Preferred Returns. Message from the Chair. Featured Articles

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1 5/30/2017 ABA Section of Business Law enewsletter: Preferred Returns JOIN THE COMMITTEE ONLINE! FREE FOR ALL BUSINESS LAW MEMBERS Message from the Chair Featured Articles The Leveraged Buyout with a Public Stub Data Mining the Venture Backed Charter Heard on the Listserve Venture Capital Industry Overview - United States and Europe (First Quarter, 2007) Trends in Terms of Venture Financings in the San Francisco Bay Area (First Quarter, 2007) Private Equity Activity Survey Europe ABA Comments to National Venture Capital Association Term Sheet VC&PE Committee Schedule of Events and Other Events of Interest Newsletter of the ABA Section of Business Law Committee on Venture Capital and Private Equity Preferred Returns Message from the Chair I am very pleased to be able to report that we are including with this issue of Preferred Returns our Subcommittee on Transactional Issues and Documents' comments on the NVCA form of Term Sheet. For those who are interested in working on the Subcommittee's next project, please contact Herb Fockler (hfockler@wsgr.com), the Subcommittee chair. I am also very pleased to inform you that in addition to our meetings we have a number of co-sponsored panels at the Annual Meeting in San Francisco - please click here for a schedule of all of our Committee's events. Finally, I understand from the ABA that our dinner in San Francisco has been SOLD OUT! Thanks to Chip Lion for helping to organize the event. I look forward to seeing many of you at the Annual Meeting and the dinner. Samantha Samantha Horn Tel: (416) Fax: (416) sghorn@stikeman.com Editorial Board: Mark Danzi Editor Hill Ward & Henderson A. John Murphy, Jr. Assistant Editor Wickersham & Murphy William (Ken) Maready, Jr. Regional Editor (Southeast) Raymond Walheim Regional Editor (Mid-Atlantic) Samantha Horn Regional Editor (Canada) Francesco Portolano Regional Editor (Italy) Featured Articles The Leveraged Buyout with a Public Stub Andrew J. Nussbaum and Joshua R. Cammaker A strength of the private equity M&A market has always been the willingness of private equity buyers to consider improvements in transaction structures and deal technology to address a seller's particular concerns and needs. Many recent public-to-private buyouts have faced criticism and challenges from shareholder groups, hedge funds and proxy advisory firms relating to the failure to provide the target's shareholders with an opportunity to participate in the future growth of the target under private equity management. The pending acquisition of Harman International Industries by KKR and Goldman Sachs Capital Partners serves as a possible middle ground, by offering Harman shareholders the opportunity to retain a minority interest while permitting the buyers to effectively take the company private. back to top More... Data Mining the Venture Backed Charter Jonathan D. Gworek The exact terms upon which venture capital investments are made are not typically announced or publicized. If available, the terms of prior venture transactions would be of interest to startups and venture capitalists alike. For a group of founders starting a company, knowing what a particular venture investor is willing to do based on what the investor has in fact done in prior deals could prove to be extremely valuable information. Likewise, a prospective venture investor could stand to gain an advantage 1/4

2 5/30/2017 ABA Section of Business Law enewsletter: Preferred Returns relative to a competitor, especially in competitive bid situations, if the investor were aware of the competitor s deal terms inclinations based again on actual deals done in the past. Pre-money valuations for prior deals are of particular interest as valuation is often the starting point for in a venture capital negotiation. Also of interest are the other primary economic terms of the venture deal liquidation preference, dividend rates and option pool size, to name a few each of which can have a significant impact on the return to the common and preferred stockholders. More... Heard on the Listserve Mark Danzi Since our last meeting, the Listserve has been very active. Among the discussions was a vigorous back and forth regarding founder indemnification. The discussion was kicked off by Andrew Hoyne on March 2 with the following post: "... do you ever see situations where founders of a VC-backed company personally (not as a corporate officer) rep and warrant the condition of the company as part of the venture financing, and personally agree to jointly and severally with the company indemnify the claims of investors for breaches of such reps? I am not concerned with a start-up... but instead am interested in your comments re a later stage financing round." Andrew received a number of detailed responses, with answers falling on both sides - with some differences apparently based on geography and company side v. investor side representation. More... Venture Capital Industry Overview - United States and Europe (First Quarter, 2007) Courtesy of DowJones VentureSource A comprehensive overview of Venture Capital industry data and trends for the United States and Europe, organized by industry, by rounds, and by regions and including valuation, liquidity, M&A and IPO statistics and trends. More... Trends in Terms of Venture Financings in the San Francisco Bay Area (First Quarter, 2007) Courtesy of Fenwick & West. A summary review of deal terms, including financing rounds, price change, magnitude of price change (or barometer), liquidation preference, multiple liquidation preferences, participation in liquidation, cumulative dividends, antidilution provisions, pay to play provisions, redemption, and corporate reorganization. For companies headquarted in the San Francisco Bay Area. More... Private Equity Activity Survey Europe 2/4

3 5/30/2017 ABA Section of Business Law enewsletter: Preferred Returns From the European Private Equity and Venture Capital Association Yearbook 2007 by EVCA/Thomson Financial/Pricewaterhouse Coopers More... ABA Comments to National Venture Capital Association Term Sheet back to top We are very pleased to be able to publish in this newsletter and in advance of our meetings at the Annual Meeting in San Francisco in August, the attached mark-up of the National Venture Capital Association form of Term Sheet, prepared by our Subcommittee on Transactional Issues and Documents. Thanks go out to all members of the Subcommittee for all of their hard work in producing the attached, which we think will be of great assistance to lawyers working with the form of Term Sheet. We look forward to discussing the Subcommittee's next project in San Francisco! Samantha Horn Chair Venture Capital/Private Equity Committee Herbert Fockler, Chair and Braden Berg, Vice-Chair Subcommittee on Transactional Issues and Documents Final Version (Redline) Final Version (Clean) VC&PE Committee Schedule of Events and Other Events of Interest back to top NEGOTIATED ACQUISITIONS Friday - 8/10/ :30 am - 12:30 pm Program: M&A Market Trends and Developments: Highlights from the 2007 Deal Points Studies on Private Targets, Public Targets, and Private Equity-Backed Going Private Acquisitions Sunday - 8/12/ :00 pm - 2:00 pm Subcommittee Meeting: Private Equity M&A VENTURE CAPITAL AND PRIVATE EQUITY Friday - 8/10/ :00 am - 12:00 pm Committee Meeting: Venture Capital and Private Equity 1:00 pm - 2:00 pm Subcommittee Meeting: Transactional Issues and Documents (Venture Capital) Saturday - 8/11/2007 2:30 pm - 4:30 pm Program: Alternative Public Markets for Fast-Growing U.S. Companies 3/4

4 5/30/2017 ABA Section of Business Law enewsletter: Preferred Returns Click to Download the Complete Events Schedule back to top The Section of Business Law of the American Bar Association 321 N. Clark Street - Chicago, IL Section Staff - businesslaw@abanet.org - Copyright 2007 Your address will only be used within the ABA and its entities. We do not sell or rent addresses to anyone outside the ABA. To change your address or remove your name from any future distribution s, complete the form at call the ABA Service Center at , or write to: American Bar Association Service Center 321 N. Clark Street Chicago, IL To review our privacy statement, go to 4/4

5 Negotiated Acquisitions Friday 8/10/ :30 am - 12:30 pm Program: M&A Market Trends and Developments: Highlights from the 2007 Deal Points Studies on Private Targets, Public Targets, and Private Equity-Backed Going Private Acquisitions Sunday 8/12/ :00 pm - 2:00 pm Subcommittee Meeting: Private Equity M&A Venture Capital and Private Equity Friday 8/10/ :00 am - 12:00 pm Committee Meeting: Venture Capital and Private Equity Friday 8/10/2007 1:00 pm - 2:00 pm Subcommittee Meeting: Transactional Issues and Documents (Venture Capital) Saturday 8/11/2007 2:30 pm - 4:30 pm Program: Alternative Public Markets for Fast-Growing U.S. Companies Taxation Sunday 8/12/2007 1:30 pm - 3:30 pm Program: Tax Issues in Venture Capital v1

6 The Leveraged Buy-Out with a Public Stub By Andrew J. Nussbaum and Joshua R. Cammaker* A strength of the private equity M&A market has always been the willingness of private equity buyers to consider improvements in transaction structures and deal technology to address a seller s particular concerns and needs. Many recent public-to-private buyouts have faced criticism and challenges from shareholder groups, hedge funds and proxy advisory firms relating to the failure to provide the target s shareholders with an opportunity to participate in the future growth of the target under private equity management. The pending acquisition of Harman International Industries by KKR and Goldman Sachs Capital Partners serves as a possible middle ground, by offering Harman shareholders the opportunity to retain a minority interest while permitting the buyers to effectively take the company private. The Harman structure entails an all-cash transaction, but with shareholders having the ability (but not the obligation) to elect to exchange up to approximately 12.5% of the Harman shares for stock of the newly-formed acquiring parent company. The stock portion of the transaction is entirely optional, and Harman shareholders can choose to receive only cash, a combination of cash and stock or all stock, with the stock portion subject to proration if oversubscribed. Because of the leverage to be incurred post-closing, the 12.5% will represent a significantly greater percentage of the equity of the new parent company. The new shares will be SEC-registered (and the buyer has committed to file periodic SEC reports for at least two years post-closing). Shares of the new parent are not required to be listed for trading on an exchange, although trading on pink sheets may develop. This represents something of a middle ground on the public-to-private landscape. The terms and amount of the rolled-over equity, or public stub, in an LBO can be varied to suit the particular needs of the parties. However, the potential benefits to both sides of such a transaction structure are clear. The shareholders of the target company have the opportunity to continue to participate, at least in part, in the future of the target company, alongside highly respected private equity investors. Moreover, the exchange of Harman shares for parent company shares, when taken together with the private equity sponsors contribution of cash to the parent company, is intended to qualify as a tax-free Section 351 exchange, generally allowing electing shareholders to defer at least a portion of their gain in the transaction. The election component of the transaction allows shareholders to choose their preferred consideration. For the private equity sponsors, a Harman-style transaction provides greater flexibility in structuring the deal, and a potentially compelling proposal to the target s shareholders that may avoid some of the recent criticisms (and effective challenges) to the usual private equity deal involving a 100% cash-out of the public. Assuming shareholders elect to subscribe for the equity rollover portion, the structure also has the advantage of decreasing the amount of equity that the sponsors will need to fund. The Harman structure will not suit all sellers, nor all private equity buyers, but in today s highly competitive deal landscape, creative equity alternatives for the target s shareholders may be a useful deal tool. * Andrew J. Nussbaum and Joshua R. Cammaker are partners with Wachtell Lipton Rosen & Katz. Mr. Nussbaum s practice involves a wide range of merger and acquisition-related matters, including cross-border transactions, spinoffs, divestitures, carve-out IPOs, private equity transactions, and joint ventures. He may be reached at AJNussbaum@wlrk.com. Mr. Cammaker concentrates his practice on mergers and acquisitions, corporate governance and securities law matters. He may be reached at JRCammaker@wlrk.com.

7 Data Mining the Venture Backed Charter: An Underutilized Tool for Ascertaining Pre-Money Valuations By Jonathan D. Gworek* The exact terms upon which venture capital investments are made are not typically announced or publicized. If available, the terms of prior venture transactions would be of interest to startups and venture capitalists alike. For a group of founders starting a company, knowing what a particular venture investor is willing to do based on what the investor has in fact done in prior deals could prove to be extremely valuable information. Likewise, a prospective venture investor could stand to gain an advantage relative to a competitor, especially in competitive bid situations, if the investor were aware of the competitor s deal terms inclinations based again on actual deals done in the past. Pre-money valuations for prior deals are of particular interest as valuation is often the starting point for in a venture capital negotiation. Also of interest are the other primary economic terms of the venture deal liquidation preference, dividend rates and option pool size, to name a few each of which can have a significant impact on the return to the common and preferred stockholders. In fact, virtually all of this information, and more, can be extracted from the publicly available charter 1 of a venture backed company. While people in the trade are generally aware that a company s charter memorializes the key economic terms of any given venture transaction, this data is not widely published and is underutilized. Some of this data is easy for the trained eye to quickly identify, while other data must be deduced from other indicators and depends on certain key assumptions. This article focuses on how this data can be used to determine pre-money valuations for Series A venture transactions in particular, 2 and also describes some of the other uses of the data that can be readily extracted from charter documents. Pre-Money Valuation. The Basic Formula In order to determine the pre-money valuation at which a company raised a round of venture capital, it is necessary to have a basic understanding of how the price per share paid for preferred stock is determined in venture capital transactions. The conventional method for determining the preferred price per share is quite simple. The preferred price per share is equal to (1) the pre-money valuation (the Pre-Money Valuation ) divided by (2) the sum of (a) the total number of issued and outstanding shares of common stock prior to the venture financing (the Common Stock Issued Pre- * Jon Gworek is a member of the law firm of Morse, Barnes-Brown & Pendleton, P.C. based in Waltham, MA on the Route 128 technology corridor just outside of Boston. Jon concentrates on the representation of start up and emerging technology companies and venture capital funds. He can be reached at jgworek@mbbp.com. 1 2 Charter on this context refers to the certificate of incorporation for a Delaware company and its analog in other states, copies of which are public record and can be obtained for a nominal fee. While this methodology could also be used in later stage financings, it is often more difficult to pull from later stage charters the necessary data, and similarly the assumptions necessary to perform the calculations become more speculative.

8 Funding ), and (b) the total number of shares of common stock to be reserved for issuance pursuant to the stock option pool after the venture financing (the Option Pool Reserve Post-Funding ) 3, or: Preferred Price Per Share = Pre-Money Valuation (Common Stock Issued Pre-Funding + Option Pool Reserve Post-Funding) Taking this simple formula and solving for the Pre-Money Valuation, the formula for Pre- Money Valuation is: Pre-Money Valuation = Preferred Price Per Share X (Common Stock Issued Pre-Funding +Option Pool Reserve Post-Funding) Therefore, it is a simple matter to solve for the Pre-Money Valuation if the other variables in the formula are known Preferred Price Per Share and the sum of the Common Stock Issued Pre- Funding and Option Pool Reserve Post-Funding. Preferred Price Per Share The Preferred Price Per Share is almost always specified directly in the charter. It is necessary to specify the original price per share of the preferred stock for purposes of defining the liquidation preference rights of the preferred stockholders. This variable is therefore readily knowable from the charter. Let s assume for purposes of this discussion, and the example set forth below, that the price per share in the charter is $1.00, a number that would be very common for a Series A preferred stock round of financing. Sum of Common Stock Issued Pre-Funding plus Option Pool Reserve Post-Funding In order to determine the sum of the Common Stock Issued Pre-Funding and the Option Pool Reserve Post-Funding, it is important to have a basic understanding of how companies determine the number of authorized shares in the charter. Every venture backed company has a certain number of shares of common stock and preferred stock authorized for issuance, and these numbers are explicitly set forth in the charter. Of these authorized shares, some number will be issued to shareholders and therefore is considered outstanding. At any given point in time, the number of shares of common stock set forth in the charter should be large enough to equal at least (1) the total number of shares of common stock issued and outstanding pre-funding, 4 plus (2) the total number of shares of common stock reserved for issuance pursuant to the option plan, plus (3) the total number of shares of common stock into which the preferred stock issued in the financing is convertible immediately after the financing. Using a hypothetical company by way of example, if there are 10,000,000 shares of common stock outstanding prior to the financing, there is an option pool of 5,000,000 shares, and 5,000,000 shares 3 4 By including the option pool in the pre-money capitalization in this way, the venture investors are not diluted when the option shares are issued. This number often, but not always, corresponds to the number of shares held by the founders prior to the Series A funding.

9 of preferred stock are being issued in the financing, then there should be at least 20,000,000 authorized shares of common stock 10,000,000 to cover the shares of common stock issued and outstanding pre-funding (what is referred to in the above formula as Common Issued Pre-Funding), 5,000,000 shares to cover the number of shares of common stock that are reserved under the option pool (what is referred to in the above formula as Option Pool Reserve Post-Funding), and 5,000,000 to cover the number of shares of common stock that the preferred stock is convertible into. 5 In addition, it is often the case, especially in earlier rounds of venture financing, that the number of shares of common stock is precisely enough to cover the number of shares needed as described above no more and no less. It is also often the case that the number of shares of preferred stock is precisely enough to cover the number of shares of preferred stock issued in the financing. For companies in which there are just enough shares, it is possible to determine the exact number of shares that make up the sum of Common Stock Issued Pre-Funding and the Option Pool Reserved Post-Funding. 6 In the above hypothetical example, this number would be 15,000,000 shares. Returning to the formula above for Pre-Money Valuation, this sum can then be multiplied by the Preferred Price Per Share, which is known for purposes of this article and has been set at $1.00, in order to determine the Pre-Money Valuation which in our example is $15,000,000. Based simply on information available in the charter of our hypothetical company, and making certain assumptions, we have arrived at the pre-money value upon which the company was funded. Option Pool Size and Impact on Pre-Money Valuation Comparisons. While the calculation described above results in the number that is generally identified as the premoney valuation in the venture capital parlance, this number depends heavily on the number of shares in the Option Pool Reserve Post-Funding. This number can and does vary considerably from deal to deal, the net result of which is that this definition of pre-money valuation makes comparisons of pre-money valuations somewhat illusory. To illustrate the point, in the above example there could have been only 5,000,000 shares of Common Stock Issued Pre-Funding, and 10,000,000 shares of common shares in the Option Pool Reserve Post-Funding, and the Pre-Money Valuation would have been the same. In light of this, an arguably more important and accurate measure of pre-money valuation is the implied value of the founders stock pre-funding a measure that will be called the true valuation for purposes of this article. It is calculated by multiplying the Common Stock Pre- Funding by the Preferred Price Per Share. For purposes of our example, the true valuation is equal to the Common Stock Issued Pre-Funding (or 10,000,000) multiplied by the Preferred Price Per Share (or $1.00), and equals $10,000,000. In order to calculate the true valuation prior to any venture funding, it is necessary to know the Option Pool Reserve Post-Funding. This number can then be subtracted from the sum of the Common Stock Issued Pre-Funding and the Option Pool Reserve Post-Funding to isolate the number of shares of common stock held by the founders. Here again there is good news to be found in the charter, as the typical venture charter often includes the number of shares reserved under the option plan. Most charters include an anti-dilution adjustment section that provides for an adjustment in the 5 6 The conversion rate is almost always one-to-one at the outset so this number typically corresponds initially to the total number of shares of preferred stock issued in the financing. This is the first key assumption that underlies the calculation of pre-money valuation in this discussion. The second key assumption is that the charter being examined has just enough shares as described.

10 number of shares of common stock issuable upon the conversion of preferred stock in the event of future issuances at a price per share below the price paid by the venture investors. Certain issuances of common stock are excepted from this adjustment, including shares of common stock issued upon the exercise of stock options issued pursuant to the company s option pool. Often times this option pool exception is limited to a specific number of shares that corresponds to the number of shares in the pool at the time of the financing, and this number is specified in the charter. 7 Other Key Terms. The charter document contains other key terms as well that are often of high interest to both the investors and the company and keenly negotiated prior to funding. Most notably, these terms include whether there is a dividend on the preferred stock and, if so, the rates and type of such dividend, whether the preferred stock issued to the venture capital investors is participating or nonparticipating preferred stock, if it is participating whether there is a multiple liquidation preference, or alternatively a cap on the return on investment above which the preferred stock ceases to participate, whether there is a pay-to-play provision, whether there is an anti-dilution feature and if so what type, whether the preferred stock is redeemable, and how many board seats the preferred stockholders are entitled to as a class. The charter also includes the number of shares of preferred stock that are authorized, and if this is just enough to cover the number of shares issued in the preferred stock financing, this number, when multiplied by the preferred price per share, yields the total amount of money raised in the round. 8 Conclusion While the process just described may seem daunting to the uninitiated, for the seasoned venture capitalist or venture lawyer, the exercise is reasonably straightforward. While certain assumptions are necessary, in many cases, especially for the fresh start company that has raised a Series A round of financing these assumptions are entirely reasonable and can result in very reliable data. Once the premoney valuation is known, it, together with the other information that is in the charter, can be used to re-create to a large degree the actual term sheet that was the basis of the underlying financing. 7 8 Arriving at the true valuation requires the additional key assumption that the number of shares specified in the carve-out corresponds to the exact number of shares reserved under the pool. This dollar amount raised can also be used, together with the liquidation preference provision, to determine the total liquidation preference that needs to be cleared before the common stockholders participate in a liquidity event scenario. This hurdle number is particularly relevant to common stockholders who are interested in better understanding the value of their shares of common stock.

11 Heard on the Listserve (August 2007): Founder Indemnification in VC Financings By Mark Danzi, Hill, Ward & Henderson, P.A. Since our last meeting, the Listserve has been very active. Among the discussions was a vigorous back and forth regarding founder indemnification. The discussion was kicked off by Andrew Hoyne on March 2 with the following post:... do you ever see situations where founders of a VC-backed company personally (not as a corporate officer) rep and warrant the condition of the company as part of the venture financing, and personally agree to jointly and severally with the company indemnify the claims of investors for breaches of such reps? I am not concerned with a start-up... but instead am interested in your comments re a later stage financing round. Andrew received a number of detailed responses, with answers falling on both sides with some differences apparently based on geography and company side v. investor side representation. Chip Lion and Dimitry Herman both noted Footnote 40 to the NVCA s Model Stock Purchase Agreement, which is generally in line with the responses from the Committee members and states: Founders representations are controversial and may elicit significant resistance. They are more common in the Northeast and counsel should be warned that they may not be well received elsewhere. They are more likely to appear if Founders are receiving liquidity from the transaction or if there is heightened concern over intellectual property (e.g., the Company is a spin-out from an academic institution or the Founder was formerly with another Company whose business could be deemed competitive with the Company). Founders representations are not common in subsequent rounds, even in the Northeast, where risk is viewed as significantly diminished and fairly shared by the investors rather than being disproportionately borne by the Founders. Common Themes. While the responses varied in many respects, some consistent themes emerged. Founder Liquidity. First, most of the responses viewed the situation in which founders are experiencing a liquidity event in connection with the financing as a special situation where personal liability may be more prevalent or appropriate. For example: I ve seen this only once in a deal that actually closed, and in that case the founders were taking money out of the company in connection with the round, and the new investors asked them to escrow a portion of their personal proceeds against an indemnification obligation. (Marc Leaf) I agree with Marc. An indemnity is market where the deal presents some liquidity to the founders or other investors. This is not common in the venture context, but very typical in the private equity context. (Dimitry Herman)

12 In my 25 years of practice only twice have I seen a founder (who was not taking money off the table) indemnify and hold harmless the investors for damages from the breach of reps and warranties of the Company and I think the investors were misguided in their demands. (Chip Lion) Intellectual Property Concerns. Second, a number of the responses mentioned the importance of intellectual property in this equation. For example: If a key company asset is intellectual property such as software code developed by the founders, and the founders previously worked for another company and did similar work but left to start the company, then a rep as to the software not incorporating code developed while employed at the prior firm is, in my opinion appropriate (and often obtained). (Robert Webb) I agree that these Founder representations are exceedingly rare in later rounds. However, there can be such personal representations regarding no violation of any IP obligations to prior employers, no person litigation (historical or pending), no personal arrangements regarding voting of shares, no prior violation of any laws, etc. This helps avoid some of the pie in the face scenarios for investors (assuming the Founder making the reps is going to be honest). (Neil Aronson) (emphasis added) Differences in Practice Based on Geography. Additionally, consistent with the NVCA commentary and (I m sure) the experience of most of our Committee members, differences on this issue surfaced based on geography, with attorneys on the West Coast falling more squarely against founder indemnification and attorneys on the East Coast seeing them more frequently. Following his comments quoted above, Chip (who is based in California) noted that I understand that practitioners on the East Coast may have a different experience and a different view. Dave Felman (who is based in Florida) shared his view that Chip s response is consistent with the position on this point often taken by California counsel... We see founders representations in earlier stage deals. Analysis of the Issue and Compromise Positions. A number of the responses provided helpful analysis and suggested possible compromise positions. Analysis. Samantha Horn replied that she has seen the request before and would resist it in all circumstances. Samantha provided the following reasons for arguing why a founder should not have to provide personal representations and warranties: The reason for establishing a corporation is to ensure that the liability of the founders is limited to the money invested in shares of the company. Below is a list of reasons I have given to a founder to argue why they should not have to personally rep and warrant. not in the term sheet very crucial business point had you known this would be requested, you would have proceeding with funding from another source it s a terrible precedent for subsequent financing rounds (you ll never get off the hook)

13 is not something provide in most deals you have past experience that they know about they have due diligenced the deal and know they risk what s the point of incorporating if you end up having to risk personal assets if this becomes standard, individuals will simply judgment proof themselves Neil Aronson added I agree with your point that if you want to go this route, you need to state so in the term sheet. Compromise Positions. The responses also evidenced compromises that are common on this issue. These compromises consist of limiting the founders personal liability through various mechanisms. Dave Felman noted The parties often compromise by limiting the representations to the founders knowledge. The point is not recourse to the founders (which makes for a tough relationship), but rather to ensure that founders pay close attention to the representations and accompanying disclosure schedules. Dimitry cited the NVCA approach. The introductory paragraph of Section 3 of the NVCA s model Stock Purchase Agreement states:... [(it being understood and agreed that any Founder s liability for breaches of any provisions of this Section 3 shall be limited to the then current fair market value [as determined in good faith by the board of directors of the Company] of the shares of Common Stock of the Company currently owned by such Founder and such Founder [may, in his sole discretion, discharge such liability by the surrender of such shares or the payment of cash] [shall discharge such liability by the surrender of such shares] and will terminate on the earlier of (i) [one year/two years] after the date of this Agreement, or (ii) the completion of an initial public offering of the Company s Common Stock)]... Michael Hawthorne responded If you have to give it, put in a cap on the exposure (something I have said is it is the shareholder percentage interest in the company e.g. if the rep liability cost $100 and the shareholder owns 30% then his liability is $30). Additional Views. William Hay, in Hong Kong, provided the following international perspective: I have seen shareholder-level indemnities in certain deals in places in Asia where international VCs are investing in existing, often family-controlled businesses. In jurisdictions where local law does not always provide an adequate remedy for fiduciary breaches, or where malpractice is not uncommon, these indemnities can help investors get comfortable with existing management. In one case in which I was involved, the investor was able to prevent the controlling shareholder from selling his shares in breach of a tag-along right because the controlling shareholder s

14 shares were pledged to the VC to secure a warranty not to breach the shareholders agreement.

15 Venture Capital Industry Overview Powered By:

16 U.S.

17 U.S. Fundraising

18 U.S. Fundraising Slows in 1Q 07 Commitments to Venture Capital Funds $80 $83.3 Funds Raised ($B) $60 $40 $20 $0 $57.4 $50.0 $26.7 $25.4 $24.4 $17.3 $17.9 $13.1 $9.9 $ Q07

19 Fund Sizes Shrinking in 2007 Median VC Fund Size (for funds greater than $20M) $200 $201 $196 Median Fund Size ($M) $150 $100 $81 $100 $120 $100 $112 $75 $100 $156 $149 $50 $ Q07

20 Percentage of Funds Under $100M Increasing Allocation of Fund Size by Number of Funds Raised per Vintage Year 100% 80% 60% 67% 62% 50% Under $100M $100M-$249M 40% 20% 24% 23% 29% 20% 13% 25% $250M-$499M $500M-$999M $1B+ 0% 7% 13% Q07

21 Quarterly Fundraising Slips in 1Q 07 Commitments to Venture Capital Funds $9 $8.1 $8.3 $8.5 $7.5 Funds Raised ($B) $6 $3 $6.1 $2.2 $4.8 $4.8 $3.2 $5.7 $4.2 $4.3 $2.9 $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07

22 U.S. Investment: Overall

23 $ Investment On Track Deal Flow and Equity into Venture-Backed Companies 6351 $94.8 6,000 Amount Invested ($B) $75 $50 $ $13.1 $ $ $ $26.7 $22.2 $22.5 $24.0 $ ,000 4,000 3,000 2,000 1,000 Number of Deals $0 $ Q07 Amount Invested ($B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

24 1Q 07 Investment Rebounds Deal Flow and Equity into Venture-Backed Companies Amount Invested ($B) $8 $6 $4 $2 546 $ $ $ $ $ $ $ $ $ $ $ $ $ Number of Deals $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 0 Amount Invested ($B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

25 IT Dominates Deal Flow Deal Flow Allocation by Industry Sector 100% 3% 11% 13% 5% 6% 8% Other 80% % of Total VC Rounds 60% 40% 20% 64% 22% 65% 27% 58% 29% Business, Consumer, Retail IT Healthcare 0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 Source: Dow Jones VentureOne/Ernst &Young

26 More Dollars Allocated to Healthcare in 1Q % 16% 2% 8% Investment Allocation by Industry Sector 16% 6% 7% 7% Other 80% % of Dollars Invested 60% 40% 55% 63% 45% Business, Consumer, Retail IT 20% 35% 35% 41% Healthcare 0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 Source: Dow Jones VentureOne/Ernst &Young

27 IT Deal Flow Remains Steady Equity Investment in Information Technology Companies Amount Invested ($B) $4 $3 $2 $1 352 $ $ $ $ $ $ $ $ $ $ $ $ $ Number of Deals $0 0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Amount Invested ($B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

28 Investment in Information Services Grows IT Investment Allocation by Sector 100% 18% 18% 9% 80% 7% 20% 23% Semiconductors % of Dollars Invested 60% 40% 20% 10% 23% 42% 48% 31% 11% 8% 21% 39% Information Services Electronics Communications Software 0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 Source: Dow Jones VentureOne/Ernst &Young

29 Healthcare Activity Climbs in 1Q 07 Equity into Venture-Backed Healthcare Companies Amount Invested ($B) $3 $2 $1 121 $ $ $ $ $ $ $ $ $ $ $ $ $ Number of Deals 25 $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Amount Invested ($B) Number of Deals 0 Source: Dow Jones VentureOne/Ernst &Young

30 More HC Dollars Allocated to Biopharm Healthcare Investment Allocation by Sector 100% 5% 10% 2% 80% 16% 3% 35% 33% Medical IS % of Dollars Invested 60% 40% 20% 76% 67% 11% 3% 62% Medical Devices Healthcare Services Biopharm 0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 Source: Dow Jones VentureOne/Ernst &Young

31 Early Stage Investing Steady in 1Q 07 Deal Flow Allocation by Round Class 100% 10% 9% 5% % of Total VC Rounds 80% 60% 40% 20% 38% 21% *31% 23% 38% *40% 34% 24% *37% Restart Later Second First Seed 0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

32 Annual Round Allocation Remains Consistent Deal Flow Allocation by Round Class (Annual) 100% 2% 8% 5% % of Total VC Rounds 80% 60% 40% 26% 24% *49% *54% 33% 36% 34% 24% Restart Later Second First 20% *37% Seed 0% Q07 *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

33 Dollars Allocated to Later Stage Remains Strong Investment Allocation by Round Class 100% 8% 9% 5% % of Dollars Invested 80% 60% 40% 47% 25% 30% 52% 46% 26% Restart Later Second First 20% *20% *27% *23% Seed 0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

34 More Than ½ of Dollars Go To Later Rounds Investment Allocation by Round Class (Annual) 100% 3% 10% 5% 80% 35% Restart % of Dollars Invested 60% 40% 20% 27% *35% *38% 36% 47% 46% 26% Later Second First Seed *23% 0% Q07 *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

35 Median Deal Size Grows in 1Q 07 Median Amount Invested Per Financing Round $9 $8.0 Median Amount Invested ($M) $6 $3 $7.0 $7.0 $7.0 $6.0 $6.8 $7.0 $6.2 $6.2 $7.0 $7.3 $7.0 $7.0 $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Source: Dow Jones VentureOne/Ernst &Young

36 Median VC Rounds Rises in 1Q 07 Median Amount Invested Per Financing Round, VC Only $9 Median Amount Invested ($M) $6 $3 $7.0 $7.3 $7.0 $6.4 $7.0 $7.0 $6.6 $6.4 $7.4 $7.5 $7.0 $7.0 $8.0 $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Source: Dow Jones VentureOne/Ernst &Young

37 Later Rounds Growing Larger Median Amount Invested by Round Class (Annual), VC Only $20 Median Amount Invested ($M) $15 $10 $5 $0 $5.8 $5.1 $3.5 $1.0 $ Q07 Later Round Second Round First Round Seed Round $9.5 $4.9 $1.0 Source: Dow Jones VentureOne/Ernst &Young

38 Later Rounds Increase in 1Q 07 Median Amount Invested by Round Class, VC Only $14 $12 $12.1 Median Amount Invested ($M) $10 $8 $6 $4 $2 $10.0 $7.3 $5.2 $1.0 $9.5 $4.9 $1.0 $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Later Round Second Round First Round Seed Round Source: Dow Jones VentureOne/Ernst &Young

39 U.S. Investment: Regions

40 Bay Area Draws Most Investment Dollars Regional Investment in the United States 1Q 07 Potomac 2% All Other US 20% Bay Area 31% Research Triangle 3% Texas 4% New York Metro 5% Washington State 6% New England 13% Southern California 16% Source: Dow Jones VentureOne/Ernst &Young

41 California Companies Garner Over 40% of Deals Regional Deal Flow in the United States 1Q 07 All Other US 23% Research Triangle 2% Potomac 3% Washington State 5% Texas 5% New York Metro 7% Southern California 11% Bay Area 31% New England 13% Source: Dow Jones VentureOne/Ernst &Young

42 U.S. Investment: Valuations

43 Valuations Hold Steady at 2006 Levels Median Premoney Valuation by Year Median Premoney Valuation ($M) $25 $20 $15 $10 $5 $9.3 $12.9 $15.4 $21.0 $25.2 $16.0 $10.8 $10.0 $13.0 $15.0 $18.3 $18.5 $ Q07

44 1Q 07 Valuations Remain High Median Premoney Valuation $25 Median Premoney Valuation ($M) $20 $15 $10 $5 $14.0 $13.5 $13.0 $12.0 $15.0 $15.4 $11.8 $16.0 $16.4 $18.4 $18.3 $20.0 $18.5 $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07

45 Later Round Valuations Climb in 1Q 07 Median Premoney Valuations by Round Class (All Industries) Median Premoney Valuation ($M) $40 $30 $20 $10 $0 $41.0 $40.0 $18.2 $11.3 $5.0 $5.2 $2.3 $1.3 $2.1 $2.0 $2.5 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Later Stage Second Round First Round Seed Round

46 HC Valuations Outpace IT Median Premoney Valuations by Industry $30 Median Premoney Valuation ($M) $20 $10 $0 $22.1 $19.3 $15.4 $12.5 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Healthcare Information Technology

47 U.S. Liquidity

48 M&As Remain Primary Exit Option Percentage Breakdown of Venture Backed Liquidity Events: IPO vs. M&A 1Q % 20% 40% 60% 80% 100% IPOs M&As

49 Amount Paid in M&As on Track in 2007 Transactions and Amount Paid in M&As Amount Paid ($B) $100 $75 $50 $ $ $ $ $ $ $ $ $ $ $ $ Number of Transactions $ Q07 Amount Paid ($B) Number of Transactions 0

50 M&A Activity Rebounds in 1Q 07 Transactions and Amount Paid in M&As Amount Paid ($B) $9 $6 $ $6.6 $6.2 $ $4.9 $7.7 $ $ $ $9.4 $8.5 $7.9 $ $ Number of Transactions 25 $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 0 Amount Paid ($B) Number of Transactions

51 Median Amount Raised Prior to M&A ($M) $100 $75 $50 $25 $0 Gains from M&A Exits Jump in 2007 Median Amount Paid in M&As vs. Median Amount Raised Prior to M&A $33 $6 $31 $7 $55 $11 $100 $10 $28 $15 $18 $17 $24 $19 $39 $47 $52 $105 $20 $22 $20 $22 $100 $75 $50 $25 $0 Median Amount Paid ($M) Q07 Median Equity Raised Prior to M&A Median Amount Paid ($M)

52 Older Companies Being Acquired Median Time From Initial Equity Funding to M&A Number of Years Q07

53 IPO Activity Begins 2007 at Solid Pace Deals and Amount Raised Through IPOs $ Amount Raised ($B) $20 $15 $10 $5 $0 120 $ $3.7 $ $ $ $ $ $ $ $ $ Venture-Backed IPOs Q07 Amount Raised ($B) Venture-Backed IPOs

54 IPO Capital Steady in 1Q 07 Deals and Total Amount Raised Through IPOs $ $ Amount Raised ($B) $1.5 $1.2 $0.9 $ $0.7 $ $1.2 9 $ $ $ $ $1.3 9 $ $1.2 $ Venture-Backed IPOs $0.3 $0.2 5 $0.0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 0 Amount Raised ($B) Venture-Backed IPOs

55 Half of 2007 IPOs from Vintage Year 2001 Median Time From Initial Equity Funding to IPO Number of Years Q07

56 Equity Raised Prior to IPO Holds Steady Median Amount Raised Prior to IPO Median Amount Raised Prior to IPO ($M) $75 $50 $25 $0 $73.2 $58.0 $54.8 $56.0 $52.0 $46.9 $47.8 $49.0 $31.3 $22.4 $ Q07

57 Valuations for 2007 IPOs Skyrocket Median Pre-Valuation at IPO $375 $363 Median Pre-Valuation at IPO ($M) $300 $225 $150 $75 $105 $172 $314 $281 $229 $226 $224 $167 $202 $316 $ Q07

58 IPO Offering Sizes Increase Median Amount Raised at IPO vs. Median Pre-Valuation at IPO $363 $350 $314 $316 $350 Median Pre-Valuation at IPO ($M) $300 $250 $200 $150 $100 $50 $0 $105 $32 $172 $42 $62 $76 $281 $60 $229 $80 $226 $65 $224 $167 $50 $48 $202 $52 $80 $300 $250 $200 $150 $100 $50 $0 Median Amount Raised ($M) Q07 Median Pre-Valuation at IPO ($M) Median Amount Raised at IPO ($M)

59 Israel

60 Israeli Investment on Pace in 2007 Deals and Amount Invested in Venture-Backed Companies with Offices in Israel $ Amount Invested ($B) $4 $3 $2 $1 $ $1.4 $4.1 $ $ $ $ $ $1.5 $0.6 $ $ Q07 Amount Invested ($B) Number of Deals Number of Transactions Source: Dow Jones VentureOne/Ernst &Young 0

61 Deal Flow and Investment Up in 1Q 07 Equity into Venture-Backed Companies with Offices in Israel $ Amount Invested ($M) $400 $300 $200 $ $ $ $ $ $ $ $ $303 $ $ $ $ $ Number of Deals $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 0 Amount Invested ($M) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

62 IT Remains Driving Force in Israel Equity Investment by Industry Sector in Venture-Backed Companies with Offices in Israel 100% 1% 7% % of Dollars Invested 80% 60% 40% 20% 79% 89% 34% 87% Business, Consumer, Retail IT Healthcare 0% 20% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 13% Source: Dow Jones VentureOne/Ernst &Young

63 Early Round Deals Rebound Equity Investment by Round Class in Venture-Backed Companies with Israeli Offices 100% % of Dollars Invested 80% 60% 40% 20% 34% 37% *29% *27% 63% 27% 54% 8% *38% Later Second First Seed 0% 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

64 Israeli Round Sizes Remain at Historical Highs Median Amount Invested in Venture-Backed Companies with Offices in Israel $6 Median Amount Invested ($M) $4 $2 $2.2 $2.3 $2.5 $3.5 $3.0 $3.0 $3.0 $4.0 $4.8 $5.0 $5.0 $ Q07 Source: Dow Jones VentureOne/Ernst &Young

65 European Fundraising

66 2007 Fundraising Pace Slows Commitments to European Funds ( B)* Funds Raised ( B) Q07 includes venture capital, other private equity, and buyout firms

67 1Q 07 Fundraising Lags Behind Recent Quarters Commitments to European Funds ( )* Funds Raised ( B) Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 * includes venture capital, other private equity, and buyout firms

68 European Investment: Overview

69 Perspective on European Market Investment in Venture-Backed Companies, US vs. Europe ( ) 6 Amount Invested ( B) 4 2 U.S. Equity Investment Overall Investment European Equity Investment 0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Source: Dow Jones VentureOne/Ernst &Young

70 Perspective on European Market Equity Investment in Venture-Backed Companies, US vs. Europe ($) $7 $6 Amount Invested ($B) $5 $4 $3 $2 U.S. Equity Investment Overall Investment $1 European Equity Investment $0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Source: Dow Jones VentureOne/Ernst &Young

71 1Q 07 Investment Activity Slows Equity Investment in European Venture-Backed Companies Amount Invested ( B) Number of Deals Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Amount Invested ( B) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

72 Biopharm Leads Investing Equity Investment in European Venture-Backed Companies by Industry, 1Q 07 Software 22% Semiconductors 4% Information Services 12% Retail 2% Services 3% Products 1% Bus. Cons. Retail 9% Healthcare Info. Tech. 41% 59% Biopharmaceuticals 25% Medical IS 0% Healthcare Services 0.2% Medical Devices 14% Electronics 4% Communications 13% Source: Dow Jones VentureOne/Ernst &Young

73 IT Deal Flow Rises in 1Q 07 Equity Investment in European Venture-Backed Information Technology Companies Amount Invested ( M) Number of Deals 0 0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Amount Invested ( M) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

74 Software Allocation Reviving IT Investment Allocation by Sector 100% 80% 52% 43% 40% % of Euros Invested 60% 40% 20% 10% 4% 10% 31% 26% 19% 8% 21% 7% 24% 29% 24% 0% 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Communications Electronics Information Services Semiconductors Software Source: Dow Jones VentureOne/Ernst &Young

75 Amount Invested ( M) Healthcare Investment Declines Equity into European Healthcare Companies Number of Deals 0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Amount Invested ( M) Number of Deals 0 Source: Dow Jones VentureOne/Ernst &Young

76 Biopharm Attracts Majority of HC Investment European Healthcare Investment Allocation by Sector 100% %of Euros Invested 75% 50% 25% 12% 84% 8% 88% 63% 22% 86% 36% 64% 0% 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Biopharmaceuticals Healthcare Services Medical Devices Medical IS Source: Dow Jones VentureOne/Ernst &Young

77 Median Round Size Grows in 1Q 07 Median Amount Invested in European Venture-Backed Companies 2.7 Median Amount Invested ( M) Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Source: Dow Jones VentureOne/Ernst &Young

78 Later Rounds Strong in 1Q 07 European Deal Flow Allocation by Round Class 100% % of Total VC Rounds 80% 60% 40% 20% 33% 26% *41% 26% 35% *47% 41% 22% *38% Later Second First Seed 0% 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 *Seed and First Rounds Combined Source: Dow Jones VentureOne/Ernst &Young

79 Top European Investors, 1Q 07 Number of Equity Investments in European Venture-Backed Companies Sofinnova Partners 12 Seventure Partners 8 Wellington Partners Venture Capital 7 3i Group 6 Quester Capital Management 6 Inventure Capital 5 Eden Ventures 5 Ace Management 5 Big Bang Ventures 5 Atlas Venture 5 Amadeus Capital Management 5

80 European Investment: Geographic Perspective

81 UK & France Garner 60% of Deal Flow Total Deals in Europe by Country, 1Q 07 Ireland 0% Switzerland 6% Denmark 5% Other 16% United Kingdom 29% Germany 8% Sweden 5% France 31% Source: Dow Jones VentureOne/Ernst &Young

82 U.K. Leads European Investment Investment in Europe by Country, 1Q 07 Ireland 0% Denmark 4% Other 15% France 28% Germany 12% Switzerland 7% Sweden 4% United Kingdom 30% Source: Dow Jones VentureOne/Ernst &Young

83 UK Leads Investment Levels Equity Investment by Country Amount Invested ( M) Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 U.K. France Germany Sweden Ireland Source: Dow Jones VentureOne/Ernst &Young

84 1Q 07 UK Investment Slips Equity into Venture-Backed Companies in the United Kingdom Amount Invested ( M) Number of Deals 0 0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Amount Invested ( M) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

85 Amount Invested ( M) German Activity Continues Descent in 1Q Equity into German Venture-Backed Companies Number of Deals 0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 0 Amount Invested ( M) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

86 1Q 07 Swedish Investment Plummets Equity into Swedish Venture-Backed Companies Amount Invested ( M) Number of Deals 0 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Amount Invested ( M) Number of Deals 0 Source: Dow Jones VentureOne/Ernst &Young

87 Investment Picks Up in France Equity into French Venture-Backed Companies Amount Invested ( M) Number of Deals Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 0 Amount Invested ( M) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

88 Irish Investment Declines in 1Q 07 Equity into Irish Venture-Backed Companies Amount Invested ( M) Number of Deals Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 Amount Invested ( M) Number of Deals Source: Dow Jones VentureOne/Ernst &Young

89 European Liquidity

90 1Q 07 IPO Activity Slows Down Amount Raised through IPOs by European Venture-Backed Companies 1,000 1, Amount Raised ( M) Number of IPOs 0 1Q04 3Q04 1Q05 3Q05 1Q06 3Q06 1Q07 0 Euros (M) # of IPOs

91 Both U.S. and European IPOs Decrease IPOs Per Quarter, US vs. Europe Number of IPOs Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 European IPOs US IPOs

92 More Information For a copy of this presentation, Corporate.CommunicationsV1@dowjones.com or call +1 (415)

93 Trends in Terms of Venture Financings In the San Francisco Bay Area (First Quarter 2007) Background We analyzed the terms of venture financings for 117 companies headquartered in the San Francisco Bay Area that reported raising money in the first quarter of Overview The results of the 1Q07 survey showed a continuation of the strong positive trend in venture valuations. The highlights of the quarter were as follows: Up rounds exceeded down rounds for the thirteenth quarter in a row (79% up vs. 9% down, with 12% flat). This was the largest ratio of up rounds to down rounds since we started the survey in early The Fenwick & West Venture Capital Barometer showed a 75% average price increase for companies receiving venture capital in 1Q07 compared to such companies previous financing round. This was the largest increase since the survey began. This increase was driven in part by eleven 1Q07 financings in which the purchase price of the stock sold in the financing was at least three times higher than the prior round. Of these eleven financings, most were in Web 2.0 and related fields. The non price terms of financings in 1Q07 were also company favorable, with the use of senior liquidation preference and participating liquidation preference at the lowest levels since the survey began. Other U.S. venture industry related results for the quarter include the following: The amount invested by venture capitalists in the U.S. in 1Q07 was approximately $7 billion in 584 transactions, compared to $6.3 billion raised in 598 transactions in 4Q06. The amount invested this quarter was the second highest amount of venture investment in a quarter since 4Q01. Venture investment in healthcare hit $2.9 billion, the highest investment level on record for that industry. 1 Investments in internet and cleantech companies also increased significantly. 2 Acquisitions of venture-backed companies in the U.S. in 1Q07 was very strong, with 95 transactions totaling $9.4 billion compared to 79 transactions totaling $7.5 billion in 4Q06. Acquisition activity in 1Q07 was the highest amount in dollar terms since 4Q00. The median acquisition amount, at $105 million, was very strong, and approximately equal with the internet bubble year of

94 IPOs of venture-backed companies declined on a transaction basis but were flat in dollar terms compared to 4Q06, with 13 IPOs raising $1.2 million in 1Q07 compared to 18 IPOs raising $1.2 million in 4Q06. Seven of the 13 IPOs were IT, the most since 3Q04, five were healthcare and one was retail. 1 Nasdaq was flat in 1Q07, but is up 5.6% in 2Q07 to date. Financing Round The financings broke down according to the following rounds: Series Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 A 18% 22% 23% 14% 11% 22% 18% 15% B 38% 31% 31% 34% 40% 35% 31% 26% C 20% 23% 24% 28% 17% 17% 23% 27% D 12% 11% 17% 16% 15% 11% 15% 21% E and higher 12% 13% 5% 8% 17% 15% 13% 11% Price Change The direction of price changes for companies receiving financing this quarter, compared to their previous round, were as follows: Price Change Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 Down 9% 22% 24% 25% 15% 19% 25% 31% Flat 12% 11% 9% 6% 11% 12% 15% 4% Up 79% 67% 67% 69% 74% 69% 60% 65% The percentage of down rounds by series were as follows: Series Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 B 7% 6% 13% 16% 12% 10% 16% 12% C 4% 15% 24% 32% 12% 5% 35% 32% D 0% 42% 38% 14% 27% 46% 33% 37% E and higher 36% 53% 33% 57% 12% 35% 23% 60% The Fenwick & West Venture Capital Barometer (Magnitude of Price Change) Set forth below is (i) for up rounds, the average per share percentage increase over the previous round, (ii) for down rounds, the average per share percentage decrease over the previous round, and (iii) the overall average per share percentage change from the previous round for all rounds taken together. Such information is broken down by series for Q1 07 and is provided on an aggregate basis for comparison purposes for the prior four quarters. In calculating the net result for all rounds, flat rounds are included. For purposes of these calculations, all financings are considered equal, and accordingly the results are not weighted for the amount raised in a financing. Q1 07 Percent Change Up rounds Down rounds Net result Series B Series C Series D Series E and higher Combined total for all Series for Q1 07 Combined total for all Series for Q4 06 Combined total for all Series for Q3 06 Combined total for all Series for Q2 06 Combined total for all Series for Q % +77% +44% +36% +100% +100% +86% +69% +95% -35% -19% N/A% -59% -47% -49% -35% -57% -49% +120% +60% +34% 0% +75% +69% +49% +34% +64%

95 Liquidation Preference Senior liquidation preferences were used in the following percentages of financings: Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q % 40% 42% 50% 40% 41% 57% 46% The percentage of senior liquidation preference by series was as follows: Series Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 B 30% 23% 30% 35% 29% 22% 42% 25% C 25% 38% 41% 76% 47% 40% 48% 40% D 50% 58% 57% 36% 60% 69% 87% 68% E and higher 64% 67% 67% 57% 41% 65% 77% 70% Multiple Liquidation Preferences - The percentage of senior liquidation preferences that were multiple preferences were as follows: Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q % 14% 26% 16% 14% 24% 30% 22% Of the senior liquidation preferences, the ranges of the multiples broke down as follows: Range of multiples Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 >1x- 2x 100% 40% 90% 83% 80% 67% 93% 88% >2x 3x 0% 60% 10% 0% 20% 33% 7% 0% > 3x 0% 0% 0% 17% 0% 0% 0% 12% Participation in Liquidation - The percentages of financings that provided for participation were as follows: Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q % 73% 64% 71% 65% 64% 70% 71% Of the financings that had participation, the percentages that were not capped were as follows: Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q % 64% 58% 64% 55% 50% 54% 60% Cumulative Dividends Cumulative dividends were provided for in the following percentages of financings: Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 8% 4% 7% 8% 3% 4% 3% 4% Antidilution Provisions - The uses of antidilution provisions in the financings were as follows: Type of Provision Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 Ratchet 5% 4% 4% 2% 4% 9% 7% 8% Weighted Average 94% 95% 95% 97% 92% 85% 92% 88% None 0% 1% 1% 1% 4% 6% 1% 4%

96 Pay-to-Play Provisions - The use of pay-to-play provisions in the financings was as follows: Percentages of financings having pay-to-play provisions. Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 8% 10% 10% 16% 11% 16% 8% 16% The pay-to-play provisions provided for conversion of non-participating investors preferred stock into common stock or shadow preferred stock, in the percentages set forth below: - Common Stock. Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q % 73% 50% 86% 73% 89% 88% 87% - Shadow Preferred Stock. Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q % 27% 50% 14% 27% 11% 12% 13% Redemption The percentages of financings providing for mandatory redemption or redemption at the option of the venture capitalist were as follows: Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q % 22% 29% 33% 27% 31% 32% 29% Corporate Reorganizations - The percentages of post-series A financings involving a corporate reorganization were as follows: Q1 07 Q4 06 Q3 06 Q2 06 Q1 06 Q4 05 Q3 05 Q2 05 9% 6% 5% 12% 9% 11% 17% 15% For additional information about this report please contact Barry Kramer at ; bkramer@fenwick.com or Michael Patrick at ; mpatrick@fenwick.com at Fenwick & West. To be placed on an list for future editions of this survey please go to our VC Survey sign up page. The contents of this report are not intended, and should not be considered, as legal advice or opinion. 1 Information in this paragraph obtained from Dow Jones VentureSource. 2 Information in this paragraph obtained from PwC/NVCA MoneyTree Report based on data from Thomson Financial Fenwick & West LLP

97 EVCA Private Equity Activity Survey 2007 Europe 31