© David Teten 2012. More at ffvc.com and teten.com © David Teten 2012. More at ffvc.com and teten.com

Serving as an Expert Network Consultant, Interim Executive, Senior Advisor, Board Member, Deal Executive, and/or Executive/Entrepreneur in Residence

How Entrepreneurs and Senior Executives Can Work with Private Equity and Venture Capital Portfolio Companies

http://www.flickr.com/photos/izzard/183927/

David Teten Partner, ff Venture Capital Chairman, Harvard Business School Angels of New York ffvc.com teten.com @dteten teten.com/contact

© David Teten 2012. More at ffvc.com and teten.com © David Teten 2012. More at ffvc.com and teten.com

•  Selected private equity and venture capital funds

•  CEO Trust •  Executive Forum •  Harvard Business School Alumni Career Management Webinar Series •  Harvard Business School Club of Connecticut •  International Executives Resource Group •  Institute for International Research PE Operations conference

Selected past audiences for this presentation

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

•  Introduction

•  Expert Networks and Interim Executives

•  Senior Advisor Networks

•  Board of Directors

•  Deal Executives/EIRs

•  Next Steps

Agenda

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Don’t Take Notes!

Download these slides from: http://www.teten.com/operating-executives/

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Background

David Teten is currently leading the first-ever research study on “Best Practices of Venture Capitalists in Increasing Portfolio Company Value through Operational Improvement”, with coauthors Koen Bremer, Gyorgy Buslig, and Adham Hussein. In 2010, he published the first-ever research project on “Best Practices in Private Equity and Venture Capital Deal Origination”, with Chris Farmer, Venture Partner, General Catalyst.

These slides provide some of the learnings from these published research studies.

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

ff Venture Capital (ffvc.com)

•  Early-stage technology venture capital fund •  Founded 1999, with over 150 investments in over 55 companies •  Focus on early stage web-based services companies with disruptive models,

including SaaS, video gaming, digital media, social, mobile and VoIP •  First investments typically $50-$250K at valuations of <$5m pre-money •  50% of fund reserved for follow-on investments •  Prominent investments include:

Cornerstone OnDemand (IPO); Quigo Technologies (sold to AOL for reported $340m); Klout; 500px; Voxy; BetterWorks

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

•  Partner, ff Venture Capital, early-stage technology venture capital fund. Over 150 investments in over 55 companies since 1999.

•  Founder and Chairman, Harvard Business School Angels of New York •  Founder and Chairman, Navon Partners, startup focused on sourcing deals for private

equity funds •  Managing Director, Evalueserve, through September 2008. 2,500-person finance-focused

research and analytics firm. •  Founder and CEO, Circle of Experts (investment research firm), sold to Evalueserve •  Founder and CEO, Teten Executive Recruiting, sold to Accolo (#42 on 2007 Inc. 500) •  Founder and CEO, GoldNames, domain name investment bank, based in Israel •  Technology/Defense Investment Banking, Bear Stearns (#1 group at Bear investment

banking by revenues) •  Lead author, The Virtual Handshake: Opening Doors and

Closing Deals Online (TheVirtualHandshake.com) •  Harvard MBA 1998, Yale BA, both with honors. •  Contact: teten.com/contact

David Teten (teten.com)

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Fund

Com

mitm

ent

Free Agent expenses+whatever you negotiate

Rejected Executives

Senior Advisor / Deal Executive expenses+whatever you negotiate

Executive/Entrepreneur in Residence modest retainer+upside

Portfolio Company / NewCo Management salary+upside

Executive’s Income

Expert Network / Interim Executive $300/hour - $1,000/day

Operating Partner / Venture Partner salary+carry (sometimes)

PE Fund Structural Options in Working with Operating Executives

Private equity funds have a wide range of options in working with executives and entrepreneurs.

Board of Directors salary + upside

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Selected Searchable Databases of PE/VC Funds

You can identify institutional investors through one of multiple online databases.

All Investors Private Equity Venture Capital

•  Capital IQ

•  Galantes

•  Grey House

•  PEDatabase.com (free

trial)

•  Pratt’s Guide

•  Preqin

•  ThomsonOne

•  Centre for Asia

Private Equity Research

•  Eurekahedge

•  Pitchbook (free trial)

•  PrivateEquityFirms.com

(free trial)

•  AngelList (free)

•  CrunchBase (free)

•  Dow Jones Venturesource

•  Findthebest.com (free)

•  PWC MoneyTree

•  TheFunded (free)

•  VentureDeal (free trial)

•  Asian Venture Capital

Journal

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Source of Gains in Private Equity-Backed Companies

Ernst & Young 2006 study of 100 exits

Operational improvement drives 71% of value creation in PE-backed companies.

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Global economic crisis •  Most portfolio companies require operating changes to survive Investors seek differentiation •  Bain: “as much as 80% of PE returns will come from real performance

improvement, rather than … financial structuring.”* Maturing Private Equity Industry •  Larger size and greater complexity leads to greater role specialization Risk Mitigation •  Operational perspective add counter-balance to deal team Strategy Driven •  Deep value investing, turnarounds, mid-market focus, and industry-specialized

funds require hands-on approach. based on Jon Weber, Anchorage Advisors LLC

* http://www.bain.com/bainweb/publications/publications_detail.asp?id=10735&menu_url=publications_results.asp

Operational improvement is particularly important now because of the economic landscape and the maturation of the PE industry.

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com Matthew Kissner, Kissner Group

Management Environment Before and After PE Investment

PE funds almost always require an upgrade in management, and change management teams if necessary.

Before Investment After Investment Reporting Independent Have a “boss”

Style Loose, entrepreneurial Financial discipline

Decision making Just do it Board approval

Determining success Divide up the cash at the end of the year

Monthly financials, annual bonuses

Spending Invest as needed Must be justified

Intro Advisor Board Next Steps Expert Deal Exec

© David Teten 2012. More at ffvc.com and teten.com Matthew Kissner, Kissner Group

Growth Capacity Before and After PE Investment

PE funds require a company to lay capacity for organic and, often, acquisition-led growth.

Success Factors when Small Success Factors for Growth Lean senior executive team Complete senior and mid-management

team Informal small group dynamics Formal roles, responsibilities, and

systems Ad hoc IT projects – reactive Flexible and scalable IT Cash basis financial systems Strong monthly financial and

operational reporting All business is good business Customer segmentation Limited prioritization Strategic plan drives priorities

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

•  Introduction

•  Expert Networks and Interim Executives

•  Senior Advisor Networks

•  Board of Directors

•  Deal Executives/EIRs

•  Next Steps

Agenda

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

Overview: Expert / Interim Executive

Position •  Provide advice to investors, primarily in 30-60 minute phone calls •  Act as executive for short time period, typically 7-30 days Pay •  $100-$1,000 / hour Path Forward •  Register at expert network and interim executive web sites •  Maintain a very detailed and current bio, and update your availability •  Keep current on your industry •  Proactively seek new assignments •  Consider becoming a public expert, e.g., with PRNewsWire ProfNet,

HelpaReporter.com

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

•  Interact with professional investors and corporations

•  Strategic, thought-provoking projects •  Competitive compensation •  Receive fees to introduce colleagues

and the big NO’s: •  No membership cost •  No marketing cost •  No time spent on negotiating or

chasing payment

Benefits To Executive of Participating in Expert Network

http://flickr.com/photos/foundphotoslj/1134148114/

Expert networks are highly attractive to participants, whether working full-time, consultants, or in transition.

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

Expert Network Access Model

Investor Buyers

Academics

Supplier

Government

New Entrants

Competitor Corporate Alumni

based on Competitive Strategy: Techniques for Analyzing Industries and Competitors, Michael Porter.

Management

Expert networks provide investors access to experts from all of the forces that impact a company.

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

Generalists •  Advantus Global (acquired

Evalueserve Circle of Experts) •  CognoLink •  GLG Research (market leader) •  Coleman Research Group •  DeMatteo Monness LLC •  Guidepoint Global

Specialty/Other Players •  Kingfish Group •  Maven Research •  Primary Insight

Selected Leading Expert Networks

The expert network industry is the fastest-growing sector of the investment research sector, with aggregate revenues over $300m.

Medical •  MEDACorp (Leerink

Swaan) •  Sermo

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

USA-focused •  Business Talent Group •  Highpoint Associates •  Point B •  10EQS

Europe-focused •  a-connect •  Eden McCallum

http://www.flickr.com/photos/opendemocracy/1441901063/

Selected Consultant Networks

Networks of independent consultants have emerged as a new niche, typically engaging in projects of 2-6 months duration.

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

Selected Interim Executive Providers

USA •  Business Talent Group •  Epoch •  Executive Smarts •  ForteCEO •  Heidrick & Struggles •  Interim America •  OnDemand Resources •  OneAccord •  Tatum Executive Services •  Willmark Associates

Europe •  Alium Partners •  BIE •  Brooklands Executives •  EIM (Executive Interim Management) •  Impact Executives •  Marble Hill Partners

http://www.flickr.com/photos/opendemocracy/1441901063/

The interim executive industry is much better developed in Europe than in the US.

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

Other forms of engagement: •  Presentations •  Surveys •  White papers •  Longer consulting projects

http://farm2.static.flickr.com/1318/1134149284_85feb293d3.jpg?v=0

Expert networks engage with experts in a range of ways, but telephone calls are the primary method.

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

•  Accept/Reject request within 48 hours

•  Consultation strictly between expert and client

•  No fixed obligation

http://farm4.static.flickr.com/3274/2866399803_8c9493b42f_o.jpg

Expert networks are designed to require an extremely low level of commitment from experts.

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

Experience •  Industry Recognition •  Academic credentials Access to unique knowledge •  Affiliations Communication skills

Irrelevant: social skills, management skills

http://www.flickr.com/photos/kanzeon_zen_center/183801709/

Expert Network Selection Criteria

Expert networks assess experts based on their knowledge and ability to share it.

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

•  Update your availability and bio -  Quantify achievements -  Explain how you acquired your

expertise •  Insert specific keywords

-  Identify firms you touched -  Focus on industry-specific

knowledge •  Update your bio and profile questions

again based on consults you get •  More ideas: teten.com/resume

The #1 driver of your participation in expert networks is the quality of data in your online profile.

http://www.flickr.com/photos/edenpictures/3460562429/sizes/z/in/photostream/

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

•  Apply for open projects •  Mail your liaison when you have

insight into a hot topic -  breaking news -  a conference you just attended

•  Go on-call •  Contribute to expert network

discussion boards (e.g., Quora.com, HighTable.com)

•  Ask

http://www.flickr.com/photos/sarahquinn/124454341/

Successful consultations lead to more consultations. Also, experts can increase consulting volume through 5 methods:

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

•  Observe compliance restrictions •  Review current news •  Ask client’s level of background—

do they want an introduction or to jump into very specific topics?

•  Ask questions to understand the client’s hot buttons

•  Make sure to answer client’s key questions

•  Acknowledge your limits •  Prepare to debate •  Offer referrals

http://upload.wikimedia.org/wikipedia/commons/3/3b/Old_key_on_table.jpg

Thorough preparation for a consultation enhances your client ratings.

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

•  Register at expert network and interim executive web sites (and LinkedIn, job boards, etc.) -  Biography -  Hourly billing rate -  Resume

•  Consider becoming a public expert: PRNewsWire ProfNet, HelpaReporter.com

http://www.flickr.com/photos/twodolla/1764565402/

Next steps to becoming an active expert network member…

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

Agenda

•  Introduction

•  Expert Networks and Interim Executives

•  Senior Advisor Networks

•  Board of Directors

•  Deal Executives / EIRs

•  Next Steps

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

Overview: Senior Advisor

Position •  Work closely with fund to source deals •  Work closely with portfolio companies to mentor & provide advice •  Modest time commitment, typically 2-10 hours/month Pay •  Variable pay; retainer or service fee Path Forward •  Work for 10+ years as successful entrepreneur/executive •  Research funds with established advisor networks / EIR programs and

contact them via referral

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

“Senior advisor network” or “Executive network” = investor-sponsored group of executives with ability and willingness to add value to portfolio companies

Industry Expert

Deal Source

Interim CFO Investor

Portfolio Company “C”

Portfolio Company “B”

Portfolio Company “A”

Board Member

based on Jon Weber, Anchorage Advisors LLC

Definition

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

based on table from Jon Weber, Anchorage Advisors LLC

Senior Advisor Network vs. Traditional Talent Sources

Senior Advisor networks offer a low-fixed-cost, high-return talent pool option.

Experts and Consultants Senior Advisor Network Executive Recruitment Relationship Owner

Expert network / consultancy Fund Recruiting firm, then handed over to fund

Duration 1–2 hours to 3 months 6 months–2 years+ Permanent job and board positions

Sample Service Providers

Gerson Lehrman, McKinsey Harvey & Co., Notch Partners

Accolo, Heidrick & Struggles, Ignition Search Partners, Russell Reynolds

Illustrative Cost $1,000/hr for expert networks $300–700/hr for consultants

Sometimes retainer, sometimes paid like investment banker

1/3 compensation

Driver of Exec Compensation

Length of consultation Value creation and continued involvement with client companies

Winning full-time employment

Confidentiality NDA possibly. Consultant may “shop” ideas.

Signed, enforceable NDA NDA unusual

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

Selected Funds with Senior Advisor Networks

Many leading PE and VC funds have built Senior Advisor Networks.

Private Equity Venture Capital •  3i •  Castle Harlan •  Cerberus •  Irving Place Capital •  General Atlantic •  Goldman Sachs Special Situations

Group •  Sun Capital •  Welsh, Carson, Anderson & Stowe

•  ff Venture Capital •  500 Startups •  Great Oaks Venture Capital •  Lions Capital

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

U.S. Funds That Typically Partner with Executives to Execute a Transaction and Bring in New Management Upon Investing

Data based on firm websites. Frontenac AUM based on last two funds. # Investments/Year based on mean activity level over firm’s existence, with some adjustment for growth of fund over time.

Partnering with operating executives is a successful strategy which is a focus for only a small number of funds.

Private Equity Fund Founded AUM ($m)

Cum. # Investments

# Deals/ Year (est.)

GTCR 1980 $8,000 100 7 Wind Point Partners 1984 $2,000 80 5 Frontenac Company 1971 $875 200 5 Housatonic Partners 1997 $1,000 50 4 Prospect Partners 1998 $270 35 3 Red Diamond Capital 2002 $150 8 1 Post Capital Partners 2004 $100 7 1

Intro Advisor Next Steps Expert

© David Teten 2012. More at ffvc.com and teten.com

Board Deal Exec

http://farm1.static.flickr.com/7/8228640_921246eaa3.jpg?v=0

•  Abernathy Group “Collaborative Investing”

•  Castle Harlan •  Frontenac •  Institutional Venture

Partners Founders Fund •  Irving Place Capital

(formerly BSMB)

Selected PE Funds with Executive Funds

Some PE funds offer favorable economic terms for executives who are “friends of the firm”.

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

Agenda

•  Introduction

•  Expert Networks and Interim Executives

•  Senior Advisor Networks

•  Board of Directors

•  Deal Executives / EIRs

•  Next Steps

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

Overview: Board of Directors

Position •  Broad oversight of management and company Pay •  Startups: options •  Established companies: $100-200K on up plus equity Path Forward •  Have history of leadership / management experience, at the C-level •  Contact recruiters in this sector via referral •  Many boards aggressively seeking women and minority representation

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

What are Boards responsible for?

•  Broad oversight of management •  Manage CEO succession •  Guidance and strategic sounding board •  “Mentors and Monitors”

“Landing a Board Seat” for International Executive Resources Group-Boston. October 26, 2011. New Directions, Inc.

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com 38

What do Boards look for in their directors?

•  Proven leadership •  Specific skills or experience, e.g.:

–  Financial background –  International experience –  Position as active or retired CEO –  Experience in dealing with challenges faced by company / CEO

•  Network –  E.g. for startups: connection to VCs

“Landing a Board Seat” for International Executive Resources Group-Boston. October 26, 2011. New Directions, Inc.

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

•  Board & Committee meeting fees vs. retainers •  Mix of cash + equity

–  Shifting to more equity, less cash –  Equity grants

•  Shares vs. options •  Fixed value vs. fixed shares

–  Equity ownership requirements

Director compensation

“Landing a Board Seat” for International Executive Resources Group-Boston. October 26, 2011. New Directions, Inc.

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

Micro Small Medium Large Top 200

Valuation $50-$500M % inc

YOY

$500M<$1B

% inc YOY

$1B< $2.5B

% inc YOY

$2.5B<$10B

% inc

YOY >$10B

% inc YOY

Total Director Comp

$91K 20% $119K 10% $148K 13% $176K 7% $228K 5%

Change in Total Director Pay by Company Size

% inc YOY = % increase over 2009-2010 data. Source: 2010 –2011 NACD Director Compensation Report

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

Four Strategies to Join a Board

•  Communicate your value •  Use your network

–  Identify/contact search firms –  Tap your own network (LinkedIn, Coworkers, Alumni Associations) –  Networking Organizations (YPO, Industry Organizations)

•  Increase your visibility –  Speak at conferences –  Publish whitepapers –  Join expert networks

•  Be imaginative, inventive, opportunistic –  Invest in the company –  Join a non-profit board

“Landing a Board Seat” for International Executive Resources Group-Boston. October 26, 2011. New Directions, Inc.

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

Additional Resources

•  “How to get on a board:” http://www.businessweek.com/careers/content/sep2007/ca20070913_129202.htm .

•  Resources: –  Your own company’s board –  NASDAQ’s registry of prospective directors:

http://www.nasdaqomx.com/whatwedo/corporatesolutions/ –  Catalyst for potential female directors: http://www.catalyst.org/ –  ELC for African-American directors: http://www.elcinfo.com/ –  Hispanic Association on Corporate Responsibility: http://www.hacr.org/

•  http://www.advisoryboardarchitects.com/blog/how-get-board-directors-or-high-level-advisory-board

•  http://newdirections.com/

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

Examples of Recruiting Firms with Boardmember Services

•  Korn Ferry: http://www.kornferryinstitute.com/leadership/board_of_directors.php

•  Stybel, Peabody: http://www.stybelpeabody.com/newsite/index.php •  Allen + Associates: http://www.allensearch.com/ •  Spencer Stuart:

http://www.spencerstuart.com/services/boards/recruitment/

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

Agenda

•  Introduction

•  Expert Networks and Interim Executives

•  Senior Advisor Networks

•  Board of Directors

•  Deal Executives / EIRs

•  Next Steps

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

Overview: Deal Executive / EIR

Position •  Full-time role looking for a company to invest in, and typically serve in as

CEO Pay •  Usually modest retainer with carrot of finder’s fee + CEO role in new

company Path forward •  Demonstrate history of successfully leading company at C-level, or

direct report to C-level •  Offer a deal thesis or letter of intent to PE firm

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

How Private Equity Views Executives

Job Seeker Deal Resource

Thesis-Driven Deal Exec

Deal Exec with Letter of Intent

Target-Driven Deal Exec

http://www.flickr.com/photos/chailey/138654755/ . Inspired by Notch Partners.

PE funds are primarily looking for deals, not executives.

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

Selected Venture Capital Funds with Formal EIR Programs

Certain VC funds proactively seek out qualified Entrepreneurs in Residence

•  Austin Ventures •  Dell (the computer company) •  Foundation Capital •  ff Venture Capital •  General Catalyst •  Redpoint Ventures •  VTT Technical Research Centre of Finland

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com http://www.flickr.com/photos/bfurlong/2351689062/ . Based on Notch Partners and many other sources.

•  Clear definition of industry – niche, size, geography, etc. •  Transaction rationale consistent with company’s growth prospects •  Basic financial markets analysis: trading range, feasibility •  Outline of value-creation opportunities •  Plan for pursuing those sources of value •  Explanation of why you/ your team are ideally suited to lead effort •  Roster of 5-20 target companies •  Status of discussions with targets

(if any) •  Thoughts on likely exit (IPO, strategic

buyer)

Elements of a Deal Thesis

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

•  Teaser •  Business plan •  Executive profile •  Forecasts

-  Strategic -  Operational -  Financial

http://www.flickr.com/photos/11846056@N06/3110329005/

Elements of a Deal Memo

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

•  CEO-level leader or direct report to C-level -  10+ years in industry/related

market. 10+ years leading P&L and preferably also balance sheet experience.

-  Clear value creation plan. Understanding of private equity.

•  Personal capital to invest •  Ideally: ready management team;

corporate governance skills (board experience), investor relations experience

http://www.flickr.com/photos/ilker/2494740320/

Deal Executive Preferred Profile: Credibility

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

•  Compatible goals •  Aligned incentives •  Personal chemistry

http://www.flickr.com/photos/superrabbit/319538167/

Deal Executive Preferred Profile: Compatibility

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

•  Proactively seeking to identify deals. -  Preferably, has proprietary deal(s)

•  Financially stable to go without salary during search

•  Spousal support •  100% committed to a risky process not

fully in your control •  Entrepreneurial and sales oriented •  Can relocate •  Prefer: acquisition experience.

http://flickr.com/photos/krikit/2745563123/sizes/o/

Deal Executive Preferred Profile: Deal-Catcher

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

•  Akoya Capital •  Blackmore Partners •  Cook Associates •  Harvey & Company •  Ignition Search Partners

(VC-focused)

PE/executive intermediaries are investment bank+recruiter hybrids which work with executives throughout the process to help execute a transaction.

Leading Investment Banks/Recruiters Specializing in Matching PEGs with Executives

•  Notch Partners •  R.B. Price & Company •  Silverfern Group •  Skill Capital •  Tri-Artisan Partners LLC

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

•  Review industry for feasibility: -  Market trends (opportunistic research

analysis) -  Valuation analysis -  Capital-intensity requirements -  Fragmentation analysis

•  Profile executive to assess candidacy •  Source companies •  Source sponsors

http://www.flickr.com/photos/pfala/3036252334/

PE fund/executive intermediaries have a standard process to execute a transaction.

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

•  Find the company and get close to signing a Letter of Intent, then pursue sponsor

•  Find sponsor and then search for company. -  Executive screens for funds with track

record of pursuing executive-led transactions and interest in industry

-  More important to use this strategy with larger deals

http://www.flickr.com/photos/thalamus/3560789785/

An executive has two main paths to choose from in pursuing a transaction:

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

•  Secrecy •  Continuity •  Speed •  Lower investment banking fees •  “Dummy insurance”: easier to keep a stake in the spunoff company •  Trust/proven competency •  Relationship with the Board of Directors

Rick Rickertson, Buyout: The Insider’s Guide to Buying Your Own Company, 49-50.

Primary Reasons Some Companies Prefer Selling to Management

Many companies prefer to sell to management, even at risk of a lower price than they might get from an auction.

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com Based on Post Capital, http://www.defenselink.mil/dodcmsshare/newsphoto/2008-03/hires_080301-F-2319R-006.jpg

•  Introduction •  Initial meetings •  Assessment of investment thesis

Duration: 2-4 weeks

Step 1 of 5: Launch Relationship with Fund

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com Based on Post Capital, picasaweb.google.com/lh/photo/FOHUbVdTEYKdftpmi6TkXQ

•  Refine thesis •  Agree on compensation/economics

and exclusivity •  Background check •  Formulate deal origination plan

Step 2 of 5: Finalize partnership between executive and fund

Duration: 1-4 weeks

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com Based on Mario Kyd, Unlimited Horizons; http://www.flickr.com/photos/carve/2856365431/

•  Inefficiencies within a market segment or industry

•  Ineffective processes •  Outdated business models •  Competition from low cost countries •  Novel product, process or idea •  Rollup of fragmented industry •  Industry changes (read the trade

rags)

Concept-Driven Approach (e.g., with investment banker)

Step 3 of 5: Identify/Contact Opportunities

Duration: 1-12 months

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com Based on Mario Kyd, Unlimited Horizons; http://www.flickr.com/photos/jurvetson/3346659199/

•  Former employers, suppliers, customers, competitors

•  Investment bankers, brokers, accountants, lawyers

•  Attend conferences •  Look for reasons why people sell

Opportunistic Approach (Network), led by Executive

Step 3 of 5: Identify/Contact Opportunities (cont’d)

Duration: 1-12 months

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com based on Post Capital; Lapis Group; numerous other sources. http://www.flickr.com/photos/matt_gibson/954340171/

•  Company meetings •  Negotiate •  Due Diligence

•  Can a deal be made? •  Can we interest investors? •  Can you “drive” the deal?

Step 4 of 5: Evaluate Targets

Duration: up to 3 months

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com Based on Post Capital upload.wikimedia.org/wikipedia/commons/4/47/Tower_Bridge_closing.jpg

•  Finalize documentation •  Finalize financing

Step 5 of 5: Closing

Duration: up to 3 months

Intro Advisor Deal Exec Next Steps Expert Board

© David Teten 2012. More at ffvc.com and teten.com

This does not reflect compensation for an executive’s role as a company employee post-deal. Note that transaction fee and carry are inversely related. * Robert Seber, Dechert LLP, “Transaction and Monitoring Fees: Does Anything Go?”, 2003.

** The PEG’s fund documents will generally discuss whether a portion of that fee (often half) is set off against management fees that the LP’s would otherwise owe. Other data based on Akoya Capital, Oberon Securities, and other interviewees.

Typical Economics for Mid-Market Private Equity Acquisition, for PEG, Deal Finders, Investment Bankers, and other Executives

Fee Type Payer Amount Recipient of Payment Transaction Fees

Capital providers

0.5-3.4% deal size*

PEG pays finder’s fee of 1-3% of enterprise value, plus sometimes carry, to deal finder + buy-side investment bank (if any). (Company (specifically selling shareholders) pay investment banker seller’s fee.)

Monitoring Fees

Company 0.2%-4.4% EBITDA (median 1.2%)*,**

Company pays outside board members for ongoing services (~$5K+/meeting + equity incentives)

Expenses Company Post-deal expenses, not pre-deal

Company pays PEG for post-deal expenses. Important for buy-side operating exec/investment banker to get PEG to commit to pay broken deal costs.

Carry Limited Partners

~1% assets + ~20% carry

LPs pay PEG this carry.

Investment rights

- - Usually unlimited co-invest rights for executives involved, with no PEG management fee. Executives will, however, pay pro rata monitoring/other fees.

Next Steps Intro Advisor Expert Board Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Agenda

•  Introduction

•  Expert Networks and Interim Executives

•  Senior Advisor Networks

•  Board of Directors

•  Deal Executives / EIRs

•  Next Steps

Next Steps Intro Advisor Expert Board Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

•  The Virtual Handshake: Opening Doors and Closing Deals Online, David Teten and Scott Allen

•  Buyout: The Insider’s Guide to Buying Your Own Company, Rick Rickertson

•  goodreads.com/teten •  ffvc.com/careers •  teten.com/blog

Suggested Reading

Next Steps Intro Advisor Expert Board Deal Exec

© David Teten 2012. More at ffvc.com and teten.com

Any questions ?

Slides at teten.com/operating-executives

ffvc.com teten.com @dteten teten.com/contact