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Contents at a Glance
Chapter 1—Introduction.................................................................................................... 17
Alternative Routes and Destinations ............................................................................18
What about Just Building a Profitable Independent Business?.................................20
A Setting for your Journey—Startup Island ................................................................21
Chapter 2—Preparing for your Journey........................................................................... 23
Poor Preparation Leads to Poor Performance—and can affect your Diet!............23
Seven Point Travel Plan..................................................................................................24
Targeting your Destination.............................................................................................27
Picking your Team...........................................................................................................27
Maintaining Momentum .................................................................................................29
Taking your Bearings.......................................................................................................34
What’s the Best Route for You and your Product? ....................................................43
Chapter 3—The Long Haul to Destination IPO (or Cash Flow Sale) ............................ 51
Destination IPO Seed Stage...............................................................................................71
Destination IPO Early Stage............................................................................................144
Destination IPO Expansion Stage ..................................................................................180
Destination IPO Mezzanine Stage..................................................................................194
Switching to Destination Cash-Flow Sale ..................................................................224
Chapter 4—The Short Sprint to Destination Asset Sale...............................................227
Chapter 5—The Slippery Slope to Destination Shutdown ............................................251
Slippery Slope to Cash Crisis........................................................................................252
How a Cash Crisis Develops........................................................................................252
On Detecting a Distant or Looming Cash Crisis......................................................255
Climbing Back on Track—Raising Funds..................................................................260
Slowing your Descent—Cutting Costs.......................................................................264
Radical Momentum Maneuvers ...................................................................................275
Making an Elegant Descent—Orderly Shutdown .......................................................291
Appendix 1—What’s it Worth? Valuing the Company ...............................................301
Appendix 2—Getting What you Want—Negotiating the Deal .................................313
Appendix 3—Gathering your Provisions—The Fundraising Process ......................325
Appendix 4—Selling the Company—The M&A Process...........................................351
Appendix 5—Every Journey Tells a Story.....................................................................377
Appendix 6—Resource Guide ........................................................................................393
Index....................................................................................................................................409
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Table of Contents
Chapter 1—Introduction ................................................................................................... 17
Alternative Routes and Destinations ............................................................................18
What about Just Building a Profitable Independent Business?.................................20
A Setting for your Journey—Startup Island ................................................................21
Chapter 2—Preparing for your Journey........................................................................... 23
Poor Preparation Leads to Poor Performance—and can affect your Diet!............23
Seven Point Travel Plan..................................................................................................24
Back-of-a-Napkin 7 Point Travel Plan Template for Any Journey .....................26
Targeting your Destination.............................................................................................27
Picking your Team...........................................................................................................27
Founding Partners.......................................................................................................28
Maintaining Momentum .................................................................................................29
The Magic of Positive Momentum...........................................................................30
The Menace of Negative Momentum ......................................................................30
Gentle Momentum Maneuvers .................................................................................31
Taking your Bearings.......................................................................................................34
Why it’s Important to Regularly Pinpoint your Position.......................................34
Company Navigator....................................................................................................35
What you’re Looking For...........................................................................................38
Taking your Bearings in 2 Simple Steps...................................................................38
The Process of Selling the Company .......................................................................42
When to Take your Bearings .....................................................................................43
What’s the Best Route for You and your Product? ....................................................43
Chapter 3—The Long Haul to Destination IPO (or Cash Flow Sale) ............................ 51
Destination IPO ..........................................................................................................52
Back-of-a-Napkin Travel Plan for the Long Haul from Zero-to-IPO ...............53
A Team for the Long Haul ........................................................................................54
Long Haul Contingency Plans...................................................................................59
Destination IPO Seed Stage...............................................................................................71
Write a Business Plan..................................................................................................72
Take the Leap ..............................................................................................................76
Hire a Good Startup Law Firm.................................................................................77
Find a Good Bank.......................................................................................................78
Hire a Good Firm of Accountants ...........................................................................79
Recruit an Advisory Panel..........................................................................................79
Secure Seed Funding...................................................................................................80
Lease an Office............................................................................................................86
Formulate your Core Messaging and Corporate Identity......................................87
Form a Corporation....................................................................................................90
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Select a Good Company Name.................................................................................92
Set Up your Capitalization Table ..............................................................................93
Create a Stock-Option Plan .......................................................................................95
File Patents and Trademarks .....................................................................................98
Create and Launch your Web Site ..........................................................................101
Publish a Technical White Paper ............................................................................103
Build a Product Prototype .......................................................................................104
Form a Board of Directors ......................................................................................105
Structure a Management Team................................................................................107
Set Up a Bookkeeping & Accounting System.......................................................108
Hire a Head of HR....................................................................................................109
Prepare for a Recruitment Ramp-up ......................................................................109
Outsource Everything that Moves..........................................................................111
Define your Corporate Values.................................................................................112
Establish a Benefits Package....................................................................................116
Write an Employee Handbook ...............................................................................116
Hire a Head of Marketing ........................................................................................118
Appoint a PR Agency ...............................................................................................120
Launch the Company................................................................................................130
Test the Market..........................................................................................................134
Close your First (VC) Round of Funding..............................................................138
Destination IPO Early Stage............................................................................................144
Press all the ‘Go’ Buttons.........................................................................................144
Hire a Career CEO....................................................................................................145
Release the Product—in Preview, Alpha or Beta if Necessary ..........................148
Seed Customers and Document their Positive Endorsements ..........................155
Form Strategic Partnerships ....................................................................................155
Publish a Corporate Web Site..................................................................................157
Hire a VP of Sales .....................................................................................................160
Structure Sales Agreements......................................................................................161
Close Sales Agreements............................................................................................161
Hire an In-House Accountant.................................................................................162
Build a Scalable IT Infrastructure ...........................................................................163
Set Up a Scalable Financial Management System.................................................165
Appoint an Advertising or Marketing Agency ......................................................165
Go International ........................................................................................................168
Polish Your Business Plan Presentation ................................................................173
Close Strategic Funding............................................................................................175
Destination IPO Expansion Stage ..................................................................................180
Release Best-of-Breed Product Range....................................................................181
Round-out the Management Team.........................................................................182
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Start to Act Like A Public Company......................................................................183
Deliver Impressive Sales ..........................................................................................184
Turn a Profit ..............................................................................................................185
Appoint Investment Bank........................................................................................186
Close Mezzanine Funding........................................................................................191
Destination IPO Mezzanine Stage..................................................................................194
Appoint Marquee Names to the Board of Directors...........................................195
Enhance & Upgrade your Web Site .......................................................................197
Take Decision to IPO ..............................................................................................198
Brace the Company for the IPO Process ..............................................................204
Go Quiet.....................................................................................................................204
Assemble the IPO Team..........................................................................................206
Carry Out the Financial Audit and Due Diligence...............................................208
Draft the Prospectus and Other Documents........................................................211
File Registration Documents with the SEC ..........................................................213
Present the IPO Road Show....................................................................................215
Set the Share Price.....................................................................................................216
Prepare to Deal with Public Investors ...................................................................216
Go Public—The IPO Itself .....................................................................................223
Switching to Destination Cash-Flow Sale ..................................................................224
Chapter 4—The Short Sprint to Destination Asset Sale ..............................................227
Back-of-a-Napkin Travel Plan for the Short Sprint from Zero-to-Asset Sale.232
Destination Asset Sale ..............................................................................................233
A Short Sprint Team.................................................................................................238
The Route from Zero-to-Asset Sale.......................................................................243
Short Sprint Contingency Plans ..............................................................................244
Reaching Destination Asset Sale & Cashing Out.................................................247
Chapter 5—The Slippery Slope to Destination Shutdown ............................................251
Slippery Slope to Cash Crisis........................................................................................252
How a Cash Crisis Develops........................................................................................252
On Track ....................................................................................................................252
Scramble Zone...........................................................................................................253
Survival Zone.............................................................................................................253
Freefall Zone..............................................................................................................254
Shutdown Zone.........................................................................................................254
On Detecting a Distant or Looming Cash Crisis......................................................255
Scramble Zone Action Plan.....................................................................................257
Survival Zone Action Plan.......................................................................................258
Freefall Zone Action Plan........................................................................................259
Climbing Back on Track—Raising Funds..................................................................260
Raising an ‘Up’ Round..............................................................................................260
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Raising a ‘Down-Round’ ..........................................................................................260
Raising a Bridge Loan ...............................................................................................262
Slowing your Descent—Cutting Costs.......................................................................264
Cutting Costs..............................................................................................................264
Slashing Costs ............................................................................................................273
Radical Momentum Maneuvers ...................................................................................275
Switch Destinations...................................................................................................275
Reinvent the Company .............................................................................................276
Warm Restart .............................................................................................................280
Cold Restart................................................................................................................285
Making an Elegant Descent—Orderly Shutdown .......................................................291
Shutdown Zone .........................................................................................................291
Orderly Shutdown.....................................................................................................292
Bankruptcy .................................................................................................................295
Appendix 1—What’s it Worth? Valuing the Company ...............................................301
Economics 101—The Laws of Supply & Demand .............................................301
Increasing the Price—the Golden Rule of Valuation ..........................................302
Valuation Techniques for Technology Companies..............................................303
Valuation Techniques—True Market Forces ............................................................303
Valuation Techniques—Earnings Multiple................................................................303
Liquidity Discount.....................................................................................................304
Valuation Techniques—Revenue Multiple ................................................................304
Valuation Techniques—Discounted Cash Flow.......................................................304
Valuation Techniques—Build Cost Plus....................................................................305
Valuation Techniques—Comparable Deals...............................................................306
Valuation Techniques—Return on Investment ........................................................306
Valuation Techniques—Rule of Thumb ....................................................................307
Example Investor Rule of Thumb Valuation Table.............................................307
Valuation Techniques—Weighted Average...............................................................308
Valuation Techniques for a Seed Stage Company ....................................................308
Playing the Discounted Cash Flow Game—for a Company with Very Little
History ........................................................................................................................309
Valuation Techniques for an Early Stage Company .................................................310
Valuation Techniques for Expansion Funding .........................................................310
Valuation Techniques for Mezzanine Funding .........................................................310
Valuation Techniques for Cash Flow Sale .................................................................311
Valuation Techniques for Asset Sale...........................................................................311
Valuation Techniques for IPO ....................................................................................312
Appendix 2—Getting What you Want—Negotiating the Deal .................................313
The Negotiation Process ..............................................................................................313
Switch into Sales Mode.............................................................................................314
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Define Objectives—Where Are We Going?.........................................................314
Pick the Negotiating Team & Establish Control..................................................314
Connect With the Individual ...................................................................................315
Connect With the Team ...........................................................................................316
Select the Negotiating Strategy................................................................................316
Agree on Agenda—How Are We Going To Get There? ...................................317
Make the Opening Moves........................................................................................317
Make Counter Moves ...............................................................................................318
Reach Deadlock.........................................................................................................318
Identify & Agree on Problems/Obstacles.............................................................318
Explore Ways of Overcoming Obstacles ..............................................................319
Make Concessions.....................................................................................................319
Close............................................................................................................................319
Negotiation Tips & Techniques ..................................................................................320
Listen...........................................................................................................................320
Reflect .........................................................................................................................320
Some Deal Killers to Watch Out For ....................................................................321
Watch the Clock ........................................................................................................321
Charm..........................................................................................................................322
Keep it Professional..................................................................................................322
Emotional Displays...................................................................................................323
Good Guy/Bad Guy ................................................................................................323
Introduce Alternative Currencies............................................................................323
Disengage Without Burning your Bridges.............................................................324
Appendix 3—Gathering your Provisions—The Fundraising Process......................325
The Fundraising Process...............................................................................................325
Appoint Fundraising Team ..........................................................................................326
Hiring a Professional Fundraiser ............................................................................327
Formulate the Pitch .......................................................................................................329
Identify Target Investors ..............................................................................................330
Create Investor Information Packs.............................................................................331
Prepare to Approach Investors....................................................................................332
Contact Management System ..................................................................................334
Approach Investors .......................................................................................................334
Investor Pitch Events ...............................................................................................336
Remember—Investors are Human Too................................................................337
Present to Investors.......................................................................................................338
Listen and Respond to Investor Feedback ................................................................340
Negotiate and Agree Terms .........................................................................................341
Preference Share Agreements..................................................................................342
Liquidity Preference or Participating Preferred ....................................................342
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The Dreaded Ratchet................................................................................................345
Two Traunch Deals ..................................................................................................346
Redemption Rights....................................................................................................347
Co-Sale Rights............................................................................................................347
Sign Term Sheet .............................................................................................................348
Complete Due Diligence...............................................................................................348
Close Round of Funding...............................................................................................349
Appendix 4—Selling the Company—The M&A Process...........................................351
Take Decision to Sell.....................................................................................................352
Pick M&A Team ............................................................................................................353
Appointing an M&A Firm/Intermediary ..............................................................353
Prepare your Paperwork ...............................................................................................357
Dress the Company Up for Sale..................................................................................358
Selling Materials .........................................................................................................358
Identify Buyers ...............................................................................................................360
Approach Buyers............................................................................................................360
Present to Buyers ...........................................................................................................361
Negotiate Terms.............................................................................................................362
Negotiate the Price....................................................................................................362
Negotiate the Structure & Currency.......................................................................362
Agree Terms ...................................................................................................................366
Board & Other Approvals............................................................................................366
Prepare Agreements ......................................................................................................367
Complete Due Diligence...............................................................................................367
Close the Sale..................................................................................................................368
Meet the Parents ............................................................................................................368
Company is Integrated as a Self-Contained Subsidiary .......................................370
Company is Absorbed into Parent..........................................................................370
Integration Plan .........................................................................................................371
Streamlining the M&A Process....................................................................................371
Selling the Company in a Hurry...................................................................................372
No Short Cuts when it comes to Preparation.......................................................373
The Sales Team..........................................................................................................373
Valuation.....................................................................................................................374
Approaching Potential Buyers.................................................................................374
Accelerated Negotiation ...........................................................................................375
Bypass the Letter of Intent ......................................................................................375
Due Diligence Process and Preparation of the Definitive Agreement .............376
Appendix 5—Every Journey Tells a Story.....................................................................377
Zero-to-IPO Direct ..................................................................................................377
Zero-to-Independent Survival.................................................................................378
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Zero-to-Cash Flow Sale Diversion.........................................................................379
Zero-to-Cash Flow Sale Backtrack .........................................................................380
Zero-to-Asset Sale Diversion (Intentional) ...........................................................381
Zero-to-Asset Sale Diversion (Unsolicited Offer) ...............................................382
Zero-to-Asset Sale Backtrack ..................................................................................383
Zero-to-Shutdown Direct ........................................................................................384
Zero-to-Bankruptcy—Direct ..................................................................................385
Zero-to-Shutdown Popular Route..........................................................................386
Zero-to-Bankruptcy Popular Route .......................................................................387
The Costly Routes to Bankruptcy and Shutdown ................................................388
Zero-to-Asset Sale Direct ........................................................................................390
Zero-to-IPO Diversion ............................................................................................391
Appendix 6—Resource Guide ........................................................................................393
Executive Resources......................................................................................................393
Business Planning Resources...................................................................................393
Organizations for Technology Entrepreneurs......................................................393
Entrepreneur & Startup Resources.........................................................................393
Finance ............................................................................................................................394
Accountant Lists & Directories ..............................................................................394
Large Accounting & Auditing Firms......................................................................394
Bookkeeping & Accounting Software....................................................................395
Incubators...................................................................................................................395
Investment Bank Lists ..............................................................................................395
Investment Banks—Largest Based on Nasdaq IPO's 2000......................................395
Investment Banks—Selection ....................................................................................396
Investor Conferences & Events..............................................................................397
IPO Resources and Information.............................................................................397
Merger & Acquisition Intermediaries.....................................................................397
Business Brokers .......................................................................................................398
Investor Lists & Match-Making Services...............................................................398
Angel Investor Lists..................................................................................................398
Prominent VC Investors—Selection.........................................................................399
VC Information & Resources .................................................................................400
Valuation Information Sources ...............................................................................400
Legal.................................................................................................................................400
Corporation Formation Services.............................................................................400
Immigration Lawyers & Resources ........................................................................401
Lawyer Lists ...............................................................................................................401
IPO Lawyers—Largest based on 2000 Nasdaq IPOs................................................401
Boutique Law Firms..................................................................................................401
IPO Lawyers ..............................................................................................................401
15
Legal Resources .........................................................................................................402
Trademark, Patent & IP Lawyer Lists....................................................................402
Human Resources..........................................................................................................402
Benefit Brokers & Resources ..................................................................................402
Large Executive Search Firms .................................................................................402
Health Insurance & Resources................................................................................403
HR & Payroll Resources...........................................................................................403
Outsourcing................................................................................................................404
Recruitment................................................................................................................404
Operations ......................................................................................................................405
Internet Domain, Search & Registraton ................................................................405
Web Hosting Services...............................................................................................405
Marketing ........................................................................................................................406
Advertising & Marketing Agency Lists ..................................................................406
PR Agency Lists.........................................................................................................406
Selected PR Agencies................................................................................................406
PR Resources .............................................................................................................407
Press Release Distribution Services ........................................................................407
Web Developer Lists ................................................................................................407
Web Site Promotion Services ..................................................................................407
Company Information & Research ........................................................................408
Market Surveys & Research .....................................................................................408
Index....................................................................................................................................409
