Financing the Entrepreneurs Business Steve Leese John Snow

Financing the Entrepreneur’s Business: Steve Leese John Snow David Vogel January 18, 2011

Financing the Entrepreneur’s Business Introductions • David Vogel, Velocity Equity Partners • Steve Leese, Quabbin Capital • John Snow, Quabbin Capital 2

Agenda • Sources of Financing • • • Friends and Family Angels Venture Capital Terms of Venture Capital Financing Questions – don’t wait until the end! 3

Sources of Financing • • Friends and Family Angels Venture Capital Commercial Loans Government Loans Corporate or Strategic Partners Grants from foundations 4

Sources of Financing Stage Pre-Seed/ Start-Up Source Founders, Friends and Family Individual Angels Investment up to $100, 000 to $500, 000 Early Funding Gap between $500, 000 and $2, 000 5 Later Venture Funds $2, 000 and up

Venture Capital • Advantages – More Cash • Access to Additional Capital – Value Added Expertise • • Management Experience Industry Experience Access to Strategic Partners Access to Personnel – Enhance Credibility in Marketplace – Facilitate Liquidity Event 6

Venture Capital (continued) • Disadvantages – Months Long Process – Dilution of Equity Ownership – Sacrifice Control – Replacement of Management – Forced Liquidity Event – V. C. Imposed Business Objectives – Your New “Partner”/“Boss” 7

Employee Matters • • • Employment Agreements Non-Competition Agreements Confidentiality Agreements Assignment of inventions and proprietary information Key Man Life Insurance Shares reserved for employees – Stock option pool: 10 – 20% of fully diluted – Vesting provisions for stock options • Restrict transfer of shares by Founders and Employees – Reverse vesting (often opposed by Founders) – Vesting 25% per year – Buy-back of unvested shares upon termination of employment 8

Additional Rights • Information Rights – Annual, quarterly and monthly financial statements – Budgets and business plans – Inspection rights • Registration Rights – Contractual right to register or participate in registration of shares for resale to public – Liquidity for investors 9

Private Equity-beyond venture • Used for more advanced cases: – Company has sustainable earnings or is approaching earnings stage rapidly – Buyouts • Control (50% +) passes to investor group – Growth equity, mezzanine loans: • Used for acquisitions, expansion, hiring, partial sale of company • Capital passes from investors to company 10

Why private equity? • Can accelerate company’s growth • Experience of capital providers • Better governance – Board of directors – Debt structure requires discipline, planning – Growth strategy-the game changes 11

Risk-not a four letter word • Management-can they grow the company? • Markets-will they remain favorable? • Economy-recent downturn as example. • Obsolescence – Commodity like product or service • Investor group, lenders-leadership 12

Is it worth it? • Capital is expensive • Investment/purchase process a huge distraction to a business • Managements can be discouraged • Many companies good to own – Only a few are worth investing in • Growth is always key-creates value 13

Example-NE Patriots • A $172 million buyout in 1994 • Now worth $1. 4 billion (source: Forbes) – Breakeven business-potential earnings – Markets-Patriots became a great product – Economy-fans have persevered, grown – Obsolescence-shrewd personnel moves – Leadership-the Kraft’s, Belichick, Brady, Wilfork; creates a professional culture 14

Private equity realizations • Exits: – Sell to a strategic investor (a competitor)usually most desirable – Sell to another financial buyer – IPO-currently limited to large companies • $1 billion plus buyouts – Downside scenarios • Distressed sales-debt driven-result in losses • Bankruptcy 15

Questions, comments? • We are available anytime to respond to questions • It has been our privilege to be here tonight. 16

Steve Leese and John Snow Quabbin Capital David Vogel Velocity Equity Partners Phone: 617 -338 -2545 Email: dvogel@velocityep. com Phone: 617 330 -9041 Email: steve. leese@quabbincapital. com john. snow@quabbincapital. com 17