*****Q1

Take a look at Richards questions below (the email) and analyze the different funding options for him. In other words, explain what each of the investments would mean for the company and how each one of them would work. Identify any missing information you need to understand the investment offers. Richard doesnt know what hes getting himself into, so identify any relevant issues necessary to fully evaluate the investments.

****Q2

These guys need help figuring out their equity split, and they need to incorporate before they can take any investment. I want you to take care of the incorporation process and then draft up their investment documents, but I want to make sure you know what youre doing before you get started. Please prepare a separate email for me discussing

a) the documents you need to i) incorporate the company, ii) which corporate form we should choose, iii) the state of incorporation, and iv) the key agreements we need to provide for the founders.

b) what you think of the equity split proposed by the incubator guy, Erlich. He seems to have given himself a job title and is proposing additional equity for himself. Given what you know of this founding team, what do you think of this split? Should changes be made, and if so, what would you propose?

b) which form documents you think we should use to draft up this financing. For our own planning purposes, assume he will be taking Peter Gregorys offer and pick the documents well use for that. Youre going to do most of the document prep, so pick a form that makes sense for you. Briefly explain your selection to me.

Background

While working at Hooli, Richard came up with an idea for a revolutionary middle out compression algorithm to greatly improve the compression and encoding of data. While this idea was not in Hoolis primary area of focus, Richard mentioned the idea to Hoolis CEO and COO, as a potential larger business opportunity. Both the CEO and COO acknowledged the potential of the idea, but informed Richard that Hooli was not in a position to pursue the idea at this time. A few weeks later Richard quit Hooli to work on his compression product idea.

After spending a couple of weeks on the idea, Richard decided to start a new venture called Pied Piper. Richard has reached out to his friend, Jared, about joining him at Pied Piper as a founder and the head of business development. Jared is excited about the idea, but is reluctant to leave his position at Hooli until Pied Pipers first product can be completed. Jared ends up consulting with Richard for six months on an informal basis, after which development of a beta version of the Pied Piper compression product is almost complete. Richard came up with the basic idea and underlying technology and did most of the development work on the Pied Piper product, but Jared provided some of the key insights especially in terms of key features and market positioning.

One evening Richard and Jared met with Peter Gregory about Pied Piper and a possible investment in the company. Peter Gregory believes that the Pied Piper technology is highly valuable and that the market potential is huge, but he recognizes that the Companys development and product marketing efforts will require significant capital investment. He hints that Raviga may be interested in funding the company provided that the Pied Piper product has a successful public launch at the TechCrunch Disrupt (Disrupt) event this year. After the meeting, Jared decides to leave Hooli and join the company full time.

Richard has already loaned the company $1.0 million and believes it would take an additional $1.0 million of funding to complete development of and publicly launch the Pied Piper product at Disrupt. Richard and Jared believe that it is possible that less capital will be required if development of the product were to be slowed and if a significant amount of work was outsourced.

They also speak with Erlich Bachman about the opportunity to join Erlichs incubator. The incubator will provide Pied Piper with office space and business advice; in exchange the company will give Erlichs incubator a 10% ownership stake of the company. advises the company to reach out to legal counsel to form an entity. Erlich creates the below proposed capital structure:

--Richard (Founder, CEO) 33%

--Jared (Founder, Head of Business 33% Development) --Erlich (Founder, Chief of Vision & Innovation) 33%

Total 100.0%

Biographies

Richard Hendricks A former engineer at a large public software company Hooli, Inc. (Hooli), which offers a suite of internet services and products. While at Hooli, Richard worked on quality assurance for mobile messaging.

Donald Jared Dunn (Jared) A friend of Richards who attended Vassar College, where Jared received his MBA/JD degree. Jared recently joined Pied Piper the Head of Business Development. He is in charge of all business matters, including hiring.

Erlich Bachman Erlich is a former entrepreneur who has started an innovation incubator after selling his airfare collator Aviato.

Peter Gregory A seasoned veteran of the venture capital world with over 22 years of experience with one of the leading U.S. venture capital firms, Peter Gregory is currently a senior partner at venture capital firm of Raviga Capital Management (Raviga). While he holds a partner position with Raviga, Peter Gregory is also known to invest in early stage companies as an angel investor. Peter Gregory has invested in some of the worlds most successful technology companies and specializes in network and cloud computing companies.

Russ Hannenman Originally from Los Angeles, Russ is a new investor to Silicon Valley. Russ made $1.2 billion in the early 1990s with his company that allowed internet user to access radio stations. In two decades Russ turned his $1.2 billion into $1.4 billion. Russ has no particular expertise in compression software.

Nastia Russ Hannenman has started dating a woman named Nastia. Nastia has no known expertise. Her investment experience is also unkown.

EMAIL:

From: Richard Hendricks [richard@piedpiper.com] Sent: Friday, May 29, 2020 12:00 PM To: Ron LaFlamme Subject: Funding Questions

Hi Ron,

Jared and I spoke with Peter Gregory about Pied Piper and a possible investment in the Company. Peter likes the technology but said that the development and product-marketing efforts will require significant capital investment. Pied Piper has made it a business goal to have a successful public launch at the TechCrunch Disrupt competition (Disrupt). By launching at Disrupt, we think we can kickstart our customer acquisition and make big waves with Pied Piper.

I believe that it will take about $1 million of funding to complete development and compete at Disrupt. We have a couple of funding options in order to make it to Disrupt:

Peter Gregory has offered to have Raviga invest $500,000 in an equity investment (How great is that for our valuation?!) Raviga would get to take 1 board seat. Is that important?

Jared was approached by Russ Hannenman who is willing to invest $10 million at a $20 million pre-money valuation (So much money, it seems these guys are making these numbers up!). Russ also wants 2 seats on the board of directors, one for himself, and one for his new girlfriend, Nastia. Russ also asked that he would like Nastia to invest $50 into Pied Piper so she can get some business experience. Its a small amount of money, so I dont see the harm in it.

We also got a surprising offer from one of our customers which is interested in doing a strategic financing in the form of an acqui-hire. They want to buy $4 million dollars of Pied Piper stock at a $6 million post-money valuation. This is also a lot of money(!) but the beta-customer also wants an exclusive right to any Pied Piper intellectual property developed in the next three years. They said it means we wouldnt be able to license or sell our product to any other customers during that period. But you know what an exclusive license is, I suppose. Youre a lawyer. 3 years feels like a lot of time, but if this helps the company get established, we can always keep growing the company afterward and sell to any customers we want.

Jared and I (with help from Erlichs incubator) think that we could reduce the need for funding if we fund ourselves and cut back on development and marketing resources. However, if we dont take any funding, it would take another 12 months to complete development. Wed miss Disrupt, but we would not have to take any money. Very importantly, wed avoid dilution. I heard dilution is bad, so this sounds appealing.

As you know this is my first time running a company, can you please explain the issues with the four possible funding paths: 1) the Raviga investment; 2) the Russ Hannenman investment; 3) the strategic investment; and 4) self-funding (not taking any money)?

I need to understand these better so I can make a decision quickly.

Thanks, Richard