CASE 2 Square with Jack Dorsey (27 points)

Background: In 2010, Square, Inc. Founder and CEO, Jack Dorsey approaches you, as the managing partner at Sequoia Capital. Because of your reputation as a trusted, honest, thoughtful, influential and well-connected investor, Jack wants you to his lead Series A round. You have confidence in him given his success at Twitter but you are skeptical about the speed of adoption for this new remote payment system. But, everyone is clawing to get into this deal. As such, youll have to move fast and offer attractive terms to Jack.

Because if Jacks background, you decide to hear the company pitch. Your interest is captured. So, you proceed with diligence to put together a term sheet. Youre not sure how much you should invest and the terms.

Opportunity: You end up deciding that a $10MM Series A should get the company to cash flow positive and so you invest $6MM and another firm will take the remaining $4MM. There are currently 3 board seats at the company and the Series A investors will increase the number of total seats.

Squares financial model is your typical hockey-stick model with revenues hitting over $240MM in revenues with $25MM in net income in year 5. Given that this is a new space, you really have no idea what the valuation should be. But, since a few loosely comparable companies can get Price/Earnings ratios of 50x, you think that this could be a good bet and the return could meet your 60% return requirement for the fund. However you are really eager to hit a homerun since your other portfolio companies are dragging. Assume that there are 2MM shares outstanding already. Where calculations are required, please show all calculations.

1. What is your hurdle rate for the investment?
2. What is the required future value of your investment to achieve your IRR?
3. What is the projected valuation of the entire company in Year 5?
4. What is your final % ownership of Square required at Exit?
5. How many shares do you need to purchase to own the required ownership of the company to hit your hurdle rate? Assume investment in in preferred stock with no dividends and a conversion rate to common stock of 1:1.
6. At what share price?
7. What is the pre-money valuation?
8. What is the post-money valuation?
9. Terms:
   1. What security should you use and why?
10. 2. How many board seats should the entire Series A class want to require?
11. 3. Would you recommend a weighted average or full ratchet anti-dilution protection and why?