Overview of Venture Equity

Overview of Venture Equity SVB Analytics Report 2017 Written by SVB Analytics: Steve Liu Managing Director sliu@svb.com Sean Lawson Senior Manager slawson2@svb.com Steven Pipp Senior Associate spipp@svb.com

Table of Contents 3 Silicon Valley Bank 7 Funding Your Venture 16 Incentivizing Top Talent 24 Trends in Private Company Valuations SVB Equity Trends 2017 2

Who is SVB? SVB Equity Trends 2017 3

Silicon Valley Bank Financial Group The market leader in startup banking Financials (Q4 2016): $ 44B Total assets 19B Total loans 84B Total client funds Services: x x Credit Valuations Strategic Advisory Treasury Management Funds Management International Banking SVB Equity Trends 2017 4

We serve the global innovation economy Technology + life science + healthcare Accelerator Revenue <$5M Growth Revenue $5M-$75M Corporate Finance Revenue >$75M Investors Private Equity and Venture Capital Individuals Private Bank SVB Equity Trends 2017 5

Serving innovation around the world SVB Financial Group s Offices SVB Financial Group s Coverage SVB Financial Group s International Banking Network SVB Equity Trends 2017 6

Funding Your Venture SVB Equity Trends 2017 7

Why Companies Fundraise Cumulative Cash Flow $ STARTUP GROWTH LATE STAGE Minimum Capital Requirement Key Risks Conception Roll Out Scale Expansion Exit Technology Product Market Talent Financing Market Fit Product Talent Financing Execution Market Size Talent Execution Competition Talent Financial Market Strategic Fit SVB Equity Trends 2017 8

Typical Sources of Capital Size of Investment $1B $100M $10M $1M F&F Angel Early Stage Venture Capital Crowd Funding Late Stage Venture Capital Mezzanine Debt Public Markets Higher Risk Company Stage Lower Risk SVB Equity Trends 2017 9

Venture Capital Economics SVB Equity Trends 2017 10

What VCs Want for Their Investment Venture Economics Original Investment $15M Ownership Share 20%. Original -Money = $75M Original Investment - $15M. Implied Original Pre-Money = $60M Exit Economics Exit Value $1B Exit Value for Investor $200M IRR at 5 Years 68% IRR at 7 Years 45% $1B Exit Investors $200M Pre-Money $60M Investment of $15M for 20% Ownership -Money $75M 5 7 Years Lots of Effort SVB Equity Trends 2017 11

Why Venture Rates of Return Are So High Follow-On Rates over 5 7 Years Cumulative Probability of Raising the Next Series: Cohort of Startups That Raised a Series Seed 2009 2012 Seed 24% 10% Went on to raise a Series A Went on to raise a Series B A 4% Went on to raise a Series C B C 1% Went on to raise a Series D+ D+ Source: CBInsights. SVB Equity Trends 2017 12

Venture Capital Is an Unusual Creature Source: Artivest. SVB Equity Trends 2017 13

Participating in the Upside, Protecting the Downside Economic Rights Price Per Share Most important and negotiable of the economic rights Participation Investor receives original investment (1x, 2x, 3x) and participates as if converted to Common. Can also be capped Declared Dividends Interest on the preferred equity investment from initial time of investment until exit Downside Protections Liquidation Preference The investor has the option to receive original investment (1x, 2x, 3x) or convert to common, whichever is higher Seniority The order in which the share classes are paid out Control Rights Right of First Refusal Investor has the right to invest in the next round of financing, often on a pro rata basis Voting Rights Defines how the preferred and common stock relate to one another in share of voting power Anti-Dilution Investor gains additional shares in a recapitalization Information Protections Board Seats Voting position within the group of elected individuals charged with corporate management and strategy Observer Rights Non-voting seat alongside the board of directors SVB Equity Trends 2017 14

Case Study: VC Preference $15M Investment for 20% Ownership, 1x LP Exit Value $40M $75M $200M STRAIGHT LIQUIDATION PREFERENCE Receive $15M OR 20% $40M = $8M Receive $15M OR 20% $75 = $15M Receive $15M OR 20% $200M = $40M CHOOSE: Hold liquidation Indifferent Convert VC RECEIVES: $15M $15M $40M PARTICIPATING PREFERRED: Receive $15M PLUS 20% ($40M - $15M) = $5M Receive $15M PLUS 20% ($75M - $15M) = $12M Receive $15M PLUS 20% ($200M - $15M) = $37M VC RECEIVES: $20M $27M $52M SVB Equity Trends 2017 15

Incentivizing Top Talent SVB Equity Trends 2017 16

Incentivizing for Long Term Success Balancing Compensation Salary Commission Common Stock Stock Options Restricted Stock Equity Compensation STOCK OPTIONS vs. RSUs Stock Options RSUs Near Term Long Term Role Salary Equity Founder C-Suite Engineer Sales Taxed as Capital Gain at Exercise Fair Market Value No value when Common < Strike Strike Gain Taxed as Capital Gain Once Vested Taxed as Income Once Vested Comp. Gain SVB Equity Trends 2017 17

409A Valuation Opinions How often should I get an independent valuation opinion? What triggers the need? What is a material event? SVB Equity Trends 2017 18

Startup Compensation Trends SVB Equity Trends 2017 19

Early Team Compensation CEO Data from Option Impact, Q4 16 CEO Equity Compensation (% FDS) CEO Salary Compensation $ THOUSANDS Founder Non-Founder Founder Non-Founder 35% $450 30% $400 25% $350 $300 20% $250 15% $200 10% $150 $100 5% $50 0% Seed Series A Series B Series C $0 Seed Series A Series B Series C Source: Advanced-HR SVB Equity Trends 2017 20

Early Team Compensation C-Suite Data from Option Impact, Q4 16 C-Suite Equity Compensation (% FDS) C-Suite Salary Compensation $ THOUSANDS Founder Non-Founder Founder Non-Founder 25% $300 20% 15% $250 $200 $150 10% $100 5% $50 0% Seed Series A Series B Series C $0 Seed Series A Series B Series C Source: Advanced-HR SVB Equity Trends 2017 21

Early Team Compensation VP Data from Option Impact, Q4 16 VP Equity Compensation (% FDS) VP Salary Compensation $ THOUSANDS Founder Non-Founder Founder Non-Founder 20% $300 $250 15% $200 10% $150 $100 5% $50 0% Seed Series A Series B Series C $0 Seed Series A Series B Series C Source: Advanced-HR SVB Equity Trends 2017 22

Option Pool as a Percentage of Ownership All Series Distribution of Option Pools for Companies (% FDS) Over 30% 5% Median Option Pool by Stage (% FDS) 30% Non-Founding CEO Founding CEO 25 30% 6% 25% 20 25% 14% 20% 15 20% 25% 15% 10 15% 32% 10% 5 10% 15% 5% 0 5% 3% 0% 10% 20% 30% 40% 0% Seed Series A Series B Series C Sources: SVB Analytics and Advanced-HR Option Impact, Q4 16. SVB Equity Trends 2017 23

Trends in Private Company Valuations SVB Equity Trends 2017 24

Series Seed Deal Count and Capital Invested U.S. Technology Deal Count and Capital Invested: 2012 2016 Capital Invested ($) # of Deals $2.5B 3,000 $2.0B $2.1B $2.2B $2.0B 2,500 $1.5B $1.2B $1.7B 1,819 2,217 2,096 1,632 2,000 1,500 $1.0B 1,273 1,000 $0.5B 500 $0.0B 2012 2013 2014 2015 2016 Source: Pitchbook. SVB Equity Trends 2017 25

Series Seed Invested Capital & Pre-Money Valuations U.S. Technology Pre-Money Valuations Middle 50%: 2012 2016 U.S. Technology Capital Invested Middle 50%: 2012 2016 $10M $9.5M $3.0M $9M $8M $7M $6M $5M $4M $3M $2M $6.0M $4.0M $2.5M $7.1M $4.7M $2.8M $8.0M $5.0M $2.9M $8.7M $5.7M $3.3M $6.0M $3.7M $2.5M $2.0M $1.5M $1.0M $0.5M $1.2M $0.5M $1.3M $0.5M $1.5M $0.7M $2.0M $1.0M $2.5M $1.5M $0.7M $1M $0.4M $M 2012 2013 2014 2015 2016 $0.0M $0.1M 2012 $0.2M 2013 $0.2M 2014 2015 2016 Source: Pitchbook. SVB Equity Trends 2017 26

Series A Deal Count and Capital Invested U.S. Technology Deal Count and Capital Invested: 2012 2016 Capital Invested ($) # of Deals $8.0B $7.5B 2,000 $6.6B $6.6B $6.0B $4.0B $4.6B 937 $5.3B 1,091 1,182 1,027 994 1,500 1,000 $2.0B 500 $0.0B 2012 2013 2014 2015 2016 Source: Pitchbook. SVB Equity Trends 2017 27

Series A Invested Capital & Pre-Money Valuations U.S. Technology Pre-Money Valuations Middle 50%: 2012 2016 U.S. Technology Capital Invested Middle 50%: 2012 2016 $30M $25M $21.2M $25.5M $25.4M $10.0M $8.0M $7.1M $9.0M $9.5M $20M $15M $10M $16.0M $8.6M $17.5M $10.0M $12.9M $15.0M $15.8M $6.0M $4.0M $6.0M $2.9M $6.2M $3.6M $4.0M $5.0M $5.5M $5M $4.3M $5.5M $7.3M $8.4M $8.6M $2.0M $1.3M $1.7M $1.8M $2.5M $2.7M $M 2012 2013 2014 2015 2016 $0.0M 2012 2013 2014 2015 2016 Source: Pitchbook. SVB Equity Trends 2017 28

New Investor Share at Financing All Series U.S. Technology % Acquired by Investors at Financing Median: 2012 2016 30% Seed Series A Series B Series C 25% 25.3% 25.8% 24.6% 25.0% 25.0% 20% 20.8% 20.3% 17.5% 20.5% 20.0% 21.5% 19.8% 21.0% 19.2% 22.0% 20.0% 17.9% 16.2% 15.8% 15.8% 15% 2012 2013 2014 2015 2016 Source: Pitchbook. SVB Equity Trends 2017 29

Market Outlook SVB Equity Trends 2017 30

Traditional Investors Replenish Capital While crossover investors have cut back on late-stage investments, the venture ecosystem as a whole has shown resilience. In 2016, venture capital commitments hit their highest level in more than a decade. U.S. Venture Capital Investments and Fundraising 2007 2016 VC Fundraising VC Investments CVC Investments Crossover Investments $90B $80B $70B $60B $50B $40B $30B $20B 1 2 Crossover Investment - 50% YoY Venture Capital Fundraising + 18% YoY $10B $0B 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 1. Corporate venture capital. 2. Crossovers include hedge funds, mutual funds, and wealth management firms. Sources: Pitchbook, National Venture Capital Association, and SVBA estimates. SVB Equity Trends 2017 31

Liquidity on the Horizon: $1B+ IPO Candidates As some of the most valuable companies consider a public offering, liquidity and talent are expected to filter through the innovation ecosystem, building the next generation of promising ventures. Q1 U.S. Tech IPOs with Market Caps >$1B, Sized by First Day Market Cap or Last Private Valuation: 2012 2016 2012 2013 2014 2015 2016 2017 and Beyond Q3 Q4 x10 x31 x33 Sources: S&P Capital IQ and Wall Street Journal. SVB Equity Trends 2017 32

Questions? SVB Equity Trends 2017 33

About the Authors Steve Liu Sean Lawson Managing Director sliu@svb.com Steve Liu is a Managing Director with SVB Analytics, responsible for leading the valuation practice and execution of the group s portfolio of valuation opinions for private companies. Prior to joining SVB Analytics, Steve spent over 10 years working with the Big 4 (Deloitte and KPMG) in New York and San Francisco, managing both domestic and international clients that ranged from start-up to Fortune 100. Steve brings a diverse financial background that includes valuations for Mergers and Acquisitions, financial/tax reporting and strategic planning. His valuation experience has focused primarily on clients in the technology and life sciences industries. Steve earned a Master in Business Administration from the Stern School of Business (NYU), and both a Bachelor and Master s degree in Engineering from The Cooper Union. Senior Manager slawson2@svb.com Sean Lawson is a Senior Manager with SVB Analytics, focusing on valuations of early-stage, venture-backed technology companies. Prior to joining SVB Analytics, Sean was an intern at Caliber Advisors in San Diego, CA, where he assisted associates and directors with valuation opinions ranging from buy-sell agreements, estate and gift, fairness opinions, financial statement reporting and security and intellectual property valuations. Sean received his Bachelor s degree in management science and a minor in accounting from the University of California, San Diego. Steven Pipp Steven is an Senior Associate with SVB Analytics, responsible for conducting due diligence and financial analysis on valuation engagements for early-stage, venture-backed technology companies. Senior Associate spipp@svb.com Prior to joining SVB Analytics, Steven worked as a financial analyst at Glenmore Consulting in Minneapolis, MN, developing business strategies and evaluating economic potential for transformative technologies. Steven earned a Master s of Science in Finance from Boston College and a Bachelor s of Science in Business from the University of Minnesota. SVB Equity Trends 2017 34

About Silicon Valley Bank For more than 30 years, Silicon Valley Bank has helped innovative companies and their investors move bold ideas forward, fast. SVB provides targeted financial services and expertise through its offices in innovation centers around the world. With commercial, international and private banking services, SVB helps address the unique needs of innovators. About SVB Analytics SVB Analytics, a non-bank affiliate of Silicon Valley Bank, serves the strategic business needs of entrepreneurs, corporates and investors in the global innovation economy. For more than a decade, SVB Analytics has helped global business leaders make informed decisions by providing market intelligence, research, and consulting services. Powered by proprietary data, SVB Analytics has a unique view into the technology and life science sectors. This material, including without limitation to the statistical information herein, is provided for informational purposes only. The material is based in part on information from third-party sources that we believe to be reliable, but which have not been independently verified by us and for this reason we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. SVB Analytics is a member of SVB Financial Group and a non-bank affiliate of Silicon Valley Bank. Products and services offered by SVB Analytics are not FDIC insured and are not deposits or other obligations of Silicon Valley Bank. SVB Analytics does not provide investment, tax, or legal advice. Please consult your investment, tax, or legal advisors for such guidance. 2017 SVB Financial Group. All rights reserved. SVB>, SVB Financial Group, and Silicon Valley Bank are registered trademarks. 0916-232 SVB Equity Trends 2017 35