GRADUATE SCHOOL OF BUSINESS STANFORD UNIVERSITY
CASE NUMBER: SM-86 MARCH 2001
SpiffyTerm, Inc.: January 2000
January 1, 2000 was not a party day for the three founders of SpiffyTerm, Inc. Annabella Labella, Krishnuvara Ramakrishna, and Bob Sledge were MBA students at a prestigious West Coast business school that was known for its beautiful red-roof-tiled buildings and for its hardworking MBAs. Instead of joining the futile celebrations for a turn of the millennium that was really just a counting mistake, they decided to focus on the on-going negotiation that they had had with a number of venture capitalists. The three students had founded the new company on the basis of an idea that had come to them while munching burritos in the school's famous cafeteria. They were convinced that the recent Internet boom had missed the real opportunities offered by this new technology. They wanted to explore the Internet's true potential by doing something that I would like to tell you about, but I would have to shoot you if I did. All I can say is that their idea involved living creatures on Mars, a really cool Web site, and lots of chocolate chip cookies for the company party.
What preoccupied the founders most was a term sheet they had recently received from their contact partner—a curious individual by the name of Wolf C. Flow—at a well-known Sand Hill venture capital firm called Vulture Ventures (Exhibit 1). As far as the founders of SpiffyTerm, Inc. were concerned, this term sheet was so incomprehensible that it could have been in written in Swahili. So instead of celebrating the new millennium, the founders decided to use this day to understand the term sheet, and, most important, to determine what valuation and other terms they should be bargaining for.
SECTION 1: BASIC VALUATIONS
The founders of SpiffyTerm, Inc. wanted to begin by calculating what they thought would be an appropriate valuation. Annabella suggested they read "A Note on Valuation of Venture Capital Deals" (Stanford GSB Case Study E-95) that one of her young and brilliant professors had written up in a moment of utter lucidity. This method required that the owners take account of the current as well as anticipated future financing rounds. The founders thought they needed to raise $4 million at this time. Currently they had allocated 5 million shares to themselves, and they wanted to put aside an option pool of 1.5 million shares for future hires. The founders also believed that they would need to raise an additional $2 million after two years.
Prepared by Assistant Professor Thomas Hellmann as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 2001 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved. To order copies or request permission to reproduce materials, e-mail the Case Writing Office at:
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Version: (A) 05/15/01