Exit Strategies

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Exit Strategies
Kimball Atwood General Partner
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Bio

• 18 years in high tech, large companies,
  entrepreneur, venture catalyst
• 3 IPOs, 5 M A, 2x entrepreneur
• Venture Catalyst specializing in Enterprise
  software Internet enabling technologies
• Partner Christine Comaford

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Exit Options

• Merger or Acquisition (M A)
• Initial Public Offering (IPO)

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State of the Liquidity Market

• Lots of recent MA activity -- 1,600 1998 YTD
  technology deals
• Healtheon pulled their IPO and completed a 40 mm
  private round instead
• theglobe.com refiled IPO range to 8 - 10 from
  11 - 13, then pulled their IPO, then went out
  at 9, rose to 90, closed 1st day at 63
• VIGNETTE and Computer Literacy pulled IPOs

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Why a Sale?

• Unsolicited offer from potential suitor
• Company cannot raise additional capital or cannot
  sustain additional growth!
• Principal Shareholder or Founder looking for
  liquidity
• Essential to M A team
• get experienced board members and advisors
  involved
• hire intermediary I-Bank/M A Specialists
• get experienced MA Counsel and Tax/Accting

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M A Activity 1997 - 1998
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M A Far more Popular than IPO
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Targeting Buyers for an Exit

• Customers who are highly dependent on your
  products/services
• Competitors who want to buy market share
• Larger players who want to accelerate Market
  Entry
• Gorillas looking to buy proven R D
• CISCO
• Microsoft
• Intel

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Three Keys to Success

• Right Fit
• Business and people
• Right Structure
• More important than price
• Right Price
• Valuation

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Five Forms of Payment
Cash Debt Private Stock Employment
Agreement Earnout
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How much is your company worth?
A Company Is Worth What Someone Is Willing To Pay
For It.
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9 ways to value a software company

• Sales multiple
• Earnings multiple
• Cash flow model
• Book value
• Liquidation value
• Replacement
• Similar company transaction
• Internal transaction price
• Internal rate of return/discounted cash flow

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Issue Purchase vs. Pooling Accounting

• Acquirers will almost always prefer a pooling
  transaction over a purchase transaction
• Must meet all 12 clearly defined FASB guidelines
  for independence for 2 years to qualify for
  pooling accounting. Consult with your lawyer or
  accountant to learn how to not taint your company
• You may prefer an all-cash deal, however, which
  necessitates purchase accounting and undesirable
  goodwill on the acquirer's balance sheet
• Earn out tie-up of key executives

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Going Public!
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3rd QTR - Slower Pace for IPOs

• 19 venture backed companies went public, raising
  1.13 billion (vs 38 in Q3 97)
• 1998 total of 68 with a total offering size of
  3.38 billion.
• Average offering size in 1998 increased to 49.7
  million compared to 34.2 million in 1997.
• According to Venture Economics and the National
  Venture Capital Association

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Median Age of Companies Going Public (Venture
Backed)
All companies Internet companies

• 1993 6 yrs old
• 1994 6 yrs old
• 1995 6 yrs old 3 yrs old
• 1996 4 yrs old 2.5 yrs old
• 1997 4.5 yrs old 2.5 yrs old
• Q1-3 1998 3.5 yrs old 2 yrs old
• According to VentureOne

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Going Public!

• Determine your comparable company universe
• Underwriters will compare your Companys growth
  rates and margins to your peers and value your
  Company accordingly
• Focus on quarter to quarter growth with all
  financial metrics
• Fill-out holes in management team
• Experienced CFOs are tough expensive to find.

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Issue Cheap Stock

• Expect to be challenged by the SEC and prepare
  arguments now, in conjunction with attorneys and
  accountants
• Document rationale and milestones for options at
  the time of the transaction, rather than after
  the fact (New products, revenue, new contracts)
• Resolution of cheap stock issue with the SEC may
  significantly delay an IPO

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Exit Resources on the Net

• Red Herring
• http//www.redherring.com/insider/1998/1023/ipo100
  .html
• Broadview Associates
• http//www.broadview.com/main_frame.html
• National Venture Capital Association
• http//www.nvca.com/
• IPO Maven
• http//www.ipomaven.com/
• Artemis Ventures LLC
• http//www.artemisventures.com/resources

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Thank You
Kimball Atwood General Partner