3. A start-up Internet venture has been founded by a trio of experienced entrepreneurs who wish to exit the venture in no more than 5 years; the company has generated no revenue as yet but expects strong gross margins due to a very low variable cost structure. The company has already received seed capital investment via its founders and angel investors and has enough capital to sustain operations for another 9 months at expected expense run rate. The expected cash flow breakeven point is in 24 months due to rapid scaling (i.e., they will be net income positive sooner but require reinvestment) at least $5 million of additional capital to achieve.

The founders wish to maintain a high degree of operational and strategic control over the venture; they are high net worth individuals who will draw no salaries until breakeven is achieved. The founders believe that they need to achieve at least $75mm in annual revenue to achieve the desired exit. Based on their own market and technology analysis, they have identified a relatively unique market niche but their proposed solution offers little in the way of potential intellectual property protection (i.e., no patents are available and / or the product could be copied). a) What type of financing is required based on this financial profile? Explain your answer. b) What challenges are likely to emerge in terms of acquiring this financing? Be specific. c) How do you think that equity should be split between the founders (assume equal cash contributions to date though one of them will assume CEO role while the others will be CFO and CTO respectively) and other early employees? Support your response. d) Suppose that the founders have been approached by a group of angel investors looking to invest another $1.5 million. Should this offer be entertained? What are the costs and benefits of such a transaction? e) Finally assume that each of the founders is a high net worth individual. In this case should they bootstrap their way to profitability and / or personally guarantee loans to this new venture? Support your response.