LBA: Financing startups

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This spreadsheet supports STUDENT analysis of the case “OptiGuard, Inc.: Series A–Round Term Sheet”
F-1798).
(UVA-
This spreadsheet was prepared by Susan Chaplinsky, Tipton R. Snavely Professor of Business Administration. Copyright © 2017 by the University of Virginia Darden School Foundation,
Charlottesville, VA. All rights reserved. For customer service inquiries, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, posted
to the Internet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of
the highest quality, so please submit any errata to editorial@dardenbusinesspublishing.com.
Jul. 21, 2017
Exhibit 1
OptiGuard, Inc.: Series A–Round Term Sheet
The Security Market Map
Identify and Access
Management
Network Security
Endpoint Security
Messaging (e-mail)
Security
User Provisioning:
Processes for granting,
changing, and auditing access
rights for user accounts
Firewall:
Products that examine and
filter network traffic
Antimalware:
Technologies that prevent
installation of execution of
malware (e.g., viruses)
Antimalware:
Services to identify and intercept
malware contained in messages
Advanced Authentication:
Authentication keys (55L keys)
tokens (RSA SecureID) and
biometrics (fingerprint
scanners)
Unified Threat Management:
Many features, one device—
firewall, intrusion, detection
and prevention, getaway
antivirus, etc.
Server Security:
Services that protect server
operating systems, hypervisors,
and virtual servers
Antispam:
Technologies that prevent spam
messages from reaching end users
Single sign-on:
Password policy services
letting users sign into multiple
applications and services with
one password
Network Intrusion Detection and
Prevention:
Products that continuously watch
networks for malicious or
suspicious activity
Endpoint Security:
Bundles of endpoint
security tools within a
centrally managed
package
Content Filtering:
Products that filter messages for
malicious content before they reach
end users
Legacy Authorization:
Typically (legacy) mainframe
user account access control
technologies
Virtual Private Network:
Services for endpoints to securely
connect to a corporate network
using encrypted communication
Access and Information
Protection:
File encryption, endpoint dataloss prevention, device control,
application control, networkaccess control
Privileged Account
Management:
Password vaults, granular
management services for
special users (e.g.,
superusers), session
monitoring and recording
Proactive Endpoint Risk
Management:
Services for automating endpoint
security and security-policy
configuration
Data source: Macquarie Group, “The Security Software Handbook,” July 7, 2016.
Web Security
URL Filtering:
Products to control or prevent
access to websites based
specifically on URLS
Web Antimalware:
Technologies that protect against
web-delivered malware and
preventing users from downloading
malicious software
Web Content Filtering:
Products to control access to
websites based on content (not just
URLs)
Web Application Firewall:
Technologies that protect
websites and their users from
common attacks (e.g., SQL
injection, XSS)
Term Sheet
ap
Web Security
oducts to control or prevent
cess to websites based
ecifically on URLS
Security and Vulnerability
Other
Security Intelligence and Event
Management (SIEM):
Products that aggregate data for
analysis and to identify patterns
that might indicate attack,
intrusion, misuse, or failure
Encryption Toolkits:
Encryption tools and
encryption-keymanagement services
Forensics and Incident
Investigation:
Products for investigating attacks,
gathering evidence, and analyzing
malware
Database Security:
Security services that protect
databases from threats or provides
user access management and auditing
functionality
Web Content Filtering:
roducts to control access to
ebsites based on content (not just
Policy and Compliance:
Services for creating, measuring,
enforcing, and reporting on
security and regulatory
compliance
Storage Security:
Services that control what storage
resources are available to authorize
users and networks
Web Application Firewall:
echnologies that protect
websites and their users from
ommon attacks (e.g., SQL
Security Device Systems
Management:
Services for monitoring and
reporting on perimeter security
equipment
Cloud Access Security Brokers:
Services that control employee
access and apply organizational
security policies to cloud applications
chnologies that protect against
delivered malware and
eventing users from downloading
Vulnerability Assessment:
Services for scanning servers,
endpoints, cloud services, and
other assets for security
vulnerabilities
Exhibit 2
OptiGuard, Inc.: Series A–Round Term Sheet
IDC Total Worldwide Forecast for IT Security Products and Services (in millions of dollars)
IDC Forecast for Worldwide IT Security Products Revenue by Segment
2015
2016
2017
2018
Endpoint security
$9,174
$9,579
$10,012
$10,458
Identity and access management
5,470
5,925
6,413
6,907
Security and vulnerability management
5,392
6,039
6,680
7,320
Messaging security
2,018
2,043
2,078
2,114
Network security
10,445
11,400
12,342
13,276
Web security
1,992
2,099
2,219
2,345
Other security
758
776
801
826
Subtotal
$35,249
$37,861
$40,545
$43,246
IDC Forecast for Worldwide Professional Security Services by Activity
IT consulting
$6,910
$7,341
$7,812
$8,328
Systems integration
12,470
13,018
13,608
14,216
Subtotal
19,380
20,359
21,420
22,544
Total
Growth % YoY
$54,629
$58,220
$61,965
$65,790
6.6%
6.4%
6.2%
Data source: Elizabeth Corr, Robert Ayoub, Christian A. Christiansen, and Robert Westervelt, “Worldwide IT Security Products
2015–2019,” #US40709015, IDC Research, Inc., December 2015; Macquarie Group, “The Security Software Handbook,” July 7
et
es (in millions of dollars)
Segment
2019
$10,912
7,430
7,935
2,156
14,230
2,474
833
$45,970
CAGR
2014–19
3.9%
8.0%
10.9%
0.8%
9.0%
5.3%
1.5%
6.9%
$8,898
14,842
23,740
6.4%
4.5%
5.2%
$69,710
6.3%
Activity
6.0%
Worldwide IT Security Products Forecast
urity Software Handbook,” July 7, 2016.
Exhibit 3
OptiGuard, Inc.: Series A–Round Term Sheet
IT Budgets Allocated to Security
IT Budget Allocated to Security by Firm Size
Business Size
2014
2015
Large Firms (> 5,000 employees)
$1 million to $10 million $1 million to $10 million
Medium Firms (500 to 5,000 employees) $0.5 million to $1.0 million
$1.0 million
Small Firms (< 500 employees) $0.1 million to $0.5 million$0.1 million to $0.5 million Proportion of IT Budget Allocated to Security by Firm Size Business Size 2014 2015 Large Firms (> 5,000 employees)
4% to 6%
4% to 6%
Medium Firms (500 to 5,000 employees)
4% to 6%
4% to 6%
Small Firms (< 500 employees) 3% to 4% 4% to 6% Data source: SANS Institute, February 2016, as reported in Macquarie Group, “The Security Software Handbook,” July 7, 2016. 2016 $10 million to $50 million $1.0 million to $10 million $0.1 million to $0.5 million Size dbook,” July 7, 2016. 2016 7% to 9% 7% to 9% 6% to 7% Exhibit 5 OptiGuard, Inc.: Series A–Round Term Sheet Capitalization Table Units in thousands Pre–Series A Capitalization Investors Common Granted Fully Richard Mannix Carl Bolencamp Seed Investors Other Investors Total Shares and Options Shares 1,000.0 400.0 140.0 100.0 1,640.0 Options¹ 100.0 40.0 Diluted Shares 1,100.0 440.0 140.0 120.0 1,800.0 ¹ Does not include 248,000 options not yet granted. Source: Author estimates. 20.0 160.0 Percentages held of: Common 61.0% 24.4% 8.5% 6.1% 100.0% n Percentages held of: Fully Diluted 61.1% 24.4% 7.8% 6.7% 100.0% Exhibit 7 OptiGuard, Inc.: Series A–Round Term Sheet Series A–Round Investments by Angel and Venture Capital Investors in Cybersecurity Firms Year Deal Count Total Capital Invested Capital Invested Mean Capital Invested Median Premoney Valuation Median Post-Money Valuation Median ($ in millions) 2015 161 $652.4 $4.83 $3.00 $11.67 $17.83 2014 167 606.3 4.12 2.50 8.89 12.13 2013 115 337.4 3.51 1.45 9.98 12.46 2012 81 346.8 4.82 2.00 10.30 15.36 2011 65 243.1 4.34 1.54 4.37 7.68 2010 42 163.7 4.68 1.30 3.58 6.40 2009 32 105.2 4.05 2.85 6.18 9.39 2008 26 74.7 3.73 2.13 3.64 7.24 2007 17 49.0 3.77 1.90 9.83 13.43 2006 20 89.2 4.95 3.33 10.47 13.34 Total 726 $2,667.6 $4.28 $2.20 $7.89 $11.52 Data source: Pitchbook, Inc., database. Exhibit 8 OptiGuard, Inc.: Series A–Round Term Sheet Exits from Venture-Capital-Backed Companies in Cybersecurity Employees Year Founded First Financing Date Mergers/Acquisitions 11/02/15 Good Technology 11/02/15 Bloxx 10/15/15 Viewfinity 10/13/15 Intronis 08/27/15 OpenDNS 07/09/15 Caspida 06/26/15 White Sky 05/27/15 ShieldArc 02/20/15 Airpost 01/13/15 Intellinx 01/12/15 Neohapsis 01/02/15 Tripwire 1,142 55 51 129 201 35 25 11 2 100 57 450 1996 1999 2007 2007 2005 2014 2005 2013 2012 2005 1997 1997 10/01/96 02/07/12 01/11/08 10/10/07 11/01/05 04/15/14 02/21/06 02/14/14 04/01/13 10/25/06 02/07/06 06/10/99 IPOs 07/16/15 06/12/14 03/21/14 01/29/14 09/20/13 756 843 722 1,177 3,000 2000 2007 2004 2000 2004 09/17/08 03/31/08 01/01/05 11/02/10 01/01/05 Exit Date Company Name Rapid7 (RPD) MobileIron (MOBL) A10 Networks (ATEN) NetPosa Technologies (300367) FireEye (FEYE) The exits shown are restricted to companies with complete data for the first venture-capital-round amount, total venture-capital a valuation. TVPI is the investment multiple or the final valuation divided by total venture-capital amount raised. Data source: Pitchbook, Inc., database. ibit 8 s A–Round Term Sheet ked Companies in Cybersecurity First Venture-CapitalTotal VC Final Valuation Round Amount ($ Amount Raised ($ millions) millions) ($ million) $1.10 0.87 5.00 5.00 2.50 9.72 1.37 2.00 0.21 4.00 5.20 4.43 $577.96 2.09 33.92 21.98 53.27 9.72 28.09 2.00 0.21 4.00 53.16 31.02 $425.00 18.70 30.50 65.00 635.00 190.00 0.73 18.00 0.75 84.90 35.00 710.00 $7.00 9.30 6.69 4.73 6.45 $92.27 157.21 118.63 4.73 105.67 $604.56 671.84 885.44 11.47 2,349.42 l-round amount, total venture-capital amount raised, and estimated or actual final apital amount raised. TVPI 0.74× 8.95× 0.90× 2.96× 11.92× 19.55× 0.03× 9.00× 3.57× 21.23× 0.66× 22.89× 6.55× 4.27× 7.46× 2.42× 22.23× This spreadsheet supports INSTRUCTOR analysis of the case “OptiGuard, Inc.: Series A–Round Term Sheet” (UVA-F-1798). This spreadsheet was prepared by Susan Chaplinsky, Tipton R. Snavely Professor of Business Administration. Copyright © 2017 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. For customer service inquiries, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval system, posted to the Internet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to editorial@dardenbusinesspublishing.com. Jul. 21, 2017 Exhibit TN3 OptiGuard, Inc.: Series A–Round Term Sheet Capitalization Table for OptiGuard before and after Series A Round without Options Granted Units in thousands Richard Mannix Carl Bolencamp Seed Investors Other Investors Total Shares and Options Common Shares 1,000.0 400.0 140.0 100.0 1,640.0 WVP Total Shares and Options 1,425.0 3,065.0 Series A Round Roll-in of Bridge Loan WVP’s Liquidation Preference Amount $5,000 $700 $5,700 Amount_Seed FD % Seed POST_Seed Source: Author analysis. $315.0 7.8% $4,050 Options Granted 100.0 40.0 Fully Diluted Shares 1,100.0 440.0 140.0 120.0 1,800.0 20.0 160.0 Percentages held of: Common Fully Diluted 61.0% 61.1% 24.4% 24.4% 8.5% 7.8% 6.1% 6.7% 100.0% 100.0% Post–Series A Common 34.1% 13.6% 4.3% 3.7% 1,425.0 3,225.0 Price $4.00 $4.00 44.2% Shares 1,250.0 175.0 1,425.0 POST A PRE A $12,900 $7,200 = $3,150 77.8% Value before new money is added PRE A $7,200 − POST_Seed $4,050 Dollar step-up in Value $3,150 dollar step-up ÷ $4,050 POST_Seed Exhibit TN4 OptiGuard, Inc.: Series A–Round Term Sheet Capitalization Table for OptiGuard before and after Series A Round with Options Granted Units in thousands Richard Mannix Carl Bolencamp Seed Investors Other Investors Total Shares and Options Common Shares 1,000.0 400.0 140.0 100.0 1,640.0 WVP Total Shares and Options 1,425.0 3,065.0 Series A Round Roll-in of Bridge Loan WVP’s Liquidation Preference Amount $5,000 $700 $5,700 Amount_Seed FD % Seed POST_Seed Source: Author analysis. $315.0 6.8% $4,608 Options Granted 100.0 40.0 Fully Diluted Shares 1,100.0 440.0 140.0 120.0 2,048.0 20.0 408.0 160 + 248 Percentages held of: Post–Series A Common Fully Diluted Common 61.0% 53.7% 31.7% 24.4% 21.5% 12.7% 8.5% 6.8% 4.0% 6.1% 5.9% 3.5% 100.0% 87.9% 1,425.0 3,473.0 Price $4.00 $4.00 41.0% Shares 1,250.0 175.0 1,425.0 POST A PRE A $13,892 $8,192 = $3,584 77.8% Value before new money is added PRE A $8,192 − POST_Seed $4,608 Dollar step-up in value $3,584 dollar step-up ÷ $4,608 POST_Seed ANTIDILUTION: WHAT RIGHTS APPLY? Units in thousands Pre–Series A Shares 2,048 Amount Series A $5,700 $5,700 Round Price TRUE $4.00 Woodland Venture Partners’ Stake Woodland Venture Partners’ Shares 41.0% 1,425 Series B $7,800 UP $8.00 DOWN $3.00 What rights apply? Preemptive right, no antidilution No pay-to-play Preemptive right, antidilution rights apply No pay-to-play Units in thousands Series A Price $4.00 Shares 3,473 V(old money) $13,892 Series B Price $3.00 Total + Shares 2,600 6,073 + V(new money) $7,800 $21,692 NCP = Source: Author analysis. $3.57 =$21,692 ÷ 6,073 Exhibit TN5 OptiGuard, Inc.: Series A–Round Term Sheet Implications of Alternative Antidilution Terms for Series A Investors Units in thousands Pre–Series A Shares and Options Woodland Venture Partners’ Series A Common Shares Shares Outstanding before New Round Old Conversion Price per Share New Conversion Price Woodland Venture Partners’ Series A Shares Adj for Antidilution Amount Raised in B Round Share Price for B Round Shares Issued in B Round 2,048 1,425 3,473 $4.00 $5,700 Full Ratchet Weighted Average $3.00 $3.57 1,900 1,596 $7,800 $3.00 2,600 39.7% 6,548 $7,800 $3.00 2,600 41.6% 6,244 Woodland Venture Partners’ Equity Stake Post–Series B 29.0% w/out exercise of preemptive right Series A doesn’t perserve original stake 25.6% Value of Woodland Venture Partners’ Stake Post–Series B $5,700 Series A perserves liquidation preference POST_Series B $19,644 $4,787 Series B Equity Stake Total Shares Outstanding after B Round Entrepreneur’s Stake (Mannix FD Shares = 1,100) Source: Author analysis. 16.8% $18,731 17.6% Exhibit TN6 OptiGuard, Inc.: Series A–Round Term Sheet Control Rights: If Woodland Venture Partners Exercises Preemptive Right Full Ratchet Units in thousands Weighted Average New Round @$8/share # Terms at Play 1 Total amount invested by Woodland Venture Partners in Series A 2 Conversion price for Series A 3 Woodland Venture Partners’ shares of Series A 4 Woodland Venture Partners’ equity stake post–Series A 5 Total shares and options pre–Series A 6 Total shares before new round (FD) 7 Series A Postmoney Firm Value $5,700 $4.00 1,425 41% 2,048 $5,700 $4.00 1,425 41% 2,048 $5,700 $4.00 1,425 41% 2,048 3,473 13,892 3,473 13,892 3,473 13,892 8 Amount raised in new round 9 Share price for new round 10 Shares issued in new round (8 ÷ 9) $7,800 $3.00 2,600 $7,800 $3.00 2,600 $7,800 $3.00 2,600 $3.00 1,900 $3.57 1,596 $8.00 713 13 Woodland Venture Partners’ purchase: Pro rata amount in new round (4 * 8) 14 Woodland Venture Partners’ pro rata shares (13 ÷ 11) 15 Woodland Venture Partners’ total shares in new round after antidilution and preemptive right (12 + 14) $3,200 1,067 2,967 $3,200 1,067 2,663 $3,200 1,067 2,492 16 Total shares after new round (5 + 10 + 12) 17 Woodland Venture Partners’ equity stake after new round (15 ÷ 16) 6,548 45.3% 6,244 42.6% 6,073 41.0% 18 New round postmoney firm value (16 * 11) $19,644 $18,731 $18,219 11 Series A adjusted conversion price Antidilution ► 12 Woodland Venture Partners’ FD shares after new round with antidilution adjustment Under Preemptive Right Source: Author analysis. Exhibit TN7 OptiGuard, Inc.: Series A–Round Term Sheet Liquidation Preference: Participating versus Standard Convertible Preferred Units in thousands Liquidation Preference Woodland Venture Partners’ Series A Equity Stake $5,700 plus cumulative dividends 41.0% Year 0 1 Exit via Sale/Merger Exit Value ▼ 3 2 $15,000 Participating Preferred First dip = Second dip 41.0% × ($15,000 - $5,700) = IRR = -$5,700 18.6% Standard Preferred IRR = IPO Source: Author analysis. -$5,700 2.6% - $9,516 63.4% 41.0% × $15,000 $6,155 MAX[pro rata share or $5,700] - $6,155 Participation ends with IPO Only applies for exits by sale - $5,700 $3,815.87 - $50,000 MAX[pro rata share or $5,700] Instructions: After reading the case and checking the exhibit and file #1 and file #2 write a paper that responds to the key question: *Would you say the term sheet for the Series A round generally favors the entrepreneur (Mannix) or the VC investor (WVP)? Be sure to cite specific terms and features of the contract to support your opinion. * Additional Guidance: Consider the following questions as part of your analysis and discussion: 1. What contract terms are important and whether they are favorable to the entrepreneur or to the investor as written in OptiGuard’s Term Sheet? 2. How attractive is the company to prospective investors? 3. Before the Series A round, what is OptiGuard’s post-money value? After the Series A round, what is the pre-and post-money value if the offer is accepted as proposed? 4. What are the implications for WVP if another investor offers to provide OptiGuard an additional $7.8 million in equity after the Series A round at a price of $8.00 a share? At $3.00 a share? 5. What are the implications to WVP if it has a participating versus conventional liquidation preference and OptiGuard is sold for $15 million in three years? 6. If you were Mannix, would you accept WVP’s offer as proposed, or attempt to negotiate certain terms of the offer? If you choose to negotiate, what adjustments would you seek to make? Be sure to follow these guidelines: • **Do not put your name anywhere **on the assignment or on shared exhibits. • Assume your audience is knowledgeable about the finance concepts we’ve covered in class and is familiar with the case facts. You don’t need to explain what Series A is or debt and equity theories. Jump right into the analysis. Also, there's no need to replicate case exhibits (you may reference them directly). • Go deep. When formulating a response, ask why. Then ask why again and justify your explanation by citing case facts and material. Back up your explanations with evidence. Integrate numbers into your arguments. • **Use no more than two significant digits **for all numbers in the text and exhibits (12%, 3.5%, or 0.46%, not .12480294). Less is more. Displaying too many digits makes numbers hard to read and actually obscures its value and intuition. • All exhibits you create yourself must be included in the write-up and be properly formatted. You must also include a link to all your exhibits so that your calculations can be seen and assessed. Place this link at the very beginning and be sure to grant your professor and peer tutor viewing privileges. Avoid including numbers in a calculation cell but instead, reference inputs/assumptions cells that do contain numbers; use black text for calculations and blue text for inputs. • Use Grammarly** to check your spelling and grammar**. Poor writing conveys carelessness and unprofessionalism. Review these reminders. • Write your report yourself and then you may utilize AI to enhance the readability of your report. Use the AI responsibly. • Annotated LO Appendix that includes the following: • Tag 3 LO's. (#termSheet, #securities, and a course LO of your choice). Write a focused description of how the LO is applied. It will be graded based on your analysis of the questions above. • Remember, tagging a vague usage of an LO will result in a 1-3. To get a 4, you need to have detailed explanations. Be selective and deep. In upper-level classes we want you to focus on the LOs because they are the core components of the class. Building your paper around the LOs is a much better approach than writing a paper and then shoving in LO footnotes/appendix. You may tag LOs with a footnote to make it is clear to you and the Professor where you are trying to highlight certain concepts. Everything you need to make your case that this is a good use of the LO should be in the main text. • Add a word count at the end of the assignment (exclude exhibits, footnotes, appendixes, and the bibliography). • Please review the extension policy for the course. Assignment Information Length: 1000-1250 (4-5 pages double spaced) Learning Outcomes Added • #LO6_securities: Evaluate the different securities issued by early-stage companies in raising capital. • #LO8_termsheet: Explain the importance of the term sheet and how it is negotiated. Choose one of these two LOs as a third LO (From the previous assignment): • • #LO1_dynamics: Analyze the dynamics of innovation and entrepreneurial culture from the perspective of entrepreneurs and investors. #LO5_retention: Investigate the means by which founders and key employees are retained by startups