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					Building Financial Projections

   April 8, 2003
   Charlie Tillett
   SM „91

   508 358-7861
   charlietillett@attbi.com
 Agenda

• Part 1
  • The Business Model


• Part 2
  • Building Your Financial Projections
Background
1991             MIT Sloan School of Management
Spring 1990      Third Place $10K Contest
Summer 1990      Intern - Boston Capital Ventures
„91 to „00       CFO of NetScout Systems (NTCT)
                 - VC financings of $6MM and $45MM
                 - IPO in August 1999
‟00 to present   Consulting CFO
                 - Dot Com – Magazine Subscriptions
                 - Enterprise Software
                 - Bomb Detection for checked baggage
   Dividing Equity
   Among Founders & Investors
                                             Initial               Initial
 Name             Title              #      Shares       %        Shares       %        Shares      %        Shares     %         Shares     %         Shares     %
Founders

 Susan            CEO                     2,000,000    50.0%    2,000,000    42.6%    2,000,000   29.8%    2,000,000   26.8%    2,000,000   13.4%    2,000,000   8.9%
 Joe              CTO                     1,000,000    25.0%    1,000,000    21.3%    1,000,000   14.9%    1,000,000   13.4%    1,000,000   6.7%     1,000,000   4.5%
 Rakesh           VP Sales                1,000,000    25.0%    1,000,000    21.3%    1,000,000   14.9%    1,000,000   13.4%    1,000,000   6.7%     1,000,000   4.5%
 Total                                    4,000,000    100.0%   4,000,000    85.1%    4,000,000   59.7%    4,000,000   53.7%    4,000,000   26.8%    4,000,000   17.9%
Key Early Employees

 Jack             VP R&D                                         500,000     10.6%     500,000     7.5%     500,000    6.7%      500,000    3.4%      500,000    2.2%
 Sam              Manager 1                                      100,000      2.1%     100,000     1.5%     100,000    1.3%      100,000    0.7%      100,000    0.4%
 Julie            Manager 2                                      100,000      2.1%     100,000     1.5%     100,000    1.3%      100,000    0.7%      100,000    0.4%
 Total                                          -       0.0%     700,000     14.9%     700,000    10.4%     700,000    9.4%      700,000    4.7%      700,000    3.1%


Advisors              Per Person #                                                                                                                                         PP
 Board Members             50,000    2                                                 100,000     1.5%     100,000    1.3%      100,000    0.7%      100,000    0.4%    0.22%
 Advisory Board            25,000    3                                                  75,000     1.1%      75,000    1.0%       75,000    0.5%       75,000    0.3%    0.11%
 Total                                          -       0.0%          -       0.0%     175,000     2.6%     175,000    2.3%      175,000    1.2%      175,000    0.8%


Option Plan           Per Person #                                                                                                                                         PP
 VP Sales & CFO           300,000    2                                                 600,000     8.9%     600,000    8.1%      600,000    4.0%      600,000    2.7%    1.34%
 Director                  50,000    5                                                 250,000     3.7%     250,000    3.4%      250,000    1.7%      250,000    1.1%    0.22%
 Sr. Eng                   30,000    15                                                450,000     6.7%     450,000    6.0%      450,000    3.0%      450,000    2.0%    0.13%
 Jr. Eng                   20,000    10                                                200,000     3.0%     200,000    2.7%      200,000    1.3%      200,000    0.9%    0.09%
 Mktg/sales/Finance        25,000    10                                                250,000     3.7%     250,000    3.4%      250,000    1.7%      250,000    1.1%    0.11%
 Admin                      2,000    5                                                  80,000     1.2%      80,000    1.1%       80,000    0.5%       80,000    0.4%
 Total                                          -       0.0%          -       0.0%    1,830,000   27.3%    1,830,000   24.6%    1,830,000   12.3%    1,830,000   8.2%


Investors

 Angels ($500K at $4.5MM)                                                                                   745,000    10.0%     745,000    5.0%      745,000    3.3%
 VC Round ($10MM at $10MM)                                                                                                      7,450,000   50.0%    7,450,000   33.3%
 VC Round ($10MM at $20MM)                                                                                                                  0.0%     7,450,000   33.3%
 Total                                          -       0.0%          -       0.0%          -      0.0%     745,000    10.0%    8,195,000   55.0%   15,645,000   70.0%


 Grand Total                              4,000,000    100.0%   4,700,000    100.0%   6,705,000   100.0%   7,450,000   90.0%   14,900,000   45.0%   22,350,000   30.0%
Disclaimer - Charlie‟s Rules-of-Thumb

• Focused on making attractive to investors

• Most relevant for technology-based companies

• May not apply to your industry or business model

• Most Common Business Plan Errors:
  • Revenue too high in year 4
  • Profit too high in year 4
  What is a Business Model?

Boston Globe - January 9, 2003
• StorageNetworks replaced the CEO and eliminated 50% of its
  workforce as it struggles to find a new business model.

• Tried to build a national network of data-storage infrastructure
  available for lease but was hurt by customer reluctance to let
  outsiders handle their most sensitive data.

• Their new business model is focused on storage management
  software.
The Business Model

• A Profit & Loss Statement that details your
  financial performance in percentage terms

• Assumes you reach critical mass

• Explains WHY your business will MAKE MONEY

• The complete business plan shows HOW!
Profit & Loss (P&L) Statement
Also called Income Statement

                                                              Sample
• Revenue (after discounts)
                                          Revenue                $   50.0 100%
• Cost of Goods Sold (COGS)
   • Direct product cost                  Cost of Goods Sold     $   20.0   40%
   • Mfg but NOT R&D
                                          Gross Margin           $   30.0   60%
• Gross Margin or Gross Profit

                                            Sales & Marketing $      15.0   30%
• Departmental Expenses
                                                             R&D $    5.0   10%
• Operating Profit – Operating Loss                          G&A $    2.5   5%
   • Profit before taxes (PBT)
   • EBITDA (Earnings before interest,    Total Expenses         $   22.5   45%
     taxes, depreciation, amortization)
                                          Operating Profit       $    7.5   15%
Business Model Example
“Typical” Data Communications Company


   Sales                                    100%
   Cost of Goods Sold (20% to 50%)          40%
   Gross Margin                             60%

           Sales & Marketing (20% to 35%)   30%
                       R&D (10% to 15%)     10%
                         G&A (4% to 6%)      5%
   Total Expenses                           45%

   Operating Profit (15%-25%)               15%
Actual Business Models
Q3 ‟98 and Q3 ‟00

                            Cisco       Cisco      Sun        Sun        IBM       IBM
                            Q3 '98      Q3 '00     Q3 '98    Q3 '00     Q3 '98    Q3 '00


Revenue                     100%        100%       100%      100%       100%      100%

Cost of Goods Sold           35%         36%       50%        52%       60%        64%

Gross Margin                 65%         64%       50%        48%       40%        36%




     Sales & Marketing       19%         21%       22%        20%       17%        14%

                     R&D     12%         14%       10%        10%        7%        6%

                   G&A       3%          3%         6%        4%         4%        3%

        Total Expenses       34%         38%       38%        34%       28%        23%



Operating Profit             31%         26%       12%        14%       12%        13%



Annual Revenue/Emp.        $ 600,000   $ 675,000            $ 520,000            $ 315,000
Actual Business Models
  Q3 ‟98 and Q3 ‟00

                           Tech Data   Tech Data      Yahoo       Yahoo      Amazon      Amazon
                            Q3 '98       Q3 '00       Q3 '98      Q3 '00      Q3 '98      Q3 '00


Revenue                      100%        100%         100%        100%        100%        100%

Cost of Goods Sold           93%          95%          11%         13%         78%         74%

Gross Margin                  7%          5%           89%         87%         22%         26%




     Sales & Marketing        4%          3%           53%         36%         23%         22%

                     R&D      0%          0%           15%         9%          8%          11%

                   G&A        1%          1%           7%          6%          3%          4%

        Total Expenses        5%          4%           75%         51%         34%         37%



Operating Profit              2%          1%           14%         36%         -12%        -11%



Annual Revenue/Emp.                    $ 2,000,000   $ 250,000   $ 400,000   $ 400,000   $ 300,000
   Case Study - CISCO
   Forecast – December 2002
                         FY '00         FY '01      FY '02      FY '03     FY '00   FY '01    FY '02     FY '03
                         Actual         Actual     Forecast    Forecast    Actual   Actual   Forecast   Forecast

Revenue              $       18.9   $       22.3   $    19.0   $    21.3   100%     100%      100%       100%

Cost of Goods Sold   $        6.7   $        9.2   $     7.7   $     7.8    35%      41%       41%        37%

Gross Margin         $       12.2   $       13.1   $    11.3   $    13.5    65%      59%       59%        63%




 Sales & Marketing   $        3.9   $        5.3   $     4.3   $     4.4    21%      24%       23%        21%

               R&D   $        2.7   $        3.8   $     3.3   $     3.4    14%      17%       17%        16%

               G&A   $        0.7   $        0.7   $     0.6   $     0.7    4%       3%        3%         3%

    Total Expenses   $        7.3   $        9.8   $     8.2   $     8.5    39%      44%       43%        40%



Operating Profit     $        4.9   $        3.3   $     3.1   $     5.0    26%      15%       16%        23%
Building YOUR Model

• Start with what you “know”
  • Your Cost of Goods Sold
  • R&D should end up at 10% to 20%
  • G&A should end up at 5% to 15%


• Target an operating profit of 15% to 20%

• Only remaining variable is Sales & Marketing
Building YOUR Model

• Verify your assumptions by looking at
  competitors or comparable companies

• You must be able to justify that:
  • You can meet a sales target of $X
  • With a Sales/Marketing budget of Y% of $X
Case Study – Storage Networks
                 Sept '02 - Actual     Charlie's Proposed Model
Revenue          $    22.0      100%            -
COGS             $    14.5       66%            -
Gross Margin     $     7.5       34%            -


R&D              $     4.0       18%            -
S, G, & A        $     8.0       36%            -
Total Expenses   $    12.0       55%            -


Op Profit        $    (4.5)     -21%            -
Case Study – Storage Networks

               Sept '02 - Actual     Charlie's Proposed Model
Revenue        $    22.0      100%                       100%
COGS           $    14.5       66%                        66%
Gross Margin   $     7.5       34%                        34%


R&D            $     4.0       18%
S, G, & A      $     8.0       36%
Total Expenses $    12.0       55%


Op Profit      $    (4.5)     -20%
Case Study – Storage Networks
               Sept '02 - Actual     Charlie's Proposed Model
Revenue        $    22.0      100%                       100%
COGS           $    14.5       66%                        66%
Gross Margin   $     7.5       34%                        34%


R&D            $     4.0       18%   $       4.0
S, G, & A      $     8.0       36%
Total Expenses $    12.0       55%


Op Profit      $    (4.5)     -20%
Case Study – Storage Networks
                 Sept '02 - Actual     Charlie's Proposed Model
Revenue          $    22.0      100%                      100%
COGS             $    14.5       66%                       66%
Gross Margin     $     7.5       34%                       34%


R&D              $     4.0       18%   $       4.0
S, G, & A        $     8.0       36%
Total Expenses   $    12.0       55%                       19%


Op Profit        $    (4.5)     -20%                       15%

            R&D plus S&M = 19% Revenue
Case Study – Storage Networks

R&D plus S&M = 19% Revenue

If we assume R&D = $4MM
                                 S&M        Revenue
then                         $         6    $    53
                             $         8    $    63
Revenue = ($4 + S&M) / .19
                             $         10   $    74
                             $         12   $    84
                             $         14   $    95
                             $         16   $   105
Case Study – Storage Networks
             Sept '02           Charlie's Proposed Model
Revenue      $   22.0    100%   $       63.0        100%
COGS         $   14.5    66%    $       41.6         66%
Gross Margin $    7.5    34%    $       21.4         34%


R&D          $    4.0    18%    $        4.0          6%
S, G, & A    $    8.0    36%    $        8.0         13%
Total Exp.   $   12.0    55%    $       12.0         19%


Op Profit    $   (4.5)   -20%   $        9.4         15%
Case Study – Storage Networks

             Sept '02           Charlie's Proposed Model
Revenue      $   22.0    100%   $     105.0         100%
COGS         $   14.5    66%    $       69.3         66%
Gross Margin $    7.5    34%    $       35.7         34%


R&D          $    4.0    18%    $        4.0          4%
S, G, & A    $    8.0    36%    $       16.0         15%
Total Exp.   $   12.0    55%    $       20.0         19%


Op Profit    $   (4.5)   -20%   $       15.7         15%
  First Major Decision:
  How will you sell your product?


                     Direct Sales Force          Distributor

Revenue                    $100           100%      $80        100%

Cost of Goods Sold          $40           40%       $40        50%

Gross Margin                $60           60%       $40        50%


Sales & Marketing           $23           23%        $8        10%

               R&D          $12           12%       $12        15%

               G&A          $5            5%         $4        5%

Total Expenses              $40           40%       $24        30%


Operating Profit            $20           20%       $16        20%
 Building Your Financial Projections
 Rules-of-Thumb for knowledge-based companies


• Average employee salary will be $70K to $80K

• Employee benefits will add 15%

• Initially, salaries will be 60% to 75% of non-COGS expense
   • Remainder will be rent, utilities, supplies, phones, travel
   • UNLESS you have extraordinary marketing!!!
   • Will reduce to 50% to 55% over time

• If you know your staffing plan, you can make a good
  estimate of each department‟s expenses
Building Your Financial Projections
Rules-of-Thumb for knowledge-based companies


  • Sales Projections in year 5
     • Between $50MM and $100MM per year

  • Market Size
    • Between 5% and 25%

  • Revenue per Employee
     • Between $125K and $300K

  • Revenue per Salesperson
     • Between $1MM and $3MM
Cash Flow Projections
Happiness is a positive cash flow

• Burn Rate
   • Your monthly operating loss plus capital expenditures


• Cash Flow Projection
   • Cumulative operating losses excluding depreciation
   • Plus cumulative capital expenses


• To determine the total cash required
   • Generally you look at your cumulative operating losses plus
     cumulative capital expenses as of the month that you reach
     breakeven
VC Observations



•   VCs don‟t expect you to spend you own money
    BUT they expect you to spend money as though
    it were your own

•   VCs don‟t want their entrepreneurs to starve
    BUT they want them to be hungry
Financial Data
Presentation Suggestions
• Steady, consistent revenue growth
   • No hockey sticks

• Steady, consistent evolution of your model

• Show % next to quarterly & yearly columns

• Show pre-tax only

• Don‟t allocate G&A expenses

• Show depreciation expenses on a separate line
 Executive Summary
 Presentation Suggestions
• Annual P&L for 4 or 5 years (with %)

• Data to justify revenue projections
  • Unit sales
  • Average selling price (ASP)

• What quarter you will be profitable

• Your total cash requirement
Full Business Plan
Presentation Suggestions

• Page 1: Annual P&L for 4 years

• Page 2 & 3: Quarterly P&L for all 4 years

• Page 4: Quarterly Staffing plan for 4 years

• Page 5: Quarterly cash flow for 4 years
End Result - Profit and Loss Statement

P & L by Year
                        Source             Year 1                 Year 2                Year 3                Year 4
Revenue
           Model 1     P&L By Qtr   $   1,275,000   100%   $ 10,500,000    88%   $ 33,750,000    82%   $ 37,500,000    50%
           Model 2     P&L By Qtr   $        -       0%    $   1,400,000   12%   $   5,250,000   13%   $ 27,500,000    36%
           Model 3     P&L By Qtr   $        -       0%    $        -      0%    $   2,400,000   6%    $ 10,500,000    14%
   Total Revenue                    $   1,275,000   100%   $ 11,900,000 100%     $ 41,400,000 100%     $ 75,500,000 100%


COGS                   P&L By Qtr   $    425,000    33%    $   3,920,000   33%   $ 13,385,000    32%   $ 23,200,000    31%


Gross Margin                        $    850,000    67%    $   7,980,000   67%   $ 28,015,000    68%   $ 52,300,000    69%


Expenses
       Engineering     P&L By Qtr   $   1,326,625   104%   $   3,475,275   29%   $   7,212,188   17%   $ 12,205,975    16%
          Marketing    P&L By Qtr   $    710,750    56%    $   1,810,750   15%   $   3,239,350   8%    $   5,300,000   7%
               Sales   P&L By Qtr   $   1,214,250   95%    $   3,466,500   29%   $   7,171,500   17%   $ 12,393,500    16%
                G&A    P&L By Qtr   $    964,575    76%    $   1,817,750   15%   $   3,117,000   8%    $   5,308,500   7%
   Operating Exp.                   $   4,216,200   331%   $ 10,570,275    89%   $ 20,740,038    50%   $ 35,207,975    47%


Operating Profit                    $ (3,366,200) -264%    $ (2,590,275) -22%    $   7,274,963   18%   $ 17,092,025    23%


Depreciation           P&L By Qtr   $    144,833           $    427,333          $    593,000          $    608,167


EBIT                                $ (3,511,033)          $ (3,017,608)         $   6,681,963         $ 16,483,858
Profit and Loss Statement – Quarterly

P & L by Month          Source                   Q1                Q2               Q3               Q4               Q1               Q2               Q3                Q4
                                           Year 1           Year 1            Year 1          Year 1            Year 2           Year 2           Year 2           Year 2
Revenue
              Model 1 Sales Plan     $       -        $   150,000       $   375,000      $   750,000      $ 1,500,000      $ 2,250,000      $ 3,000,000      $ 3,750,000
              Model 2 Sales Plan     $       -        $        -        $       -        $       -        $   200,000      $   300,000      $   400,000      $   500,000
              Model 3 Sales Plan     $       -        $        -        $       -        $       -        $       -        $       -        $       -        $        -
       Total Revenue                 $       -        $   150,000       $   375,000      $   750,000      $ 1,700,000      $ 2,550,000      $ 3,400,000      $ 4,250,000


COGS                    Sales Plan   $       -        $    50,000       $   125,000      $   250,000      $   560,000      $   840,000      $ 1,120,000      $ 1,400,000


Gross Margin                         $       -        $   100,000       $   250,000      $   500,000      $ 1,140,000      $ 1,710,000      $ 2,280,000      $ 2,850,000


Expenses
           Engineering Expenses      $   169,375      $   312,875       $   378,000      $   466,375      $   576,038      $   792,275      $   965,163      $ 1,141,800
            Marketing Expenses       $   111,250      $   136,250       $   185,125      $   278,125      $   330,600      $   409,200      $   470,738      $   600,213
                Sales Expenses       $   146,188      $   220,188       $   378,813      $   469,063      $   672,563      $   792,188      $   938,938      $ 1,062,813
                 G&A Expenses        $   173,700      $   206,875       $   284,325      $   299,675      $   388,150      $   417,975      $   492,300      $   519,325
       Operating Exp.                $   600,513      $   876,188       $ 1,226,263      $ 1,513,238      $ 1,967,350      $ 2,411,638      $ 2,867,138      $ 3,324,150


Operating Profit                     $   (600,513) $      (776,188) $       (976,263) $ (1,013,238) $         (827,350) $      (701,638) $      (587,138) $      (474,150)


Depreciation             CAPEX       $     9,833      $    20,833       $    45,667      $    68,500      $    81,167      $   105,000      $   117,333      $   123,833


EBIT                                 $   (610,346) $      (797,021) $ (1,021,929) $ (1,081,738) $             (908,517) $      (806,638) $      (704,471) $      (597,983)
             Sales and COGS Forecast

Sales Plan              Source               Q1               Q2               Q3               Q4                Q1                Q2                Q3                Q4

                                       Year 1          Year 1           Year 1           Year 1             Year 2            Year 2            Year 2            Year 2

Unit Sales

             Model 1      Input          -                    20               50          100                200               300               400               500

             Model 2      Input          -                -                -                -                     20                30                40                50

             Model 3      Input          -                -                -                -                 -                 -                 -                 -

          Total Units                    -                    20               50          100                220               330               440               550



Revenue

             Model 1 $     7,500   $     -        $   150,000      $   375,000      $   750,000      $   1,500,000     $   2,250,000     $   3,000,000     $   3,750,000

             Model 2 $ 10,000      $     -        $       -        $       -        $       -        $    200,000      $    300,000      $    400,000      $    500,000

             Model 3 $ 15,000      $     -        $       -        $       -        $       -        $        -        $        -        $        -        $        -

    Total Revenue                  $     -        $   150,000      $   375,000      $   750,000      $   1,700,000     $   2,550,000     $   3,400,000     $   4,250,000



Cost of Goods Sold

             Model 1 $     2,500   $     -        $    50,000      $   125,000      $   250,000      $    500,000      $    750,000      $   1,000,000     $   1,250,000

             Model 2 $     3,000   $     -        $       -        $       -        $       -        $     60,000      $     90,000      $    120,000      $    150,000

             Model 3 $     3,500   $     -        $       -        $       -        $       -        $        -        $        -        $        -        $        -

       Total COGS        To P&L    $     -        $    50,000      $   125,000      $   250,000      $    560,000      $    840,000      $   1,120,000     $   1,400,000
            Staffing Plan

Staffing Plan                   Staffing Staffing Staffing Staffing Staffing Staffing Staffing Staffing
                                       Q1         Q2         Q3         Q4         Q1         Q2         Q3         Q4
                                 Year 1     Year 1     Year 1     Year 1     Year 2     Year 2     Year 2     Year 2


Engineering
                 CTO    Input          1          1          1          1          1          1          1          1
        Programmer      Input          4          8          10         12         15         20         25         30
         Tech Writer    Input      -              1          1          2          2          4          4          4
                Other   Input      -          -          -          -          -          -          -          -
          Total Eng                    5          10         12         15         18         25         30         35


Marketing
       VP Marketing     Input          1          1          1          1          1          1          1          1
    Product Manager     Input          1          1          2          2          3          3          4          4
            Mar-Com     Input      -          -              1          1          2          2          2          2
                Other   Input          1          1          1          2          2          2          3          3
        Total Mktg                     3          3          5          6          8          8          10         10
                   Salary Expenses


Staffing Plan                     Annual                       Expense        Expense        Expense        Expense        Expense        Expense        Expense        Expense
                                   Salary                                Q1             Q2             Q3             Q4             Q1             Q2             Q3             Q4
                                                                   Year 1         Year 1         Year 1         Year 1         Year 2         Year 2         Year 2         Year 2
                                            Benefits/COLA ->        115%           115%           115%           115%           117%           119%           121%           123%
Engineering
                 CTO    Input   $ 150,000                      $ 43,125 $ 43,125 $ 43,125 $ 43,125 $ 43,875 $ 44,625 $ 45,375 $ 46,125
        Programmer      Input   $ 75,000                       $ 86,250 $ 172,500 $ 215,625 $ 258,750 $ 329,063 $ 446,250 $ 567,188 $ 691,875
         Tech Writer    Input   $ 60,000                       $     -        $ 17,250 $ 17,250 $ 34,500 $ 35,100 $ 71,400 $ 72,600 $ 73,800
                Other   Input   $ 80,000                       $     -        $     -        $     -        $     -        $     -        $     -        $     -        $     -
          Total Eng                           To Dept Exp      $ 129,375 $ 232,875 $ 276,000 $ 336,375 $ 408,038 $ 562,275 $ 685,163 $ 811,800


Marketing
       VP Marketing     Input   $ 125,000                      $ 35,938 $ 35,938 $ 35,938 $ 35,938 $ 36,563 $ 37,188 $ 37,813 $ 38,438
    Product Manager     Input   $ 95,000                       $ 27,313 $ 27,313 $ 54,625 $ 54,625 $ 83,363 $ 84,788 $ 114,950 $ 116,850
            Mar-Com     Input   $ 75,000                       $     -        $     -        $ 21,563 $ 21,563 $ 43,875 $ 44,625 $ 45,375 $ 46,125
                Other   Input   $ 80,000                       $ 23,000 $ 23,000 $ 23,000 $ 46,000 $ 46,800 $ 47,600 $ 72,600 $ 73,800
        Total Mktg                            To Dept Exp      $ 86,250 $ 86,250 $ 135,125 $ 158,125 $ 210,600 $ 214,200 $ 270,738 $ 275,213
     Non-Salary Expenses

Departmental Expenses                   Source                    Q1            Q2               Q3            Q4
                                                           Year 1           Year 1        Year 1           Year 1
Engineering
      Salaries & Benefits             Staffing Plan   $   129,375      $   232,875   $   276,000      $   336,375
    Tech Supplies (PP/PM) $   2,000   input/formula   $    30,000      $    60,000   $    72,000      $    90,000
               Misc / Other               input       $    10,000      $    20,000   $    30,000      $    40,000
      Total Engineering                 To P&L        $   169,375      $   312,875   $   378,000      $   466,375


Marketing
      Salaries & Benefits             Staffing Plan   $    86,250      $    86,250   $   135,125      $   158,125
            Literature / PR               input       $     5,000      $     5,000   $    10,000      $    10,000
              Trade Show s                input       $       -        $    25,000   $       -        $    50,000
               Misc / Other               input       $    20,000      $    20,000   $    40,000      $    60,000
        Total Marketing                 To P&L        $   111,250      $   136,250   $   185,125      $   278,125
        Non-Salary Expenses

Departm ental Expenses                    Source                    Q1            Q2            Q3            Q4
                                                             Year 1           Year 1        Year 1        Year 1
Sales
         Salaries & Benefits            Staffing Plan   $   122,188      $   179,688   $   309,063   $   366,563
             Travel (PP/PM) $   3,000   input/formula   $     9,000      $    18,000   $    36,000   $    45,000
        Commission (% Rev)      5.00%   input/formula   $       -        $     7,500   $    18,750   $    37,500
                Misc / Other                input       $    15,000      $    15,000   $    15,000   $    20,000
               Total Sales                To P&L        $   146,188      $   220,188   $   378,813   $   469,063


General & Adm in
         Salaries & Benefits            Staffing Plan   $   129,375      $   143,750   $   195,500   $   195,500
               Rent (pp/pm) $    375    input/formula   $    19,125      $    28,125   $    41,625   $    48,375
    Tel & Postage (PP/PM) $      200    input/formula   $    10,200      $    15,000   $    22,200   $    25,800
                Misc / Other                input       $    15,000      $    20,000   $    25,000   $    30,000
                Total G&A                 To P&L        $   173,700      $   206,875   $   284,325   $   299,675
Profit and Loss Statement - Quarterly

P & L by Month          Source                   Q1                Q2               Q3               Q4               Q1               Q2               Q3                Q4
                                           Year 1           Year 1            Year 1          Year 1            Year 2           Year 2           Year 2           Year 2
Revenue
              Model 1 Sales Plan     $       -        $   150,000       $   375,000      $   750,000      $ 1,500,000      $ 2,250,000      $ 3,000,000      $ 3,750,000
              Model 2 Sales Plan     $       -        $        -        $       -        $       -        $   200,000      $   300,000      $   400,000      $   500,000
              Model 3 Sales Plan     $       -        $        -        $       -        $       -        $       -        $       -        $       -        $        -
       Total Revenue                 $       -        $   150,000       $   375,000      $   750,000      $ 1,700,000      $ 2,550,000      $ 3,400,000      $ 4,250,000


COGS                    Sales Plan   $       -        $    50,000       $   125,000      $   250,000      $   560,000      $   840,000      $ 1,120,000      $ 1,400,000


Gross Margin                         $       -        $   100,000       $   250,000      $   500,000      $ 1,140,000      $ 1,710,000      $ 2,280,000      $ 2,850,000


Expenses
           Engineering Expenses      $   169,375      $   312,875       $   378,000      $   466,375      $   576,038      $   792,275      $   965,163      $ 1,141,800
            Marketing Expenses       $   111,250      $   136,250       $   185,125      $   278,125      $   330,600      $   409,200      $   470,738      $   600,213
                Sales Expenses       $   146,188      $   220,188       $   378,813      $   469,063      $   672,563      $   792,188      $   938,938      $ 1,062,813
                 G&A Expenses        $   173,700      $   206,875       $   284,325      $   299,675      $   388,150      $   417,975      $   492,300      $   519,325
       Operating Exp.                $   600,513      $   876,188       $ 1,226,263      $ 1,513,238      $ 1,967,350      $ 2,411,638      $ 2,867,138      $ 3,324,150


Operating Profit                     $   (600,513) $      (776,188) $       (976,263) $ (1,013,238) $         (827,350) $      (701,638) $      (587,138) $      (474,150)


Depreciation             CAPEX       $     9,833      $    20,833       $    45,667      $    68,500      $    81,167      $   105,000      $   117,333      $   123,833


EBIT                                 $   (610,346) $      (797,021) $ (1,021,929) $ (1,081,738) $             (908,517) $      (806,638) $      (704,471) $      (597,983)
 CAPEX & Cash Flow Projection
Cash Flow                       Source                                    Q1                Q2                Q3                Q4
                                                                   Year 1            Year 1            Year 1            Year 1
  Beginning Cash         Input (Beginning only)               $       -        $ 4,281,488       $ 3,273,300       $ 1,849,038


  Gross Margin             From P&L Quarterly                 $       -        $        -        $   100,000       $   250,000
  Expenses                 From P&L Quarterly                 $ (600,513)      $   (876,188)     $ (1,226,263)     $ (1,513,238)
  Investment                              Input               $ 5,000,000      $        -        $        -        $        -
  Capital Expense              From P&L CAPEX                 $ (118,000)      $   (132,000)     $   (298,000)     $   (274,000)
  Change in Cash                                              $ 4,281,488      $ (1,008,188)     $ (1,424,263)     $ (1,537,238)


  Ending Balance                                              $ 4,281,488      $ 3,273,300       $ 1,849,038       $   311,800


Capital Expenses                                                          Q1                Q2                Q3                Q4
                                                                   Year 1            Year 1            Year 1            Year 1

  Employee Workstations (PP)                      $   4,000   $    68,000      $    32,000       $    48,000       $    24,000
  Prototype Expenses                                  Input   $    50,000      $   100,000       $   250,000       $   250,000
                                                              $   118,000      $   132,000       $   298,000       $   274,000


  Cumulative CAPEX                                            $   118,000      $   250,000       $   548,000       $   822,000


Depreciation
  Depreciation Charge                                         $     9,833      $    20,833       $    45,667       $    68,500
Real World Expenses

• See $50K Web Site for more detail
 PART 2 - Dividing the Pie

• Address two fundamental questions:
   How much of my company should the VCs get?
   How much of my company should employees get?


• “The Formula”
• Conceptual Framework for Stock Ownership
• Some Real-World Examples & Advice
     Valuation – “The Formula”
     VC % = VC$ / (pre-money + VC$)
                                    Example 1   Example 2   Example 3   Example 4
                Pre-Money ($MM)     $    10     $    10     $    15     $    15
            plus Investment ($MM)   $     5     $    10     $     5     $    10
         equals Post-Money ($MM)    $    15     $    20     $    20     $    25

                Investment ($MM)    $     5     $    10     $     5     $    10
     divided by Post-Money ($MM)    $    15     $    20     $    20     $    25
als VC Ownership (see note below)       33%         50%         25%         40%

          Founder's Shares in MM        1.00        1.00        1.00        1.00
   Newly Issued VC Shares in MM         0.50        1.00        0.33        0.67
              Total Shares in MM        1.50        2.00        1.33        1.67

       VC Ownership % assumes only 1 round of financing
YourCompany.COM
 Stage 1 - Before any funding (pre-money)




                    Founder

                    VC

                    Employees




 Let‟s assume a pre-money value of $10MM
YourCompany.COM
Stage 2 – Assume $10MM raised at a $10MM pre-money
valuation would yield a post-money valuation of $20MM)

The WRONG* way to look at it:




                                 * WRONG because the
                     Founder     post-money pie is shown
                     VC
                                 as the same size as the
                     Employees
                                 pre-money pie
YourCompany.COM
      Stage 2 – Same example

      The RIGHT way to look at it

Original Company ($10MM Pre-Money)   $10MM Cash in Bank (Money)




                       Founder                            Founder

                       VC                                 VC

                       Employees                          Employees
 YourCompany.COM
Stage 2 – Same example
Combine the two and the “post-money” pie is twice as large




                            Founder

                            VC

                            Employees



 Pie represents both “original company” and new cash
YourCompany.COM
Stage 2 – Another way to look at the same example.
Your holdings are the same but the company is twice as large



                                  Founder

                                   VC

                                   Employees


  Think of issuing stock to employees in the same way
Raising money in stages

                         All at once         Round 1         Round 2
          Pre-Money              5                5             16
      plus Investment            5                3              4
   equals Post-Money            10                8             20

           Investment           5               3                4
divided by Post-Money          10               8               20
       equals Dilution       50%              38%             20%

         Your Shares          100      50%     100     63%     100 50%
 VC Shares - Round 1          100      50%      60     38%      60 30%
 VC Shares - Round 2                                            40 20%
         Total Shares         200 100%         160 100%        200 100%
    Some Observations on VCs

• What do VCs want? Return on investment of:
     • Three to five times (300%-500%)
     • Within 4 to 6 years
•   Therefore:
     • Your company‟s post-money value must increase 3 to 5 times
•   Prefer management with a track record
•   Average investment is $5+ million
•   By the liquidity event, VCs want to make sure that founders hold at
    least 10% to 20% of the equity
     • Round 1 financings are in the range of 25% to 50%
     • This allows for additional dilution in round 2 & 3
     • They will also build in an option pool of 10% to 20%
Employee Equity – Real World Examples

• Create the right number of shares – 10MM to 20MM
• Equity by Position – very general guidelines
    CEO – 5% to 10%
    Other VPs – 1% to 2.5%
    First Level Managers - .2% to .3%
    Scale down other levels of employees from here
    Slight premium for technical hires
• Early stage companies may have to exceed these guidelines
• 4 year vesting, 25% after 1 year then 6.25% per quarter
VC Funding Recommendations

• Create more VC interest to increase the valuation
• Research VC Firms. Approach one appropriate for:
   • Your business stage
   • Your business size
   • Your industry
• There‟s more than valuation:
   • Advice & council
   • How will they react when things go bad?
Random Advice

• Build a GREAT team
   • Technology, Marketing. Sales, Finance
• Get a good lawyer before you:
   • Negotiate with VCs
   • Grant stock or options
• A Big-5 accountant adds to your credibility
• Write this down – Section 83(b) of IRS tax code
• Build relationships with investment community (VCs &
  investment bankers) BEFORE you need them

				
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