. Explores the process for acquiring
master in order to grow their clean tech ventures. Whether you have a a core technology, from both universities and big biotech and
developed technology or are merely interested in getting involved in the pharmaceutical companies. Discusses how these agreements will affect
clean tech industry, this session will guide you through the stages in your ongoing business operations, partnering activities, and exit and
the life cycle of financing your venture and bringing your ideas to the acquisition opportunities.
marketplace.

FALL 2008 HIGHLIGHTS:
15TH ANNUAL PHOENIX CONFERENCE
On October 3 and 4, 2008, the firm co-hosted Phoenix 2008, a two-day medical device and diagnostic conference for chief executive officers that examined
key issues facing the industry. The event was held in Scottsdale, Arizona, with more than 160 medical device CEOs in attendance, and was co-hosted by
PricewaterhouseCoopers, Versant Ventures, and Windhover Information. The conference featured a discussion with Bill Hawkins, president and chief
executive officer of Medtronic, in which he explored such issues as healthcare reform, the future of innovation, and the changing regulatory landscape; a
presentation by Alexander Tsiaras of Anatomical Travelogues, a developer of scientific visualization software; and a presentation by Tommy Thompson,
former U.S. Health and Human Services Secretary, on Medicare policy reform. Other highlights of the two-day conference included a retrospective case
study of Guidant and interactive breakout sessions addressing such topics as companies’ relationships with healthcare professionals, proposed Democratic
and Republican healthcare reforms, and successful financial strategies for medical device start-ups.

SECOND ANNUAL ALGAE BIOMASS SUMMIT
On October 23 and 24, 2008, the firm co-hosted the second annual Algae Biomass Summit in Seattle, Washington. More than 650 CEOs, start-up
executives, scientists, educators, and investors from 25 countries attended the summit, at which technologists, producers, scientists, investors, and
policymakers explored the emerging use of algae as feedstock for biofuels and other sustainable commodities. The event featured a keynote address from
venture capitalist Vinod Khosla of Khosla Ventures, who spoke about the market potential of algae production for biofuels. In addition, Congressman Jay
Inslee (D-Washington), a member of the House Energy and Commerce Committee, encouraged attendees to engage with their congressional representatives
to help educate them on the potential of algae to serve as a renewable energy source. Rounding out the two-day event, numerous panels of experts
addressed such topics as U.S. government laboratory and university algal-based research, factors considered by venture capitalists when deciding whether
to invest in a company, and the prospects for algal-based jet fuel in the commercial aviation market.

Wilson Sonsini Goodrich & Rosati co-hosted the Algae Biomass Summit with Byrne & Company. The event also served as an official conference of the Algal
Biomass Organization.

Editorial Staff: Doug Collom, editor-in-chief (Palo Alto Office); Mark Baudler (Palo Alto Office); Herb Fockler (Palo Alto Office); Craig Sherman (Seattle
Office); Yokum Taku (Palo Alto Office)
Knowledge Management Staff: Eric Little, Heather Crowell

650 Page Mill Road, Palo Alto, California 94304-1050 | Phone 650-493-9300 | Fax 650-493-6811 | www.wsgr.com
Austin New York Palo Alto San Diego San Francisco Seattle Shanghai Washington, D.C.

For more information about this report or if you wish to be included on the email subscription list for the quarterly
publications of this report, please contact Eric Little (elittle@wsgr.com). There is no subscription fee.
This communication is provided for your information only and is not intended to constitute professional advice as to any particular situation.
Please note that the opinions expressed in this newsletter are the authors’ and do not necessarily reflect the views of the firm or other Wilson Sonsini Goodrich & Rosati attorneys.
© 2008 Wilson Sonsini Goodrich & Rosati, Professional Corporation. All rights reserved.