Learn about about Finding Your Way Through the Venture Capital Gauntlet with Steve Schilling, President of Convergent. In this one hour session Steve explores: The various types and sources of capital, how to determine when (and if) to raise capital, how to prepare, how the Venture Capitalist’s world works, the ins and outs of valuation and the importance of managing your Cap Table.

1. Digital Ignition
Presents
FINDING YOUR WAY
THROUGH THE VENTURE
CAPITAL GAUNTLET

2. Agenda
• The Basics – Venture Capital defined
• When are you ready to raise capital
• The Venture Capitalist Perspective
• The Ins and Outs of Valuation
• Risk, Rewards & Disclosures
• Funding, Form & Structures
• Managing your Cap Table
• Option Pools
• How much from whom
• How it’s done

3. Venture Capital the Basics
• Venture Capital – a form of financing that is provided to
small, early-stage, emerging firms that are deemed to
have high growth potential or which have demonstrated
high growth.
• Sources:
o Family & Friends
o Angels, Angel Groups & Angel Networks
o Venture Capital
o Private Equity
o Crowd-Sourced Capital

4. Venture Capital’s Perspective
• Their World
o 9 out of 10 will fail
o Success Returns must be large
o Lingo to know: Fund X, Reserves, Series A-B-C, Limiteds, Fully
invested and Cross Fund investing
o Legal life of a fund is typically 10 years but 90% live longer
• What are they looking for
1. Team
2. Idea
3. Plan
4. Validation
• Why your model is wrong

5. What drives valuation
• EBITDA
• Revenue
• Revenue Growth Rate
• Gross Margin
• Uniqueness of Product
• Scalability of model
• Standardization, documentation & Process
• Market positioning & Brand Recognition

6. The “Why” of valuation
• Predictability & Scalability is key to valuation
o EBITDA drives IRR
o Valuation is ultimately a multiple of future cash flow
• New Owner wants to know
o Revenue & EBITDA are predictable
o Business will scale up easily
o More aggressive growth is achievable
o Systems & Processes are already in place
o The new “baton carrier” will win the race
• Unicorns
o Normal rules do not apply
o Very, very, very rare

7. Pre and Post valuation
• Pre-funding valuation is more art then science
• Typical scenario
o Pre Money Valuation = $5 million (50%)
o Equity Investment = $5 million (50%)
o Incentive pool for mgt = 15%
o Post Money Valuation = $10 million
• Founders 42.5%
• Investors 42.5 (possibly with preference)
• Management Incentive pool 15%
o Larger equity investments do not necessarily dictate giving
up larger percentages of ownership

8. Scenario 1 – Organic Growth
Annualized
Run-Rate 2012 2013 2014 2015 2016
Rev 2,000 3,560 5,120 6,680 8,240 9,800
COGS 1,080 1,922 2,765 3,607 4,450 5,292
GM 920 1,638 2,355 3,073 3,790 4,508
46% 46% 46% 46% 46% 46%
S&M 100 412 412 412 412 412
Opx 800 1,156 1,312 1,802 2,036 2,270
Tot Opx 900 1,568 1,724 2,214 2,448 2,682
EBITDA 20 70 631 859 1,342 1,826
1% 2% 12% 13% 16% 19%
est Head
equiv 7 10 11 15 16 18
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2012 2013 2014 2015 2016
Rev EBITDA
-
50,000
100,000
1 2 3 4 5
Valuation (Post)
Valuation (Post)
Pre-
Money 5,000 86% 3,069 4,414 5,182 8,101 11,019
Equity 0% - - - - -
Mgt 800 14% 491 706 829 1,296 1,763
Valuation
(Post) 5,800 100% 3,560 5,120 6,012 9,397 12,782

9. Scenario 2 - $5 Mil Raise
Annualized
Run-Rate 2012 2013 2014 2015 2016
Rev 2,000 5,900 9,800 17,600 29,300 41,000
COGS 1,080 3,186 5,292 9,504 15,822 22,140
GM 920 2,714 4,508 8,096 13,478 18,860
46% 46% 46% 46% 46% 46%
S&M 100 1,760 1,660 3,220 4,780 4,780
Opx 800 2,680 3,160 2,960 4,130 5,300
Tot Opx 900 4,440 4,820 6,180 8,910 10,080
EBITDA 20 (1,726) (312) 1,916 4,568 8,780
1% -29% -3% 11% 16% 21%
est Head
equiv 7 29 32 41 59 67
Pre-Money 5,000 42% 2,458 4,083 5,588 13,323 25,608
Equity 5,000 42% 2,458 4,083 5,588 13,323 25,608
Mgt 2,000 17% 983 1,633 2,235 5,329 10,243
Valuation
(Post) 12,000 100% 5,900 9,800 13,412 31,976 61,460
(10,000)
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2012 2013 2014 2015 2016
Rev EBITDA
-
50,000
100,000
1 2 3 4 5
Valuation (Post)
Valuation (Post)

10. Scenario 3 - $10 Mil Raise
Annualized
Run-Rate 2012 2013 2014 2015 2016
Rev 2,000 9,800 17,600 29,300 44,900 60,500
COGS 1,080 5,292 9,504 15,822 24,246 32,670
GM 920 4,508 8,096 13,478 20,654 27,830
46% 46% 46% 46% 46% 46%
S&M 100 3,720 3,220 4,780 6,340 6,340
Opx 800 3,960 5,520 4,930 6,490 8,050
Tot Opx 900 7,680 8,740 9,710 12,830 14,390
EBITDA 20 (3,172) (644) 3,768 7,824 13,440
1% -32% -4% 13% 17% 22%
est Head
equiv 7 48 59 65 85 96
Pre-Money 10,000 42% 4,083 7,333 10,990 22,820 39,200
Equity 10,000 42% 4,083 7,333 10,990 22,820 39,200
Mgt 4,000 17% 1,633 2,933 4,396 9,128 15,680
Valuation
(Post) 24,000 100% 9,800 17,600 26,376 54,768 94,080 -
50,000
100,000
1 2 3 4 5
Valuation (Post)
Valuation (Post)
(10,000)
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2012 2013 2014 2015 2016
Rev EBITDA

11. Exit Valuation Comparison
• Exit Valuations are calculated as a
multiple of EBITDA
• Actual valuation would likely be
greater for larger faster growing
scenarios
• Estimates exit valuations are as
follow
o $0 Raise = $11 mil
o $5 Mil Raise = $61 mil [Investor’s Return 5x]
o $10 Mil Raise = $95 mil [Investor’s Return 4x]
• Founders own 42.5% (charted
below)
-
10,000
20,000
30,000
40,000
50,000
60,000
70,000
2012 2013 2014 2015 2016
Revenue
0 Mil
5 Mil
10 Mil
-
20,000
40,000
60,000
80,000
100,000
2012 2013 2014 2015 2016
Valuation
0 Mil
5 Mil
10 Mil
- 5,000 10,000 15,000 20,000 25,000 30,000
2012
2013
2014
2015
2016
0 Mil
5 Mil
10 Mil

12. Risk, Rewards & Disclosures
• Disclosures
o The numbers presented here are for discussion purposes only – actual
performance WILL VARY!
o Valuations are estimates and will be influenced by many factors including
things outside of the company’s control – economic conditions for example
• Private equity brings both strings and benefits
o Often compared to getting married (but with no options for divorce)
o Increased growth requirements (capital return expectations)
o Additional demands & oversight (board seats)
o Benefits include resources, contacts and industry expertise
o Access to capital – add on rounds
o Can ultimately mean loss of control
o Larger returns

13. Forms, Structures & Terms
• Common
• Preferred
• Convertible (or Convert)
• Up Rounds and Down Rounds & other Follow on
Rounds
• Cram Down

14. Managing your Cap Table
• A capitalization, or cap, table is a record of the pro-rata
stock ownership of the company’s founders and
shareholders.
• The basic data included in a cap table are:
o Company stockholders
o Classes of stock and how much was paid
o How many shares of each class are owned and by whom
o Total ownership on a fully diluted basis (issued and non issued (options))
• Number and “Quality” of shareholders matters
• Reps and Warranties

15. Option Pools
Title Range*
CEO 5 - 10
COO 2 - 5
VP 1 - 2
Independent Advisor 1
Director .4 – 1.25
Lead Engineer / Developer .5 – 1
Senior Engineer / Developer .33 - .66
Junior Engineer / Developer .2 - .33
Management option pools are typically 10% to 20% of total equity
* Represents percentage of total option pool

16. How much from whom
• Friends and family < $100,000
• Angles $100,000 to $700,000
• Super Angles $200,000 to $1,000,000
• No man’s land $1,000,000 to $2,000,000
• Early Stage Venture $2,000,000 to $7,000,000
• Later Stage Venture $5,000,000 to $25,000,000
• Silicon Valley Venture $5,000,000 Plus
• Private Equity $100,000,000 +

17. How its done
• The Pitch Deck
o Practice, practice, practice
o Listen to feedback (even conflicting feedback)
• The Financial Model
• 1,000s of meetings & presentations
o Ask everyone for a referral
• Networking is critical
• Don’t forget “Strategics”
• Look beyond Atlanta
• Be careful of the meaningless “yes”

18. The Beginning
Questions