FRONT END ISSUES FOR BACK END FUNDING'

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FRONT END ISSUES FOR BACK END FUNDING.

• Mark White mwhite_at_whiteandlee.com
• Tom Armstrong tarmstrong_at_whiteandlee.com
• March 29,2006

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WHATS OF VALUEAND WHO OWNS IT

• Technology, customers, brand.or the Mexican/S.
  American market?
• Ownership is in the US but Value remains in
  Mexico (new innovation)
• Issue is what happens on the downside
• Finnish model- Nexit VenturesUS Sales subs then
  become parents with off-shore development

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WHAT ABOUT BUSINESS SOUTH OF THE BORDER?

• Consolidate or keep separate?
• US as global platform marketing, tax
  issuesrevenue recognition
• Utilization of resourcescosts and logistics
  advantages
• Focus (on US) vs. low hanging fruit (in SA
  markets).incompatible?
• Is the product ubiquitous or hispanic?
• Assess risk and upsidethen decide

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US EMPLOYEESDO YOU NEED THEM?

• no legal reason.and are expensiveinvestors want
  the best team
• engineers in Mexicosalesmen in the US
• dont have two separate pay scalespay FMV for
  the job
• cultural differenceon equity demands, team
  playmake rules clear
• cautionsat will clear terms title inflation

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BASIC POSITIONING

• Superior Disruptive TechnologyBut a Tough Sell!
• Niche Products for the US-Hispanic Population
• Outsource Supplier with Cost and Logistics
  Advantages
• Channel Partner into Mexico and South America

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WHATS COMPELLING.

• Revenues global market competitive advantage
• If have thisdo you need the money?
• Whats hotthe consumer.mobility.brand
  extensioncontentdelivery and management
  platforms
• Non-tech works toofor hedge funds higher
  returns
• Roll-ups, divestitures and standards are sexy
• The team is always important
• Own as little as possibleget partners to do the
  heavy lifting

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FINANCIAL STRATEGY TO MAXIMIZE VALUATION

• convertible bridge loansbootstrappingreally
  want venture money?
• A little or a lot (of money.)
• Step-up valuationsBUT.dont set yourself up for
  failure.
• Examples.
• Nau/HotMail just in time financing,
• Snapshow get the full commitment
• Medicos stay with the real number
• Intellicap rollup story, not one-at-a-time
• Data Domain/Symmid incubator deals
• XEMobile weird deals still happen
• Cyclos a strategic investor first?
• NewCardio make sure the technology works!!

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WHAT DOES THE INVESTMENT SYNDICATE LOOK LIKE?

• syndicates coming backcyclical
• strategic investors must provide strategic
  advantage20/10 rule
• seldom mix of angels AND institutions
• processdry-run 1st or 2nd tier targets?
• Catch 22.you need the money but you are not
  ready?
• When to use Angels.
• Control
• No choice
• When to use VCs.all other times

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HOW TO GET INVESTORS TO CLOSE

• get all needed info
• create competition
• show real progressand use for the money
• plug the holes
• set a deadlinebut be careful!
• Have a Plan B if the money doesnt come

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CONTROL ISSUESNOW AND LATER

• The Board is important!
• Get your independents on the Board now
• Look for balance after the 1st round
• Know your directors as people
• Know their preferencesand do your homework
• Shareholders.affirmative vs. blocking votesBIG
  DIFFERENCE
• REALITYVCs control even if dont on paper
• BEST BETbalance the syndicate

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STUFF YOU NEVER THOUGHT OF.

• IRC 409A stock option valuation
• Capitalization allocations
• CEO mentors
• GAAP accounting revenue recognition transfer
  pricing
• Forecastinghow aggressive should you be?!
• Reporting to the Boardnot each other
• Your friends are now assets

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NOW WHAT?!....MANAGING THE BOARD AND SHAREHOLDERS

• Monthly Board meetings.not easy!
• Always pre-manage bad news
• Dont be a cowboy.
• Set realistic expectationsdont agree to
  unachievable goals
• In a disputedivide and conqueruse the
  friendlies
• RememberVCs usually see things the same way
• Assume the worse

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GETTING OUT MA CONSIDERATIONS

• Timing is everythingthink about the metrics
  needed NOW
• Structure is Important.Tax and Liability are the
  BIG ISSUES
• Valuation..Its Different from a Financinggame
  this now!
• Management Issues.Price Allocation, Vesting,
  Non-Competes
• Hot Issues.Tradable Stock, Limitation of
  Liability, Escrows and Earn-Outs

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Questions?