Morocco Day 1 July 2008

1. Morocco Day 1July 2008

2. Agenda Day 1 - Valuation • Introductions • Ted Anderson • Jeff Karras • Valuation introduction • The difficulties of early stage valuation • The art and science of valuation • Multiples analysis • VC or DCF Model • Beyond the numbers • Valuation Examples • Case Study

3. Ted Anderson Managing General Partner Ventures West Management Inc.

4. Ventures West -Firm Overview • Recognized nationally as a premier early stage technology investor – currently investing 8th fund • Largest and oldest private Canadian venture capital firm - Venture capital manager since 1973 • Established team, in key cities (Montreal, Toronto, Ottawa, Vancouver) • Prior funds total over $700 million; VW4-8 total $600 million (since 1993) • 90 technology company investments in Ventures West 4-8 • Established, stable team plus recent additions • 7 Partners—average of 14 years of VC experience and 11 years at Ventures West • Investors represent almost all of the large private equity investors in Canada • 36 exits (Ventures West 4-8)—26 acquisitions and 10 IPOs (NASDAQ, TSX, AIM) • Example exits—Angiotech (19X, 88% IRR), AudeSi (3.5X, 67% IRR), Chantry (2.4X, 59% IRR), LinkAge (5.2X, 324% IRR), Pivotal (18X, 109% IRR)

5. VW Investment Strategy • Venture capital investments - Primarily in Canada • Approximately 20-25 investments in a US$200 million fund • Early stage investments • High potential sectors (biotech, cleantech, communications) • Lead the “A” round, initial position > 20% • Active investor, board seat • Syndication (often with US funds) in later rounds • Extensive partnering • Exit by IPO or strategic sale

6. Jeff Karras General Partner Levensohn Venture Partners

7. Levensohn Venture Partners -Firm Overview • Established presence in Silicon Valley since 1996 • $193 million in total committed capital • $334 million in distributions to date since inception • Investment Team of five together since 2002 • Focused, selective strategy fewer investments and more time per portfolio company • Hands-on investment style with proven ability to identify, build, and harvest winning companies • 30 investments since 1996 • 16 exits to date • 23% IPO • 30% M&A • 30% Remain private

8. LVP Investment Strategy • Early stage investor emphasizing companies that have completed initial technology development • Thematic team-based approach to technology investing with California focus • Lead deals and require board seat, with subsequent active role on boards • Proactive engagement in operating and strategic projects across portfolio companies

9. VALUATION

10. The Stages • Expansion Stage- Revenues increase, low or negative earnings, limited operating history, some but few comparables, value based mostly on future growth • High Growth- Rapidly growing revenues and earnings, meaningful operating history, large number of comparables, value in both assets and future growth • Mature Growth- Revenue growth slows but operating income still growing, lots of operating history, lots of comparables, value driven more from existing assets than future growth • Declining- Revenue and operating income begins to decline, substantial operating history, declining number of mostly mature comps, value driven by existing assets.

11. Early Stage If everything was Ideal, • There would be historical financials • An entrepreneur’s financial projections would be accurate • VCs would know the timing and exit value • A company would know exactly how much cash was require to break-even • There would be no competition for deals The challenge with early stage startups • Non existent or low revenue • Negative operating income • Little operating history • Few if any true pure play comparable companies • Value based entirely on future growth- value relies on the ability of managers to turn a promising idea into commercial success

12. Art and Science From a practical standpoint, valuation tends to be both Art and Science Typically more Art than Science

13. The Science of Early Stage Valuation • Public market comparables and M&A comparables • Requires applying trading or transaction multiples of earnings or cash flow i.e. P/E or P/CF associated with comparable companies to the current and future performance of the target business • The “VC” or DCF model • Requires forecasting the future cash flows of the business to a terminal value and discounting those cash flows back to the future at a an appropriate discount rate The earlier the company is in its development, the more difficult it is to use financial models

14. Public Comparable Analysis

15. M&A Analysis

16. The “VC” or DCF Method Objective: Determine the number of shares a VC needs to receive for a given level of investment in order to achieve investment return objective. Determining Key Inputs: • Terminal value be at time of exit • Time to Exit • Discount Rate

17. VC Model V= terminal value at time of exit= $25 million T=time to exit=4 years I= amount of investment by VC= $3 million R= discount rate used by investor=50 percent X= number of existing shares owned by entrepreneur = 1 million -note options should be treated “as if exercised’ Step 1: Determine the post money valuation ie. the present value of the company after the initial investment has been made NPV of the terminal value = V/ (1+R)t = $25 million/ (1.5)4 = $4,938,272 Post

18. VC Model V= terminal value at time of exit= $25 million T=time to exit=4 years I= amount of investment by VC= $3 million R= discount rate used by investor=50 percent X= number of existing shares owned by entrepreneur= 1 million -note options should be treated “as if exercised’ Step 2: Determine the pre- money valuation PRE = Post – investment cost = $4,938,272 - $3 million =$1,938,272

19. VC Model V= terminal value at time of exit= $25 million T=time to exit=4 years I= amount of investment by VC= $3 million R= discount rate used by investor=50 percent X= number of existing shares owned by entrepreneur = 1 million -note options should be treated “as if exercised’ Step 3: Determine the ownership fraction required to achieve required rate of return Ownership Fraction = $3 million/ $4,938,272 =60.75%

20. VC Model V= terminal value at time of exit= $25 million T=time to exit=4 years I= amount of investment by VC= $3 million R= discount rate used by investor=50 percent X= number of existing shares owned by entrepreneur = 1 million -note options should be treated “as if exercised’ Step 4: Calculate the number of shares If x = founders shares and y = # of shares required y/ (1,000,000 +y) = ownership fraction or 60.75% y = 1,000,000 [(0.6075 / (1-0.6075)] =1,547,771 shares

21. VC Model V= terminal value at time of exit= $25 million T=time to exit=4 years I= amount of investment by VC= $3 million R= discount rate used by investor=50 percent X= number of existing shares owned by entrepreneur = 1 million -note options should be treated “as if exercised’ Step 5: Calculate the Price Per Share $3 million / 1,547,771= $1.94 per share

22. The Art • Beyond the numbers, countless other factors influence valuation • Market pressures of a deal • Prior investor or management expectations • Recent data on comparable financings • Level of comfort with company including • Business plan • Executive team • Stage in the market • Beyond valuation, there are many tools used to mitigate risk (Option pool, Liquidation Preferences, Participation, Drag-along) – This is Day 2 • Often we will use the financial model as a part of the negotiation and share the models with the entrepreneurs. This take some of the emotion out of the process

23. Case Study: Shotspotter • Shotspotter Gunshot Location system • Combination of themes: wireless technology, mesh networks, GPS technology, and acoustic algorithms • Met CEO at conference • Company had history of successful field deployments in public Safety • Well suited to multiple markets

24. Case Study: The Process • Initial meetings to understand company and meet team • Subsequent meetings to understand the technology, business model, customers, traction, etc… • Customers are important part of our diligence. Spoke with existing and potential customers. Looking to hear commitment and believe that SS is relieving a pain • Technology Demonstration • Intellectual property – Hired IP attorney to review the portfolio • Deployment process and costs • Pipeline review

25. Case Study: Key Findings • Public safety market progressing, but less certainty around military • Worked through strategy to penetrate military market • Bottom line, Military remained a risk and was factored into valuation • Revenue Forecast was too aggressive • Discounted as a part of the valuation exercise • No immediate competitive threat, but patent portfolio important • IP Attorney helped company identify areas of weakness and plan put in place • Margins were too low for the business • Worked with company to understand plan to bring them in line

26. Case Study: The Valuation • We were pre-emptive and the company was not out officially raising money • We did not want to overpay, but understood that if we were too low, they would talk to other VCs for a higher valuation • Worked on a comp analysis, M&A analysis, and even a DCF. Modeled the round and the returns for all of the investors • Disagreed over the revenue forecast and got creative with the valuation

27. Agenda Day 2 – The Deal • The deal • Proper due diligence • Forecasting • Relationships with team and other investors • The other terms beyond price • Basic Terms in the term sheet • Preferred vs Common stock • The offer • The charter • Stock purchase agreement • Investor’s rights agreement • Case Study • Managing the deal after the investment

28. Deal Negotiation • Experienced VCs and Entrepreneurs understand that valuation alone is a small part of the investment process • Critical elements to a deal • Proper due diligence • Working relationship with team • Relationship with existing investors • Term Sheet

29. Proper Due Diligence • The management team • Personal reference checks • Technology (if applicable) • Consultants that can help to validate • Business model • Pipeline review • Customer reference checks • Financials including forecast • Legal due diligence • Intellectual property review • Existing company documents around governance

30. Forecasting in Venture Capital • It is the responsibility of the entrepreneur to provide a well thought analysis of the market opportunity and the cost structure needed to properly to execute on the opportunity • A VC must pay attention to a number of factors including • Product development • Margins on product • Cash burn and cash out date • Critical milestones • Validation of near term sales forecasts • Fixed costs such as office space and other contractual money owed (in case of shut down) • A sensitivity analysis is a critical tool for evaluating the risks in a forecast

31. Board Dynamics • Critical to have aligned interests among board members and entrepreneurs • Prior to any investment, must speak with each member of the board and the management team to • White papers with best practices for Board Participation • A Simple Guide to The Basic Responsibilities of VC-Backed Company Directors • After the Term Sheet: How Venture Boards Influence the Success or Failure of Technology Companies • Rites of Passage: Managing CEO Transition in Venture-Backed Technology Companies • http://www.levp.com/news/whitepapers.shtml

32. The Term Sheet • Starting point for a good faith negotiation/ few binding provisions • Structure contracts to protect investment from negligence or malice Four Sections of a Term Sheet 1. The basic description of the offer 2. The Charter 3. Stock Purchase Agreement 4. Investor Rights Agreement

33. Preferred vs Common Stock • Common Stock • The basic stock held by founders, employees, and public shareholders upon IPO • In general, provides basic voting privileges • Preferred Stock • Preferred shares give holders preference over Common shares • Seniority in liquidation (i.e. preferred shareholder paid first) • Seniority in payment of dividends • Special privileges documented in the Shareholders agreement including Board Seat, voting rights on additional capital, right to participate in future financings, and ability to veto the choice of CEO • Right to approve spending • VCs almost always take Preferred Stock

34. Basic Offer • Fully Diluted Ownership- assumes all preferred stock is converted and options are exercised • Original Purchase Price- price paid per share • Capitalization Table- lists all securities in the capital structure before and after the deal -typically includes common, preferred, options pool • Aggregate Purchase Price- price paid for all shares of a security • Post-money Valuation= price per share*fully diluted share count -analogous to market cap for a public company • Pre-money Valuation= post money valuation-$ investment

35. The Charter • The Charter establishes the rights, preferences, privileges and restrictions of each class and series of the company’s stock • Dividend Preference- restricts the payment of dividends to common stock unless first paid to preferred • cumulative dividends accrue even if not paid • non cumulative dividends do not accrue except in the final period prior to payment • Deemed Liquidation Event- sale, merger or shut down • Liquidation Preference- determines where an investor stands in the investor hierarchy in the case of a liquidation event • pari passu means all (or some) preferred investors are treated equally • 3X liquidation preference means an investor get back triple their investment before any other equity claims are satisfied • Preferred Stock • Non- participating Preferred Stock- receives only Original Purchase price plus any accrued dividends • Fully Participating Preferred Stock- receives Original Purchase price plus accrued dividends and then participates with commons stockholders on an as-converted basis. • Cap on Preferred Stock Participation Rights- receives Original Purchase Price plus accrued dividends and participates with common stock up to an agreed multiple of the Original Purchase Price • Protective Provisions- give minority investors a laundry list of protections against possible expropriation by managers or other investors

36. The Charter - Continued • Anti-dilution Protection- protect investors stakes if future rounds of financing are done at a lower price ie. “a down round” by adjusting the original conversion price • “full ratchet reduces conversion price to the lowest price of any later stock sale • weighted average reduces conversion price by the weighted average price impact of the subject transaction • Formula for Weighted Average Conversion Price • Adjusted Conversion Price = Original conversion price* ((fully diluted # of shares outstanding prior to new issue + new money received / original conversion price)) / (fully diluted shares outstanding prior to new issue + number of new shares issued in subsequent transaction) • Mandatory Conversion- convertible preferred is typically convertible at the option of the holder but may be required to be converted in the event of a qualified public offering • Pay-to-Play- requires all investors to participate to the full extent of their participation rights in any “down round” or lose their anti-dilution rights • Redemption Rights- the right to require the company to redeem (pay back) the investors investment

37. Stock Purchase Agreement • Contains company reps and warranties • Conditions to closing and • Outlines responsibilities for fees and expenses.

38. Investor Rights Agreement • Matters pertaining to a company going public • Matters Requiring Investor Approval- give minority investors a laundry list of protections against possible expropriation by managers or other investors. • Employee Stock Options- shares or options set aside for employee compensation and incentives - cliff vs. step vesting

39. Case Study – McLean Watson/Media Synergy Inc

40. After the Investment • Due diligence and reviews on valuation continue after the investment • Follow-on investments • On-going portfolio valuation • The exit