Expert answer:analyze the case and excel and answer the question
Expert answer:analyze the case and excel and answer the questions
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FEBRUARY 18, 2015
WILLIAM A. SAHLMAN
MICHAEL J. ROBERTS
WebTracker
Julie Stern and Mark Foster sat down at their usual table at the Java Shack in Cambridge,
Massachusetts. It was a popular place, but the two cofounders of WebTracker often met there at 7:00
a.m. for coffee and had no problem claiming their usual spot. The former classmates had reconnected
at their fifteenth high school reunion. Foster was an MBA graduate of a top-tier Midwestern business
school, and Stern was a computer science grad from an East Coast technology institute. Both were
working for large software companies. They had discovered they shared an entrepreneurial drive and
the hope of founding a company. In early 2014, they had finally hit on what they thought was a great
idea. They had spent the first half of the year fleshing it out and developing a software prototype.
Stern and Foster did this work on nights and weekends, from their homes rather than from their
offices, to avoid running afoul of any potential intellectual property claims by their employers. They
also felt that this general market sector was one in which their current employers did not and would
not participate. Nonetheless, they knew that even threatened legal action could have a chilling effect
on their progress. Stern explained, “We quit our jobs a month ago, and each told our bosses we were
working on a start-up, but couldn’t share the idea with them yet. I am sure people had their antennae
up. We were up front with the VCs [venture capitalists] about the situation, and they spoke with their
lawyers and seemed to get comfortable.”
It was now May 27, 2014, and they had spent the previous six weeks meeting with venture
capitalists in an attempt to raise $2.5 million. The prior evening, they had received term sheets from
two of the firms that most excited them: Regent Capital and Bantam Ventures. Stern noted, “We’ve
been working toward this for the better part of a year, and we finally got these term sheets last night.
It is really exciting to have a choice of these two solid VC firms; but the term sheets were full of legal
jargon and pretty complicated, so we told ourselves we’d get out of the office for a few hours and try
to decide how to proceed.”
Foster added, “I’ve been doing some due diligence on these VCs with some entrepreneurs and
people in the start-up community, and these firms and the people we are dealing with also have some
differences. We have to try to sort that out as well.”
________________________________________________________________________________________________________________
HBS Professor William A. Sahlman and former Senior Lecturer Michael J. Roberts prepared this case solely as a basis for class discussion and not
as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events, and despite
occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities is coincidental. The assistance of
Mick Bain of WilmerHale is gratefully acknowledged.
Copyright © 2015 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.
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915-543 | WebTracker
Developing WebTracker
After their initial meeting at their high school reunion, the two spent the succeeding months talking
and emailing ideas to one another. By early 2014, they had settled on an intriguing concept. In his role
as a product manager for a large international software firm, Foster frequently found himself trying to
research the effectiveness of various web marketing and promotion campaigns. An early tool called
“weblogging” had literally logged every action that every consumer took with respect to every page
and every link on his company’s Web site. The massive amount of data took a lot of crunching by
people in some distant department, and the time lag and lack of interactivity made for a frustrating
experience.
A more recent approach called “tagging” had significantly simplified the problem, but it still
required a fair amount of technical skill to implement the tagging “codes” and analyze the data. As
Foster was explaining his frustration to Stern, she became enthusiastic about the prospects of solving
that problem with a software-as-a-service (SAAS)–based tool. After 10 weeks of coding, she had
developed a crude prototype that demonstrated their approach had merit.
In essence, site developers would log on through the SAAS platform and do their Web page coding.
When they had finished a given page, they could go back and highlight text, links, buttons, and other
features of the Web page. Using a menu-based system, they could specify the data they wanted to
collect about that area. For example, the system could track the first piece of the site that the customer
directed their cursor to, their “hover” time over any portion of the page, the Web page they had visited
prior to landing on the current site, where they went next, the links they clicked, etc. Then, using a
simple interface, any client could see, download, and analyze these data. It was a marked improvement
over any system the two were aware of, and they had done considerable digging.
The two estimated that WebTracker would require nearly $15 million in funding to reach breakeven
cash flow (see Exhibit 1 for summary financials). Stern noted, “We think that $14.5 million should get
us to the point where we can fund our own growth. With the SAAS model, once you start getting real
traction, it pays to step on the gas and ramp up the sales effort. That makes the business less profitable
in the short run, but it’s key to keeping momentum and building share. That’s why we’d look at such
a large round, say a Series B of $12 million, once we hit that point.”
Raising Venture Capital
Stern and Foster made considerable progress while they were still employed, but once they had
proven the basic concept to themselves, they quit their jobs and worked full time on WebTracker. Their
savings had sustained them for a few months, but, in March, they had decided they needed funding to
begin to hire some other programmers and prepare themselves to seek paying customers. Foster
described this effort:
We knew who the top-tier VCs were, based on looking at the hot deals over the past few
years, especially in the SAAS space. We had some intros to most of these firms, through people
we knew in the tech community, and some of my friends from business school. In the end, we
decided to start at the top and approached half a dozen or so firms. It was an interesting process.
We had our mutual friends forward a personal introduction and two-page executive summary
to each of these firms, and all of them circled back within 48 hours wanting a meeting.
At Bantam, we met with Paul Ronan, who is very well known in the SAAS world, having
founded a major company before he left an operating role to become a VC. At Regent, we met
2
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with the analyst and the junior guy, who then set us up for coffee with Jim Jones, who is their
top software person. He has a great reputation and sits on probably a dozen boards of some
pretty interesting software companies, half of them SAAS. It was fairly clear he hadn’t looked at
any of the background until we sat down for coffee and he pulled out his folder, but he got up
to speed and became very interested very quickly. Bantam is a small and new firm with a
relatively little fund—just $50 million, compared to $400 million for Regent. It is all former
entrepreneurs: there are no “career” VCs. They specialize in software and Internet deals, and we
would be only their third investment.
All of these meetings had happened the week of May 19. Now, Stern and Foster had received two
term sheet offers. (See Exhibit 2 for a comparison of the two term sheet proposals. See Exhibit 3 for the
Cap Tables for the Regent and Bantam offers. See Exhibit 4 for excerpts from the WilmerHale “Deal
Terms” trends report.)
Foster looked ahead:
The $2.5 million we are trying to raise should last us for 18 months or so. We will have to
start trying to raise another round in one year. If everything is on track, based on how the market
looks now, we’d be out trying to raise a round of $12 million or so at a $45 million pre-money
valuation . . . that’s the hope. Of course, there’s also the potential exit. If we hit all our numbers,
we could have a public company. We know, however, that a strategic sale is a much more likely
outcome. Such a sale could still be terrific for everyone.
He also relayed a conversation he’d had with Jones:
One of the first things we looked at was the dilution, and it seemed that the Bantam deal left us
with somewhat higher ownership than the Regent offer did. Jones, from Regent, called after they
emailed over the term sheet, and I told him we had at least one offer that looked less dilutive to
us. He said, “Well, we’re glad to pay up for performance. Your financial projections for 2016 call
for $2.4 million in revenue; we can give you performance-based options for 700,000 shares that
vest at the end 2016, contingent on you hitting your revenue target.” I looked into this possibility
and realized these would go to existing common shareholders and employee option holders, in
proportion to their now-existing stock or option holdings. So I guess we need to sort out how
we feel about that as well.
Stern added her thoughts:
One thing I am confused about is the founder vesting. When we formed this company, we
signed a founders’ agreement between the two of us in which we agreed that we would vest
50% of our shares upon incorporation and the remaining 50% at 2% per month. Doesn’t that
remain in effect?
Also, I checked out a few of these people with some of my friends who have been part of
founding teams at other companies. Regent is exceptionally well regarded, has been a player for
decades, almost since the beginning of real, institutional VC. It is on its eleventh fund, and it has
backed lots of companies that are legends in the VC world. Here is a sampling of what I heard:
They are extremely well connected and very insightful; but it is hard to get Jones’ attention.
I wish he could go five minutes without looking at his Blackberry. The staff is always calling
looking for information, reports, and updates to our financial model.
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915-543 | WebTracker
They are one of a very small number of firms who have been consistent top-decile
performers. That counts for a lot.
They poke around a lot to try to get our insights. It seems like they are trying to get our
thoughts on other potential investments.
I get sound advice without a lot of “attitude.” Jones always has a perspective on exactly what
the “biggest issue” is for us, and works to ensure that the team is focused on it.
They do a lot of founder redeployment and are pretty quick on the trigger when the
company hits any problems.
Jones got us in to see all the CTOs and key people at potential customers, which was a huge
help.
We got lots of help from them; they know all the headhunters and PR people, and that really
got us plugged in quickly. When it was time for the IPO, they were a huge help.
Foster had done some checking on Ronan and Bantam: “I heard that Ronan spends a lot of time
with his companies, has good insights and advice, but the firm is just a lot less established, and not as
plugged in. They have done a few hot deals lately, but no big exits yet. They are all entrepreneurs,
however, and seem very entrepreneur-friendly.”
Some specific comments included:
Very young firm—how will they perform, and will they leave you high and dry if they can’t
raise a second fund?
Ronan’s operating background is a great help, but sometimes he forgets he is a board
member and can get a little too much in the weeds on operating issues.
*
*
*
As their coffee arrived, Stern and Foster turned their attention to the term sheets before them.
Stern’s first remark to Foster was, “This looks pretty complicated.” “Yes,” he replied, “but we better
work our way through it because we need to respond to the VCs.”
4
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$0
$0
COGS
Gross Margin
$2,150
Ending Cash
$450
-$1,700
-$1,400
$1,400
$0
$0
2015
Assumptions
$2.5 million Series A closes Sept 30, 2014
$12 million Series B round closes Jan 1, 2016
-$350
-$350
Income/(Loss) from Operations
Cash Flow from Operations
$350
Total Operating Expenses
Gross Margin %—Total
$0
Last Q
2014
Total Revenue
WebTracker Summary Financial Plan ($000)
Exhibit 1 WebTracker Summary Financial Projections
$7,750
-$4,400
-$3,645
$4,498
35%
$853
$1,583
$2,436
2016
$3,250
-$4,500
-$3,599
$6,100
45%
$2,501
$3,056
$5,557
2017
$650
-$2,600
-$2,424
$10,124
55%
$7,700
$6,300
$14,000
2018
$2,468
$1,818
$2,272
$16,328
60%
$18,600
$12,400
$31,000
2019
$14,344
$11,877
$14,846
$26,754
65%
$41,600
$22,400
$64,000
2020
915-543
-5-
915-543 | WebTracker
Exhibit 2 Comparison of Regent and Bantam Term Sheets1
REGENT
BANTAM
Closing Date
As soon as practicable, following the Company’s
acceptance of this Term Sheet and satisfaction of
standard conditions to closing (the “Closing”), with a
target of Sept. 30, 2014.
As soon as practicable following the Company’s
acceptance of this Term Sheet and satisfaction of the
Conditions to Closing (the “Closing”).
Employee Option Pool
Employee options shall have cliff vesting at 12
months for 25%, then in equal monthly installments
for 36 months following. For Founders’ vesting, see
below.
Immediately prior to the Series A Preferred Stock
investment, 1,350,000 shares will be added to the
option pool, creating an unallocated option pool of
1,461,000 shares.
Expiration
This term sheet expires May 28, 2014, at 12:00 p.m., if
not accepted by the Company by that date.
Non-Binding
In consideration of the time and expense devoted and
to be devoted by the Investors with respect to this
investment, the No Shop/Confidentiality and
Counsel and Expenses provisions of this Term Sheet
shall be binding obligations of the Company whether
or not the financing is consummated. No other
legally binding obligations will be created until
definitive agreements are executed and delivered by
all parties.
No Shop Provision
The Company agrees to work in good faith,
expeditiously, toward a closing. The Company and
the Founders agree that they will not, for a period of
8 weeks from the date these terms are accepted, take
any action to solicit, initiate, encourage, or assist the
submission of any proposal, negotiation, or offer
from any person or entity other than the Investors
relating to the sale, or issuance, of any of the capital
stock of the Company and shall notify the Investors
promptly of any inquiries by any third parties in
regards to the foregoing. The Company will not
disclose the terms of this Term Sheet to any person
other than officers, members of the Board of
Directors and the Company’s accountants and
Cliff vesting for employee options at 1 year for first
33%, then the remaining 67% in equal monthly
installments over the succeeding 24 months. See
Founders’ vesting schedule below.
Prior to the Closing, options on 850,000 shares will be
added to the option pool.
This term sheet expires at 5:00 p.m. on May 30, 2014.
In consideration of the expense and efforts devoted
by the Investors with respect to this prospective
investment, the No Shop/Confidentiality and
Counsel and Expenses provisions of this Term Sheet
shall be binding obligations of the Company whether
or not the financing is consummated. No other
legally binding obligations shall exist until definitive
agreements are executed and delivered by all parties.
The Company agrees to work in good faith
expeditiously toward a closing. The Company will
not, for a period of 30 days from the date these terms
are accepted, take any action to solicit, initiate,
encourage, or assist the submission of any proposal,
negotiation, or offer from any person or entity other
than the Investors relating to the sale or issuance, of
any of the capital stock of the Company or the
acquisition, sale, lease, license, or other disposition of
the Company or any material part of the stock or
assets of the Company, and shall notify the Investors
promptly of any inquiries by any third parties in
regards to the foregoing. The Company will not
disclose the terms of this Term Sheet to any person
1 Portions of these term sheets are adapted from the sample term sheet that appears in “Partnering with Venture Capitalists,”
Jeffrey Bussgang and Michael J. Roberts, Core Reading #8240, Harvard Business School Publishing, 2014.
6
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WebTracker | 915-543
attorneys and other potential Investors acceptable to
Regent, as lead Investor, without the written consent
of the Investors.
Counsel and Expenses
Investor counsel to draft Closing documents.
Company to pay all legal and administrative costs of
the financing at Closing, including reasonable fees
(not to exceed $30,000) and expenses of Investor
counsel, unless the transaction is not completed
because the Investors withdraw their commitment
without cause.
Security/Amount Raised
Up to $3 million of Series A Preferred Stock of the
Company (the “Series A Preferred Stock”).
Price Per Share
To be funded at a price of $2.00 per share (based on the
capitalization of the Company set forth in the Cap
Table in Exhibit 3 (the “Original Purchase Price”).
other than officers, members of the Board of Directors
and the Company’s accountants and attorneys and
existing stockholders and noteholders, without the
written consent of the Investors.
Company to pay all legal and administrative costs of
the financing at Closing, including reasonable fees
and expenses of one counsel for the Investors, in an
amount not to exceed $25,000.
$2.5 million to purchase the Company’s Series A
Preferred Stock (the “Series A Preferred Stock”).
$2.27 per share (the “Original Purchase Price”).
Pre-Money Valuation
The Original Purchase is based …
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