BUS 314 Lecture 7: BUS314 Session 7

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BUS 314 Session 7
Lecture 10/31/2016
- If ou’e a iesto ad ou’e leadig the iside oud ou’e ettig agaist ouself.
o Tpiall, it’s the sae deal as efoe, hih is pett diluted eause it’s the
same share as before.
- Investors want to put money into the business and not into the founders
- Ol tie ou’ll iest i the foudes is he thee’s a had tie doig a IPO ad the
oad deides the Foudes eed soe liuidit hile thee’s also a iesto that
would be a good shareholder. At this point the company is generating a good cash flow.
- X divided by 1-peetage that the iestos ae gettig to fid the “hae Couts Post
Moe
- Optio Pool is’t alas alloated ight aa eause the Pool is to gie a ietie fo
future growth.
- Use the whole fractional share when dividing, do’t oud up the ues
- Coetile Det, ake loas to the usiess ad ot to you pesoally.
- Read Chapter 7 and Chapter 8
- Whe VC’s egi to ehae adl t ou hadest to get the off the oad.
Zeugma Systems
- Co Founded Fall 2004
- While oadad peetatio, speeds otiue to iease…oadad ARPU otiues
to decline
- Broadband networks run risk of being relegated to dumb pipe
- Net Neutrality banned companies from partnering up with others for sole promotion
- People do’t u platfos the u solutios.
- FCC Loop hole as that if a opa offe thei o seie as pootio it’s legal.
- Do an early / late adopters chart for Frontrvnners
2009 Triple Shock
- Global economic meltdown
- Venture capital situation dire
- Missed the final cut at BT
- Investor withdraws promised funds
- Company is immediately offside with bank and secured debt holder
H1 2010 Stabilizing Situation
- Paid off bank, negotiated standstill with secured debt holder
- Cut team in half, including two executives
- Recalibrated plan; VSs confirm in current economy no appetite for this business
- Emergency funding from current investors
- Hired IB to run sale process.
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Ended Up
- Selling the company to U.S. Telecom Service, cut the company in half, and placed the
losses into a smaller entity.
- Put all the Assets into a subsidiary company and sold Zeugma to U.S. Telecom
Lessons
- Pursue markets that buy from startups
- Be e a of go’t
Types of Securities
- Common Shares
o Most basic unit , the founders shares that carries no special liquidation
preferences
o It produces alignment, nobody is senior of getting paid back before the other.
- Preferred Shares: VC’s use this oall so the’ll get paid ak fist
o Simple Preferred Shares: in the event of the payout where the amount is less
than what was put in the liquidation pref works where the person gets paid their
portion and leaves. Then the remainder gets divided amongst the common
shareholders on a Pro-Rata share basis without the Pref holders participation.
However if the amount left over is above the amount that went in then the
simple prefs will be able to participate pro rata
o Participating Preferred: Investors get their money back first and get to
participate how the remaining money is allocated. (1x, 2x, 3x)
o
- Regarding Voting: Votig usuall takes plae ased o  shae  ote. VC’s a ofte
ake it hee the sdiate has  otes.
- Options: Usually used as a retention. The exercised price gets set at the current stock
price. If it gets priced lower than the current price (Underwater) then the person gets a
Tax Ratification.
o Put Option: When you have the right to sell a share. (When you have a negative
outlook o the stok ou ould sell Haig a “hot o the Copa)
o Call Option: When you have the right to buy a share (When you have a positive
outlook on the stock you would buy)
o Vesting: getting awarded a block of options based on a time period.
Vesting can accelerate If the company making the acquisition wants
100% of the stock and be able to pick and choose who they obtain.
Usually happens only for executives because people who do this are
usually trying to use their own executives
o Cliff: You do’t get athig at fist ut at a etai tie ou get a ea’s oth
o Double Trigger: change in control followed by a termination of employment ( for
easos othe tha ause i.e. ou’e doe soethig eall ad). This eflets the
fact that directors and executives are most vulnerable in the event that their
company is acquired. 90 Days stock options is general
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o Warrants: An option to buy a common share, usually offered to outsiders.
Tacked on as a loan from the lender. Lenders are less likely to call off a loan if
the’e a shaeholde i the opa.
Event or time based vesting. Typical timeline is 2 years.
Almost always have accelerate vesting.
i.e. take o a little det eause ou’e ofotale ou’ll e ale to pa
it through your cash flow. (Never want to raise equity to pay debt)
Investors will ask for a 2% warrant, i.e for every 100$ they give you they
get a 2% warrant which is 2$
Maturity Date
o R“U’s ae Restited “tok Uits (eig used as sustitute fo oo shaes
in highly volatile businesses)
Are increasingly used in public companies
Companies buy the shares from the open market and give it to the user
Means you get a share when the vesting occurs.
If you have high volatility in your stock you can have years where your
stock option goes under water
You do this if the stock market is very unsustainable you issue this.
- BLACK SCHOLES FORMULA
o Debt:
Convertible: Is’t iteded to e epaid, ad its iteded to oet to a
forthcoming financing. converts to the security sold in seed round
(common shares usually emerge during the seed round). 20 % discount
will always turn to 25% more shares as a result of the 20% discount.
Seed Round has to be above a certain dollar amount. i.e. you
have to be raising at least 1M.
As a seetee fo the iesto, they’ll usually ask fo a disout
on the shae if they feel like they’e takig a hae.
o i.e. You invest 100k but then you say you get 20% off ,
you’ll ost likely get 5% oe shaes duig the seed
round
o You iest k, ad the aluatio is at M , lets say it’s
2$/share, you get 50k shares
o Say you get a 20% discount your dollar comes back at
1.6/share, divide 100k/1.6
o Your 50k shares turn into 62,500 shares with a 20%
discount, which is basically 1.25/share
“ay you’e a lede ad youe oied that the opay ay go
really well, youll put a cap value on the seed round.
o i.e. i the eet that you hae’t doe ualified fiaig
and you have a cap of 20m , no matter what, when the
opay eahes that goal you’e paid you potio.
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