Seed Transformation Program

Financing Your Growth

Professor Amit Seru

Steven and Roberta Denning Professor, Stanford GSB
Senior Fellow, Hoover Institution
WARM UP:
BIG PICTURE
 What is Finance about?
q A Firm is a collection of projects
❍ Each project produces (or consumes) cash
A L flows at different points of time
❍ Our job is to figure out a way to compare
OA1 D different projects
OA.. 2 E
Projects ❍ Investors use similar framework
.
OAN q Complications
❍ Cash flows?
❍ Cash flows arrive at different points of time?
❍ Cash flows fluctuate over time?
 What is Finance about?

A L
FCF
OA D
FCFt = EBITt(1 – t) + Dept – CAPXt – ΔNWCt
t E

CFt
V =å
t (1 + r )
t

Required Return
Risk-Free Risk
or = +
Interest Rate Premium
Cost of Capital
 What About Financing?

q The total value of the company is the

value of all the cash it will be able to
A L distribute to investors (debt + equity)
FCF
OA D rD
q Funding from two sources:
t E rE ❍ Equity (shareholders/common shares)
❍ Debt (banks, bond holders)
Discount rate: rA
 Firm and its Value
Assets Liabilities
Cash Debt
Tangible
Plant/Prop/Equip
Enterprise Net Working Cap, etc. Equity
Value Intangible
= PV(FCF) IP, Human Cap, Brands,
etc.

Enterprise Value = PV(FCF) = Equity + Debt – Cash

Value of Equity = PV(FCF) + Cash – Debt
Digging Deeper into Sources of Value (FCF)

q Free Cash Flows

❍ Projections
❍ Growth

FCF1 FCF2 FCF10 V10

𝐹𝐶𝐹" (1 + 𝑔)
V0 = + 2
+ ... + 𝑉+ = 10
10 !
1 + r (1 + r ) (1 + r ) (1 + r ) (𝑟 − 𝑔)
 Digging Deeper into Sources of Value (r)

Discount Rate = Compensation for Time + Compensation for Risk

q Discount Rate
❍ Risk free rate: Yield curve (inflation)
❍ Risk Premium: (RM – RF)
❍
Other Approach to Valuation: Multiple Analysis
BROAD STEPS FOR MULTIPLE ANALYSIS

Find Comparable Firms

Calculate “Multiple” for Comparables

Calculate Average across Comparables

Multiply Average with Characteristic of Firm to be Valued

Different Multiples Give Different “Answers”

Multiples method computes the value of the firm based on the average “multiple” – i.e., ratio of value
to some key characteristic -- of comparable firms multiplied by the same key characteristic of the firm
being valued. Value of the firm = [Value/Key Characteristic]Comparables × Key Characteristic of Firm,
with Value/Key Characteristic being the “multiple”. The exact multiple being used depends on the
context.
 Other Approach to Valuation: Multiple Analysis

q Common Multiples Used…

❍ Cash-flow-based Value multiples (Market Value Firm/Earnings, Market Value Firm/EBITDA)
❍ Cash-flow-based Price multiples (Price/Earnings (P/E), Price/EBITDA)
❍ Asset-based Value multiples (Market Value Firm/Book Value Assets)

q Sometimes industry-specific value multiples used (e.g., MV Firm/Hospital

Beds, MV Firm/Number of Customers)
❍ Characteristic based on industry (e.g., Clicks For Web-Site, Paid Miles Flown for Airlines or
Number of Patents For a Hi-Tech Firm)
❍ Or on context (e.g., using Revenues for unprofitable firms instead of Profits or EBIDTA).
FINANCING
TYPES
Financing? Why Care?
 Financing Possibilities?

FINANCING ECOSYSTEM

Founders, friends
High and family
Risk Bourne by Investor

Business angels
Venture
capitalists
Nonfinancial
corporations
Equity
markets
Low

Commercial banks

Seed Start-up Early Growth Established

Stage
Financing Possibilities?
DEBT VERSUS
EQUITY
 Debt versus Equity: Big Picture
Simple contract: D with Face value = 50
120
A L
Total
OA D
100
Debt E
80
Value of Claim

Equity

60

40
q Debt
❍ “First Stab” at Cash flows à RD < RE
20 ❍ RD and Covenants
0
0 10 20 30 40 50 60 70 80 90 100
Value of Cash Flows
Payoff
Debt Or Equity?

Payoff
Exit value
Exit value
q First stab at cashflows q Last in line
q Focus on downside q Focus on upside
q Avoid risky and uncertain projects q Swing for the fences, e.g. VC/PE
 Why is Debt capital interesting? (or not)
PROS CONS
q Can be quick to access q Can be expensive

q Easy to exit the relationship/ return capital q Impatient capital – cash goes to service
interest payments vs. building your
q Lenders do not get involved in decision- business
making at your company
q Generally requires assets that can serve as
q Recording-keeping & reporting collateral
requirements are light
What are lenders/debt holders looking for?
q 100%+ collateral (the easier to seize & sell-off, the better)

q Your banking business; business account, payroll processing, personal

account, staff accounts, etc.

q A business plan which shows the ability to service interest & repay on-time

q Good record-keeping practices; annual audited accounts, proper board

resolutions

q Personal guarantee
 What should you look out for?
q Price: Not just the interest rate, but all other fees associated with securing and
paying back the loan

q Be very cautious with foreign currency obligations

q Run your numbers and always factor in working capital

q Try to match the duration of the debt with the duration of the project – don’t
promise to pay back in 2 years, when you’ll still be under construction in Year 3

q Increase your asset base through revaluation of property

 Why is Equity capital interesting? (or not)
PROS CONS
q Longer-term view – gives time to grow the q Potentially reduces your level of control – all
business before having to show financial shareholders have a right to influence
results decision-making

q Investors can add-value through their q Due diligence can be intrusive

expertise/skills and networks
q Exiting the relationship may be complicated
q Presence of an independent 3rd-party can
be a catalyst for change
q Requires additional transparency
 What are Equity Investors looking for?
q A solid plan and management who can execute it;
❍ A level of open-mindedness and self-awareness to review/edit the plan and augment
the team
❍ The above often leads to attractive cash flow, which is the investors’ ultimate objective
(rather than assets)

q All information under the sun (financials, operational metrics, market information)

q Good working ‘chemistry’

q A board seat and regular board meetings

q A liquidity event at some point in the future (3 to 7 yrs)

 What should you look out for?
q Valuation; do your research/ hire an advisor. Going prices in your industry?

q Do your own background check; Where does their money come from? What is
their track-record? How will they add value to your business? Ask for
references

q Good working ‘chemistry’

q Come to a clear understanding on the possible & preferred exit scenarios

q Review the Shareholders’ Agreement very carefully

q Prepare yourself as people will question your decision.

 Debt Or Equity?
TRADEOFF MODEL

The graph shows the level of debt on the X axis and the value of the levered firm on the Y axis. As the level of debt increases, the value of the firm increases
from the interest tax shield, but also from the improvements in managerial incentives. If leverage is too high, the PV of financial distress costs as well as costs of
less financial flexibility. Source: Berk and DeMarzo, 4th edition.
 Debt Or Equity?

MARKET REACTION TO EQUITY ISSUE ANNOUNCEMENT SOURCES OF FUNDING FOR CAPITAL

EXPENDITURES

The figure plots stock price movement around equity offering (SEO) announcement for firms in the The chart shows net equity and debt issues as a percentage of total capital expenditures for firms in
US. On average, there is a drop in the stock price (3% or so) when firms announce equity issuance. the US. The majority of capital expenditures are financed from retained earnings, followed by debt.
The price change is plotted after removing the effect of market index. Given the negative market On net, in fact, firms are buying back equity more than they are issuing it. This would be very
reaction, why would firms with good private information (about future FCFs say) ever want to issue consistent with firms trying to take on projects without incurring costly signaling. Signaling is costly
equity? They might do so if they expect funds raised from issuing equity to be invested in projects because firms with good information are signaling by taking actions – such as paying out cash, or
that would generate returns that are large enough to more than compensate for the drop in stock raising debt or buying back shares – which they otherwise would not undertake. Source: Berk and
price at equity issuance. Especially, if the firm has no other sources of financing available (like DeMarzo, 4th edition.
internal funds) or available at a reasonable cost (like debt). Source: Berk and DeMarzo, 4th edition.
Hybrid Securities: Part Equity and Part Debt
Example: Convertible Bonds
q A convertible bond gives the owner the right (but not the obligation) to exchange
the bond for a fixed number of common shares.
❍ Lower interest payments than regular bonds à value of being able to convert

20,000
Equity
Total payoff to 18,000
new claimholders 16,000 Convertible debt
14,000
12,000 Straight debt
10,000
8,000
6,000
4,000
2,000
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Value of the firm's assets in one year
“RISK CAPITAL”
Financing Risk
 Cycle of Risky Funding

Self-funding by founders

“Family and friends” round

Accelerators
Angels
80%?
Failure
VC Investment

More VC
Investments
~80%

M&A IPO
Ownership Considerations: “Startup” Equity Financing
VPre = Pre-money value
NOld = total number shares already issued
P = price per share Pre
V
P = Old
N
X = dollars to be raised
NNew = number of new shares that must be issued
X = P ´N New

VPost = Post-money value

V Post
= V Pre
+X
Ownership Considerations: “Startup” Equity Financing
post-money value

pre-money pre-money money

value value raised

+
Price per
= = Share
+

“old” “old” “new”

shares shares shares

total shares
Ownership Considerations: Outside Equity Financing

MARKET VALUE BALANCE SHEET MARKET VALUE BALANCE SHEET AFTER VC RAISE
BEFORE CAPITAL RAISE

A L A L
OA=300 300= EFounder OA=300 300= EFounder
OANEW=100 100= EVC

300=VF 300=VF 400=VF 400=VF

On the left side is the MV balance sheet before the capital raise, but at valuations implied by a “term sheet” offer. Without a
term sheet (investment offer) it might not be clear that the assets are worth anything at all. Different investors may take different
operating strategies, which will be reflected in the valuations implied by the term sheet. Some may take more risky strategies for
instance. On the right side is MV balance sheet after a $100 million raise at a $300 million pre-money valuation with no option
pool.
 A Simple Example: VC/PE Firm to Rescue

q You started your company in 2016, getting some money from friends and family
❍ 300,000 initial valuation
❍ 30,000 shares

q In 2020 you will need to raise 1M in outside funding

❍ 4M post money valuation
❍ VC/PE firm comes to rescue
 A Simple Example: VC/PE Firm to Rescue

2020
2016
Pre Money Valuation 3,000,000 =4,000,000 -1,000,000
Initial Valuation 300,000 Number of Old Shares 30,000
Share Price 10.00 Price Per Share 100.00 =3,000,000/30,000
Total Shares 30,000 Money to be Raised 1,000,000
Number of New Shares 10,000 =1,000,000/100.00
Post Money Valuation 4,000,000

Shares %
???
Shares %
Founder 20,000 66.67% Founder 20,000 50.00%
Friends and Family 10,000 33.33% Friends and Family 10,000 25.00%
Total 30,000 PE Firm 10,000 25.00%
Total 40,000
 4,000,000 Post Money Valuation ???
10,000,000
10,000,000
Expected Total
9,000,000
Firm Value at
8,000,000
25% Discount Rate Exit
7,000,000

6,000,000

5,000,000
4,096,000
4,000,000 40% Discount Rate
3,000,000
2,603,000 2,000,000

1,000,000

0
2020.0 2021.0 2022.0 2023.0 2024.0
Year
 Contract? Convertible Preferred Shares

PAYOFF TO FOUNDERS AND VC IN $ MILLION

450
Founders Series A
400

350 A L
300 OA=200 200= EFounder
250 OANEW=50 50= EVC
200 80% share
150 250=VF 250=VF

100

50
20% share
0
0 50 100 150 200 250 300 350 400 450 500
Total Exit Proceeds in $ Millions
The graph shows the payoffs to different parties as a function of the total exit proceeds -- e.g., the entire amount the firm is sold for in a trade sale, or the entire value of company shares in an IPO -- for a
term sheet $50 million investment at a $200 million pre-money valuation, with no option pool and a 1x liquidation preference. The solid red line shows the payoffs to Founders, who receive nothing if the
firm is sold for less than $50 million; then they receive every dollar up to $250 million, then an 80% share of every dollar above $250 million. The dotted red line shows, for comparison, what a regular
equity investor with 80% ownership would receive. The solid yellow line shows the payoffs to the Venture Capitalist, who has a right to at least a $50 million payoff if funds are there, and shares in 20% of
the company equity in a successful exit. The dotted yellow line shows for comparison what a regular equity investor with 20% ownership would receive.
Example of Angels
 Examples of Angels

70+ investments
12 + investments
 Smaller Check Size

Worldwide
17,445 Median Size
$25,000,000

$20,000,000
Europe U.S. Asia
1,514 $15,000,000
2,709 12,156 $15,000,000

$10,000,000
$7,000,000
California Massachusetts New York
5,605 597 2,087 $5,000,000
$1,000,000 $350,000
$0
Equity Angel Venture A Venture B
Silicon Crowdfunding
Valley
3,858

Stanford
582
 Flow of Funds

Investors

Angels

Fund-raising
Returns

Securities

Cash
Venture Capitalist
Securities

Cash

Portfolio
Companies
Portfolio
Companies
 Structure of Funds: GP/LP

Limited
Partner Limited
Partner
General
Partners Investors (LPs) Intermediaries (GPs)
Corp. Pension Funds
Limited Public Pension Funds
PE and LBO Funds
VC Funds
Issuers
$ $ Start-ups
Partner Endowments Growth Equity Funds (Early Stage
Foundations Mezzanine Funds Later Stage)
Sovereign Wealth Funds Distressed Debt Funds
Management Venture Capital Insurance Companies
LP
Infrastructure Funds
Private Cos.
(Growth Capital
Corp. Investors PE
Company Fund X Banks Interests
Venture Leasing
Also: Securities LBOs)
Public Cos.
Partnership Partnership Wealthy Individuals Fin’l Institution Affiliates (LBOs)
Also: Publicly Traded PE Firms
Fund of Funds Activist Hedge Funds

Venture Capital
Fund XI
Partnership Portfolio Portfolio Portfolio (Direct
Investments)
Company Company Company
FOUNDER
PERSPECTIVE
 Growth, Liquidity and Control

Growth

Liquidity Control

When deciding the structural form of the corporation, managers/owners face tradeoffs that creates a tension between liquidity, growth and
control. First, between control and growth: a firm must decide how much money to bring in from outside to invest in the company versus using own
funds, bearing in mind that outside capital comes at the expense of reduced control, increased accountability and less possibility of extracting
private benefits. Second, between liquidity and growth: a firm must decide how much money from operating assets to pay itself (controlling and
non-controlling shareholders). The tradeoff is that paying out allows investors to smooth consumption, whereas reinvestment would allow the firm
to grow and also provide more benefits and perks only to controlling shareholders.
INVESTOR
PERSPECTIVE
 VC/PE Value Creation: Big Picture
Financial
Engineering
A L
Operational OA D
Engineering
E
Governance
Engineering
q Three sources of value creation:
❍ Operational: Operations of the firm (revenues, costs)…
❍ Financial: Mix of financing, payout policy…
❍ Governance: Incentives, ownership, disclosure, board structure,…
Value Creation only through $$?

60

50
Assisting portfolio companies
40

30 Sourcing deals

20
Managing firm

10 Networking
Meeting LPs
0 Other
WHY DOES
GOVERNANCE
MATTER?
 Governance and Finance

IMPORTANT ASPECTS OF GOVERNANCE EXTERNAL MARKET SIZE AND DISCLOSURE

Research has isolated several aspects of governance that are considered important by external This figure plots the residualized external-market-capitalization-to-GDP ratio and disclosure
financiers. The first aspect relates to transparency and disclosure. The second aspect relates to the requirement index. Residualization entails regressing that variable (e.g., disclosure requirement Index
nature of the board of directors. The third important aspect relates to rights of creditors. A related or external-market-capitalization-to-GDP ratio) on several “control variables” such as anti-director
aspect of governance is the efficiency of courts in resolving creditor-firm disputes. Finally, because right index, log of GDP per capita, and efficiency of the judiciary. It allows us to assess the
external financing is difficult to obtain in emerging economies, projects are financed in large part by relationship between variables that are plotted, keeping the impact of control variables the same. The
the internal wealth of founders. Therefore, firms in such markets have a more concentrated ownership disclosure requirements index measures the extent to which various types of information are disclosed.
structure relative to firms in developed economies. Source: LaPorta et al. (2008) A higher index corresponds with more stringent disclosure requirements. Source: LaPorta et al. (2006)
 Governance, Markets and Risk Capital

EQUITY AND DEBT MARKETS PE MARKET

This figure presents the size of equity, bank and private bond market in various economies. It shows The data plotted represents the proportion of total PE fundraising and number of funds in emerging
that equity and debt financing in developed economies far outpaces their emerging market markets relative to overall aggregates. It shows the low penetration of PE in emerging markets. Most
counterparts. The essence of this boils down to the fact that when lenders can more easily force PE investments in EMs tend to be non-majority investments. This is in large part a product of the
repayment, redeem collateral, or obtain control, they are more willing to extend credit. Similarly, business culture: founders and owners (often families) are often averse to giving up control. Moreover,
external equity providers are more likely to extend financing when they are assured that their rights PE firms find it difficult to run firms without founders since valuable, proprietary knowledge resides
will be preserved and that they will get paid by the firm in the future (through dividends or buybacks with the founders. Exiting investments in such environments is also challenging. Markets tend to be
for instance). Source: Beck et al. (2009). less liquid and less developed, making IPOs difficult. Source: Preqin Special Report on PE in EMs
 Governance in Contracts

So long as the Investor holds any Investment Securities of the

Board Company, it will be entitled to elect such number of board
members on the Company’s board of directors (the
Representation
“Investor’s Directors”), such that the Investor is represented
by such proportion of board members equaling not less than
its ownership of the company’s share capital. The Chairman
of the Board will be an independent mutually acceptable to
both Investor and Sponsor.
 Down Round Protection
If, while the Investor holds any investment Securities in the
Down Round Company, any subsequent equity or equity-linked financing
Protection rounds are priced on the basis of a pre-money valuation of
the Company that is lower than the post-money valuation
resulting from the Investment (a “Lower Valuation”), the
Company shall issue to the Investor a number of free
common shares, or shares issued at the lowest price
allowable by law, of the Company, such that the Investor
own after such issuance the number of Investment
Securities it would have owned if they had invested in the
Selected Subsidiaries on the basis of the Lower Valuation.
 Investor’s Tag Along Rights
If any of the Existing Shareholders proposes to sell/transfer
Investor’s Tag all or any of their shareholding in the Company, the New
Along Rights: Investor shall have the right (but not the obligation) to
require the third party acquirer, to purchase from the New
Investors, shares held by the New Investor in the Company
pro-rata to the shares being sold/transferred by the Existing
Shareholders, for the same consideration per share and
upon the same terms and conditions as to be paid and
given to the Existing Shareholders by the third party
acquirer.
 Investor’s Preemptive Rights
The Investor shall have a pro rata right, but not an
Investor’s obligation, based on its percentage equity ownership in the
Preemptive Company, to participate in any subsequent issuances of
Rights: equity or quasi-equity instrument that the Company may
propose to issue, other than securities to be issued
(i) pursuant to a board-approved option plan;
(ii) upon a share split;
(iii) on exercise, conversion or exchange of any share equivalent; or
(iv) as consideration for an acquisition, duly authorized by the board
as well as any equity or quasi equity instrument that any other
Shareholder proposes to transfer.
 Investor’s Right of First Refusal

In the event any of the Founding Shareholders of the

Company, intend to sell their shareholding in the Company
Investor’s or a portion of it to a third party, then such selling
Right of First shareholder shall first offer the right to purchase such
Refusal shares to the New Investor at the same price and terms
and conditions as it was offered to the third party.
 Investor’s Drag Along Rights

If the Company cannot provide an exit to the Investors by

Investor’s the Target Exit Date, the New Investors will have a right to
Drag Along drag the Founding Shareholders and the Existing
Rights: Shareholders and force a sale.
CONCLUSION
 Conclusion

q “Warm Up”

q Financing Type across Lifecyle

q Debt versus Equity

q Risk Capital

q Founder and Investor Perspectives

q Why Governance Matters

CASE STUDIES
Date Amount / Round Valuation Est. Revenue Lead Investors
Accel Partners
May, 2012 $70M / Series A — $50M
Sequoia Capital
Accel Partners
$850M pre-
Sep, 2014 $150M / Series B $150M Insight Venture
money
Partners
Accel Partners
Apr, 2017 $180M / Series C $2.3B pre-money $250M Insight Venture
Partners
Nov, 2018 — $8B $400M+ SAP
Requirements for Bank/Debt
New forms of Financing Emerging
APPENDIX:
PAYOFF
EXAMPLES
 Three Financing Strategies

• Equity
– Issue 1,000 new shares at 10 a share.
• Straight Debt
– Issue 10 zero coupon, 1 year bonds at 1,000 each.
– Interest rate is 15% (promise to pay 1,150 in a year).
• Convertible Debt
– Issue 10 convertible, 1 year zero coupon bonds at 1000 each.
– Interest rate is 8% (promise to pay 1,080 in a year).
– Each bond can be converted into 80 shares of common stock.
– Conversion Price = 1,080/80= 13.50 (i.e., 35% “conversion premium”)
 Case 1: Payoff to New Equity Holders
as a Function of Firm's Total Value in One Year
New equity holders own half of the firm.
20,000
18,000
16,000
Total payoff to 14,000
new equity 12,000
holders 10,000
8,000
6,000
4,000
2,000
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Value of the firm's assets in one year
 Case 2: Payoff to Straight Debt Holders
as a Function of Firm's Total Value in One Year
Debt holders are paid 11,500 if the total value of the firm's assets is at
least 11,500; otherwise their payoff is = the value of the firm's assets.
20,000
18,000
16,000
Total payoff to 14,000
straight bondholders 12,000
10,000
8,000
6,000
4,000
2,000
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Value of the firm's assets in one year
 Case 3: Payoff to Convertible Debt Holders
as a Function of Firm's Total Value in One Year
If all bonds are converted, then the total number of shares becomes 1,800, of which
convertible bond holders have 800. Thus, they would own 4/9 of the firm upon
conversion. It is optimal to convert when 4/9 of the firm's value is larger than 10,800,
i.e., when firm's value is larger than 24,300.
20,000
Total payoff to 18,000
convertible 16,000
bondholders 14,000
12,000
10,000 slope = 4/9
8,000
6,000
4,000
2,000
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Value of the firm's assets in one year
 Payoffs to New Claim Holders
under the Three Financing Strategies
20,000
Equity
Total payoff to 18,000
new claimholders 16,000 Convertible debt
14,000
12,000 Straight debt
10,000
8,000
6,000
4,000
2,000
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000
Value of the firm's assets in one year
 Payoffs to New Claim Holders
under the Three Financing Strategies (zoomed)
Equity
16,000
15,000
14,000 Convertible debt
Total payoff to
new claimholders 13,000
12,000 Straight debt
11,000
10,000
9,000
8,000
7,000
6,000
15,000 20,000 25,000 30,000
Value of the firm's assets in one year
 Convertible Redeemable
Preference Shares
The Investor proposes to invest the sum of up to USD 1
Convertible
Redeemable million in the Company, via Convertible Redeemable
Preference Preference Shares (the “Convertible Notes”).
Shares Face Value: the Face value of the Convertible Redeemable
Preference shares will be USD 1 million.
Coupon: The Convertible Redeemable Preference Shares
shall attract a coupon of 11.5% per annum, payable
quarterly on agreed Coupon Payment Dates.
Tenor: The Convertible Notes shall mature five years after
the Closing Date, and be repaid at the end of their Tenor
at the Redemption Amount.
 Convertible Redeemable
Preference Shares
Redemption Amount: the redemption amount will be
Convertible
Redeemable equal to 2.5x the Face Value of the Convertible Notes and
Preference Shares would be due a day after the 5th anniversary.
Term: While it is not the Investor’s intention to convert
the Convertible Notes, it reserves the right to convert the
Notes into Ordinary Shares at any time during the life of
the investment upon the occurrence of the following
events:
• The Company fails to meet the performance targets
agreed upon with the Investor for six (6) consecutive
quarters;
• etc.
 Convertible Redeemable
Preference Shares
This right can be exercised partially or wholly on the
Convertible
Redeemable Note at the Investor’s discretion at a coupon payment
Preference Shares date. This right will be exercised at a ratio derived from
the valuation of the company based on the average of:
• EBITDA Multiple of 4.0x average EBITDA over a 3
year period based on the most recent audited
annual accounts;
AND
• Book value multiple of 1.2x average book value
over a 3 year period based on the most recent
audited annual account.
 Liquidation Preference
On liquidation, winding up, dissolution or sale (through a merger, sale of
Liquidation shares, sale of assets, or other acquisition) of the Company liquidation
Preference: proceeds (the "Liquidation Proceeds") will be paid as follows (the
"Liquidation Preference"):
a) To the New Investor: 100% of the Purchase Price calculated by
multiplying the price for A Series shares times their Ordinary
Shares ownership.
b) If Liquidation Proceeds remain after payout (a) , proceeds are paid
to the Ordinary Shareholders: until the total returned to the
Ordinary Shareholders is equal to 100% of their ownership
calculated by multiplying the price for A Series shares times their
Ordinary Shares ownership.
c) If Liquidation Proceeds remain after payout (b), the remaining
funds will be distributed pro rata to the New Investors, calculated
on an as-if-converted basis, and to the Ordinary Shareholders.
Liquidation Preference Series A Initial Value = 2.5m
Series A Shares = 62.5% of Total
Liquidation Preference = 1x
6

4
Slope = 1
3 Slope = 0.625

0
0 1 2 3 4 5 6 7 8
Value At Liquidation
 Founders’ Payoff Series A Initial Value = 2.5m
Series A Shares = 62.5% of Total
Liquidation Preference = 1x
3.5

3
Founders’ Slope = 0.375
Payoff 2.5

1.5
Slope = 1
1

0.5

0
0 1 2 3 4 5 6 7 8
Value of At Liquidation
 More Aggressive
Liquidation Preference
On liquidation, winding up, dissolution or sale (through a
Liquidation merger, sale of shares, sale of assets, or other acquisition) of
Preference: the Company liquidation proceeds (the "Liquidation Proceeds")
will be paid as follows (the "Liquidation Preference"):
a) To the New Investor: 100% of the Purchase Price
calculated by multiplying the price for A Series shares
times their Ordinary Shares ownership.
b) If Liquidation Proceeds remain after payout (a), the
remaining funds will be distributed pro rata to the New
Investors, calculated on an as-if-converted basis, and to
the Ordinary Shareholders.
 More Aggressive Series A Initial Value = 2.5m
Liquidation Preference Series A Shares = 62.5% of Total
Liquidation Preference = 1x
7

5 Slope = 0.625
4

3 Slope = 1
2

0
0 1 2 3 4 5 6 7 8
Value of At Liquidation
 Comparison for Founders Series A Initial Value = 2.5m
Series A Shares = 62.5% of Total
Liquidation Preference = 1x
3.5
3
Founders’ 2.5
Payoff
2
1.5
1
0.5
0
0 1 2 3 4 5 6 7 8
Value At Liquidation