American History 1988
Chapter 133 - 127 Millionaire

Chapter 133: Chapter 127 Millionaire

"Mr. Morgentaler, 20 million dollars it is then, just like you’ve priced it." Dean didn’t haggle anymore, as it was pointless, since it was only the first round of valuation.

In Dean’s original expectations, the bottom line for Byte Software’s valuation was around 12 million dollars, roughly ten times the profit of the Teams software in January.

Why choose January? Because that was the month Teams software sold the most, thanks mainly to the support of many Stanford alumni.

Following that, without the boost from those personal connections, sales were likely to drop.

Indeed, as Dean had predicted, the sales in February could be considered good if they were half of January’s.

It was already late February, and the longer the negotiations dragged on, the more disadvantageous it was for Byte Software.

If they were to wait until the end of the month, investors would want to see the latest month’s sales figures for Teams, and by then Dean would be in a disadvantageous position.

With sales declining, the investors’ valuation and enthusiasm would also diminish. 20 million dollars was already 8 million more than Dean’s initial expectations, so he had nothing to complain about.

David Morgentaler, who felt a vague sense of loss, also nodded his head in agreement to this valuation after a moment’s thought.

"OK, everyone can barely accept this offer, Mr. Morgentaler can take the lead investor role."

In the financing process, the lead investor plays a crucial role. Their advantages in project experience and other resources often bring tremendous assistance to the startup company.

Therefore, choosing the right lead investor is as critical for a startup as choosing the right strategic direction.

Morgan Tailer was the venture capital firm Dean was most familiar with; they had invested in Apple as well as other IT industry companies like routers and optical fibers.

Because of their similar investment experience, Dean believed Morgan Tailer was very suitable to be the lead investor for Byte Software.

Of course, the most important part was the agreement they had beforehand, and now it was Dean’s time to fulfill his promise.

"Dean, according to our initial verbal agreement, Morgan Tailer can take 10%, right?" David had already learned of the previously agreed upon conditions between the two parties from Gary.

Dean didn’t deny this, "Yes, once Teams gets the patent application, Morgan Tailer will have the priority investment right to a 10% stake."

"OK, so how much equity is Byte Software planning to release in this round of financing?" This was a crucial question that would determine the composition of interests for all parties in the future.

"15%," this figure was what Dean decided on after understanding most companies’ financing processes, for the first round of financing.

According to the current valuation of Byte Software, 15% equated to 3 million dollars, enough for the company to embark on a new round of expansion and channel development.

"15%..." David did some mental calculations and then nodded in agreement, "As per the agreement, Morgan Tailer will invest 2 million dollars to secure the 10%..."

"Mr. Morgentaler, thank you very much for your support~" The financing process went unexpectedly smooth, and Dean was visibly pleased.

Byte Software was just a software company, it had no production costs. The 2 million dollars could be quickly used for marketing and then to expand Teams’ sales channels.

Marcus and David were even more astonished. Was this the legendary venture capital? They had been sitting down for less than an hour, and a deal of 2 million dollars had already been reached.

"Dean, this comes with conditions." Not letting them get too excited too soon, David unsurprisingly began to exercise the lead investor’s prerogatives.

"Before fundraising, Byte Software must reserve a sufficient option pool for employees. Countless past cases have shown that only with attractive incentives can those elite talents be drawn to join Byte Software."

David pointed to the documents about Byte Software that Dean had submitted earlier, "Like I just mentioned, it’s still very young. You need professional Chief Operating, Financial, even Chief Executive Officers.

Only with these talents joining, can Byte Software grow rapidly. And then, in the next one to two years, secure a ticket to enter Nasdaq!"

An option pool for talents? Dean and Marcus were taken aback. They had crammed some knowledge about financing recently, and they weren’t ignorant of the concept of an option pool.

But frankly, it was happening faster than they had anticipated, since this was only Byte Software’s first round of financing.

"Mr. Morgentaler, as far as I know, many companies set up their option pool after reaching a certain level of growth. Right now we..." Dean spread his hands, Byte Software didn’t even have its own proper office yet.

"No, Dean~" David shook his head, "Byte Software has already skipped the seed round, start-up phase, and even the first round. I would rather consider this financing as the second round."

"The second round?" Dean and Marcus looked at each other in confusion, "Mr. Morgentaler, Byte Software hasn’t even been established for three months?"

"There’s no necessary connection," David Morgentaler took a sip of his coffee, "There are always some unexpected and special existences, like Byte Software."

Seeing they were still somewhat confused, David put down his coffee. "Alright, let me roughly explain."

"The seed round, which some people also call the angel round, typically involves funding amounts between $500,000 and $1 million. The capital is mainly used to validate the feasibility of a new idea, generally provided by angel investors or small venture capital firms.

During the startup phase, $500,000 to $2 million, these funds are used to pay for marketing and product development-related costs. The first round, $1 million to $10 million, is used for early-stage production and sales financing.

The second round is operational capital. It usually ranges from $2 million to $20 million, used by companies early on to sell products and services and possibly for expansion."

David spread his hands and said, "Clearly, Byte Software has already skipped the first three stages. It has a relatively mature product, Teams, and has even begun to turn a profit. Our fundraising goal this time is for further expansion, isn’t it?"

"So if all goes well, Byte Software could quickly begin its third and fourth rounds, and even an IPO?" Dean suddenly realized that the game of capital is both complex and simple.

"Dean, you still don’t understand," David leaned back in his chair slowly, "Going public and the number of funding rounds are not related. There’s no rule that dictates you must complete all funding stages before listing.

Even now, most companies in Silicon Valley only go through two rounds of funding before they start preparing to go public, which entirely depends on the target company’s development situation."

"I think I get it now," after David’s explanation, for the first time Dean had a vague concept of this kind of capital game.

"So, what percentage of the equity does Morgan Tailer expect Byte Software to reserve for the employee stock option pool?"

"According to normal practice in the software industry, this ratio is generally between 10% and 20%. However, according to your proposal just now, Dean, we will take the middle value—15%. How does that sound?"

Dean pulled out paper and a pen and quickly began to calculate, "Funding 15%, option pool 15%, that means our three founders’ original shares need to be correspondingly discounted by 70%."

By this ratio, after completing the current round of funding, Dean would hold onto 56% of the shares, Marcus and David would each have 7%, the investing institutions would hold 15%, and the option pool 15%.

"That’s correct, Dean, you have a gift for mathematics." David was amazed at how quickly Dean, with no relevant financial knowledge, understood the dilution and allocation of shares.

"Trust me, Dean, even if Morgan Tailer hadn’t made such a requirement for the option pool this time, other investors would propose similar employee incentive plans during subsequent funding rounds and the IPO.

The cost to Byte Software would be greater then because the valuation will be a different number by that time. Most importantly, the employee stock option pool is considered for the long-term benefit of the company.

Neither the founders nor the investing institutions gain any additional benefit from it; this benefit belongs entirely to the employees."

David Morgentaler had a point; it was for the good of everyone. After discussing it with Marcus, Dean accepted the request.

"Mr. Morgentaler, does the $2 million only come through if we accept such terms?"

"Of course, that’s the rules of the game in Silicon Valley." Although David was eager to invest in Byte Software, everything had to happen within a predefined framework.

"Okay, we accept these terms." Dean wasn’t a madman with delusions of grandeur. To believe one could keep their equity and deceive investors into giving money was no reasonable expectation.

In terms of playing the game of capital let alone David Morgentaler sitting in front of him, even Gary, who had been a bystander, would be streets ahead of him.

Seeing that Dean wasn’t agonizing over his share, David was also satisfied with the negotiation. "Regarding the results of today’s discussions, lawyers will draft it into a specific contract later.

By the way, the 15% investment share, aside from Morgentaler’s 10%, does Byte Software need us to introduce any other co-investors? You know, I know many people on Sand Hill Road."

"Thank you for your consideration, but regarding the other 5%, I need to check with some friends first. So..." Dean shrugged; he had made promises to Clark.

This was also Dean’s way of repaying Clark for his earlier help with Byte Software. Connections are built through transaction after transaction.

"Okay, I understand." David knew he had to maintain his own network, "But you need to tell me who it is first so we can avoid any awkward situations."

As the lead investor, David had that right. If a co-investor had a poor relationship with Morgentaler, both parties could communicate in advance to avoid disputes over differences later on.

Dean understood this principle too, so he didn’t hide anything, "Clark from Silicon Graphics."

David knew Clark, and since Morgentaler had no issues with him, he shrugged, "Let me know after you’ve discussed it with him, and we can confirm the share count and pricing for Byte Software together."

"I’ll respond within two weeks," Dean stood up and shook hands with David and his son. If nothing unexpected happened, the first round of Byte Software’s funding would be settled.

After watching them leave, Marcus and David could no longer contain themselves. "Shit! Dean, you’re now a millionaire!"

"Until we go public, they’re worth nothing~" Valuation is only the investment company’s and founders’ expected future value of the company; except for them, no one recognizes that number.

"Right, Dean, we’re not public yet, but do we need to set a price for the shares now?" Marcus dabbled in stocks occasionally, but in his mind, only public companies had fixed share prices and trades.

"Valuation is just an overall quote, and to facilitate subsequent financing, the number of shares and the price per share need to be agreed upon in advance. Of course, before going public, these two figures may change many times."

Just as before, Dean was also working hard to understand all the knowledge in the financing process.