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Walden University

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I'm working on a statistics writing question and need guidance to help me understand better.

answer 4 questions in bullet point. 1-2 pages is fine. but you only have 10 hours. 1. Would you say the term sheet for the Series A round generally favors the entrepreneur (Goodson) or the angel investor (Trio)? Be sure to cite specific terms and features of the contract to support your opinion. 2. Before the Series A round, what is the proposed value of SecureNet? After the Series A round, what are the pre- and post money value if the offer is accepted as proposed? 3. What are the implications for Trio if another investor offers to provide SecureNet an additional $3 million in equity after the Series A round at a price of $8.00 a share? At $1.50 a share? 4. If you were Goodson, would you reject the offer and seek out a more experienced venture capitalist, accept Trio's offer as proposed, or attempt to negotiate certain terms of the offer? if you choose to negotiate, what adjustments would you seek to make?

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For the exclusive use of j. WU, 2021. UV2505 SECURENET, INC.: SERIES A ROUND First there is a mountain, then there is no mountain, then there is. —Zen proverb In the fall of 2000, Richard Goodson reflected on his experiences over the past six months since his company had merged with another Internet startup to form SecureNet, Inc. Goodson became CEO of the combined company and was in the process of seeking additional financing. To date, Goodson had been unsuccessful in attracting venture capital funding and had instead focused his efforts on local investors. In July 2000, he raised $250,000 in seed capital followed, in September 2000, by a bridge loan of $250,000 from Trio LLC, a group of angel investors. The bridge loan was straight debt and repayment was contingent upon completion of a Series A round of financing, which was necessary to keep SecureNet afloat until several deals with key customers closed. In October 2000, Goodson received an offer from the same angel group to purchase $1.4 million in Series A convertible preferred stock. While Goodson welcomed the offer, he was uncertain whether the terms of the proposed agreement and the amount offered met his company’s growing needs. First, Cyrus Maston, who headed Trio LLC, did not possess a great deal of experience in venture investing. With a successful seed round behind him, Goodson considered whether it might be a good time to revisit some venture capitalists and attempt to bring in a more experienced investor. Second, with only $1.4 million coming from the Series A round, SecureNet would again need to find additional funds to build its sales force and revenues. Thus, two key issues needed to be resolved before Goodson could make a decision on Trio’s offer: whether $1.4 million was enough for nearly 40% of the firm’s equity and how the proposed contract terms would play out in the likely event of subsequent funding. Company Following his graduation from business school, Goodson went to work for a large financial institution in its investment-banking-technology group. While an investment banker, he This case was prepared by Susan Chaplinsky, Professor of Business Administration, and April Triantis, Associate Professor, University of Virginia Law School. It was based on field work by Robert Duran and Jonathon Mohler (MBA ’02) and was written as a basis for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright  2002 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies, send an e-mail to No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 4/04. This document is authorized for use only by james WU in MIE 218 Winter 21 Galle taught by Robert Galle, University of California - Irvine from Jan 2021 to Jul 2021. For the exclusive use of j. WU, 2021. -2- UV2505 worked on several successful initial public offerings for Internet companies. Goodson soon left the world of investment banking to pursue his dream of starting and running his own company. He founded GroupWorks, Inc., a provider of Internet groupware, with a small team focused on providing calendar and messaging solutions through a Web-based service. In June 2000, GroupWorks announced a merger with Fortress, Inc. Fortress, founded in Charlottesville, Virginia, created solutions for the growing information-security market. Its first product was a server-based application that stood between an email server and the Internet to transparently manage encryption and decryption without user intervention. Goodson became the CEO of the combined firm, which he renamed SecureNet, Inc. International Data Corporation (IDC) estimated that the worldwide market for information-security services was approximately $6.7 billion. By the end of 2005, IDC expected the market to more than triple to $21 billion. Fortress’s products alleviated the difficulty of securing e-commerce transactions and reduced the costs of implementing those solutions using preconfigured network appliances.1 The merger also stood to benefit from the increased attention placed on digital signatures. On June 30, 2000, President Bill Clinton signed the Electronic Signatures in Global and National Commerce Act, which made digitally signed contracts as binding as those using pen and paper. Goodson saw this as an opportunity for SecureNet to leverage Fortress’s technology: “This legislation will help replace reams of paper and sanction the use of the Internet as a legal tool for conducting business.” Even with federal legislative support, digital signatures faced an uphill adoption battle that SecureNet intended to take advantage of: “We will make it easy for the everyday user to participate, and place management of the public key infrastructure at the ISP [Internet Service Provider] level of the Net.” SecureNet’s product could be easily extended to create digital signatures as well as to secure e-commerce, thereby creating additional revenues from its current product line.2 In addition to the recently signed legislation, two other federal laws placed pressure on specific industries to upgrade the level of security around data used in e-commerce transactions. The Gramm-Leach-Bliley Act required financial institutions to protect sensitive financial information. SecureNet’s Email Security System™ not only met the security requirements of the Act but also secured delivery of statements, prospectuses, trade confirmations, and account statements that could save financial institutions considerable expense. In addition, the Health Insurance Portability and Accountability Act (HIPAA) required the health-care sector to encrypt personally identifiable medical information transmitted over the Internet. 1 A “network appliance” was a device that had both the hardware and software component and was configured to perform a specific task with minimal intervention. 2 In July 2000, SecureNet received national press attention when it announced that it would open-source and freely distribute a version of its secure e-mail server software under the name Antivore™. The announcement was in response to increasing public debate surrounding an FBI project that allowed monitoring of email traffic from an ISP without the knowledge of the sender or recipient of the email. Antivore™ placed a major obstacle in front of the FBI’s ability to eavesdrop on e-mail. This document is authorized for use only by james WU in MIE 218 Winter 21 Galle taught by Robert Galle, University of California - Irvine from Jan 2021 to Jul 2021. For the exclusive use of j. WU, 2021. -3- UV2505 Background on Encryption Increasingly, companies found it necessary to send personal, proprietary, or confidential information over the Internet.3 As this information traversed the Internet between parties, it was typically routed through open and unsecured networks, crossing several public and private routers and servers. While the information was traveling between parties, copies could be made and the contents read or modified. Additionally, because of this open and unsecured design, it was possible to forge information so that it appeared to originate from trusted parties. In 1991, Phil Zimmermann wrote Pretty Good Privacy (PGP), a desktop encryption program, to prevent the tampering or forging of e-mails, and offered it as freeware to the Internet community.4 PGP quickly became the most widely used encryption software in the world and launched an entire industry providing encryption software to ensure privacy and security for Internet communication. PGP was built around a relatively new way of encrypting information called “public key” (PK) cryptography. Prior to PK cryptography, most encryption was based on symmetrical or secret key cryptography, where a single key was used to encrypt, or lock, the message, rendering it unreadable. To decrypt, or unlock, the information in the now unreadable message, the same key had to be applied. The security of the message was dependent on keeping the key a secret. Once the key was known, anyone who intercepted the message could read it. Exhibit 1a diagrams the symmetrical-key-encryption process. PK cryptography introduced a more complex but more secure method for encrypting messages. In PK cryptography, a pair of keys—the public and private keys—were used to encrypt and decrypt messages. When the public key of a pair was used to lock a message, only the private key of the same pair could unlock it, and vice versa (i.e., what the private key locked, only the public key could unlock, as shown in Exhibit 1b). Typically, the public key was freely shared, and therefore, to send someone an encrypted message, only the public key was needed. Finding a recipient’s public key required that it be made available through some type of accessible infrastructure, such as a Web site or a corporate e-mail directory. Software companies created suites of applications, collectively known as Public Key Infrastructure (PKI) software that facilitated the creation, storage, management, and use of public keys. Industry Overview The world of e-commerce security vendors could be divided into two main groups: traditional PKI software vendors and secure service providers (SSPs). Each of these approaches made compromises to give customers e-mail security. 3 Much of the information for this section comes from Bruce Schneier’s Applied Cryptography (New York: John Wiley & Sons, 1996). 4 (accessed 4 April 2004). This document is authorized for use only by james WU in MIE 218 Winter 21 Galle taught by Robert Galle, University of California - Irvine from Jan 2021 to Jul 2021. For the exclusive use of j. WU, 2021. -4- UV2505 PKI software vendors Entrust, RSA Security, and Baltimore Technologies were companies that sold suites of applications and server software. The PKI implementations were usually used by the information-technology groups of governmental or corporate organizations. These implementations usually required a mix of server hardware and software, desktop software, and recoding of some applications to obtain the full benefit of the entire PKI. Over time, most PKI vendors had moved away from proprietary implementations and adopted standards based on X.509 and S/MIME technologies.5 Secure service providers Such secure service providers (SSPs) as Verisign,, ZixIt, and managed the PKI and allowed users to access services for a monthly fee. The benefits of this outsource model were that the service providers implemented, managed, and maintained the infrastructure, and the users were able to be up and running quickly. Problems arose when service providers based their platforms on proprietary systems or required both parties involved in a conversation to use their technology. In addition, some service providers required the installation of software on the client machine, which increased the complexity of implementation. One final concern was that, because the SSP provided and managed the infrastructure, the end-user company had to trust the SSP to provide high-quality service and protect its confidentiality. SecureNet Products SecureNet’s initial software products focused on easy set-up and direct exchange between end users and the Internet. The network appliance model offered lower implementation costs compared with full-featured PKI implementations. Moreover, because the network appliance was run by the company, it provided a transparent infrastructure that decreased concerns about confidentiality. 5 The X.509 standard was part of the larger X.500 series of standards. X.500 defined a structure for storing, querying, and managing large electronic directories. Because some of the entities in that directory might use cryptography, the X.509 standard was created to define how cryptographic information would be managed, associated with an end entity, and trusted. The trust model promoted by X.509 was strictly hierarchical. The trust of one party derived from the trustworthiness of that party’s position in a hierarchy. X.509 did not, however, define standards for processes like encrypting e-mail or other transactions. Secure Multipurpose Internet Mail Extensions (S/MIME) was a similar secure messaging standard to OpenPGP. Instead of being a stand-alone solution, S/MIME was more tightly integrated into mail-message formatting. In practical terms, this standard was conceptually the same as PGP, including identical security levels, but the implementations differed slightly. Both were valid and maintained standards. This document is authorized for use only by james WU in MIE 218 Winter 21 Galle taught by Robert Galle, University of California - Irvine from Jan 2021 to Jul 2021. For the exclusive use of j. WU, 2021. -5- UV2505 SecureNet targeted companies that faced the greatest need to increase security in their ecommerce transactions. The financial industry was attractive because of its propensity to be an early adopter of technology, the impact of the Gramm-Leach-Bliley Act, and the high costs of a breach of security. The health-care industry faced similar pressures from the HIPAA federal regulations. Additionally, the health-care industry comprised more than one million institutions, each a potential customer of SecureNet. Unlike the financial industry, the health-care industry had generally been reluctant to adopt new technology, but with the increasing pressures to reduce costs and improve service, many health-care providers had begun to explore the use of e-commerce and the electronic transmission of information. SecureBase SecureNet’s first product, SecureBase™, was an e-mail gateway that handled encryption and decryption of messages originating at a corporate e-mail server. SecureBase handled messages in a transparent manner so that the sender of an e-mail never had to find the recipient’s public key and could receive e-mail after it had been decrypted. Compared with competing PKI products, SecureBase had the advantages of requiring no installation on end users’ desktop computers and no change in the way email was sent or received. SecureFind SecureNet’s second product, SecureFind™, was defined as a “PKI backbone.” SecureFind reduced the complexity of one user’s finding another user’s public key if they did not share the same SecureBase server. With SecureFind, any two users of SecureBase could send each other secure email by just typing in the other user’s email address. By resolving one of the major roadblocks in the adoption of PK technology, SecureNet could build a network of PK repositories. SecureNet realized that SecureFind could be modified to work with other PKIs or SSPs, allowing them the same benefits of SecureBase. At some point, vendors could be included in SecureBase, allowing easier access to suppliers. SecureNet had trademark and patent protection for its Email Security System, Secure Mail Gateway, and SecureFind. With a new technology that was yet unproven, SecureNet faced sales cycles of three to six months. Sales typically included a working installation of the SecureBase product and technical support. SecureNet products were often evaluated against those of such competitors as Entrust, Verisign, and RSA Systems. Customers remarked on the advanced nature of the product, its technical capabilities, and ease of use. Below are representative customer comments: The SecureNet system has been a real pleasure to work with, thanks to the ease of installation and the simplicity of its use. Our attorneys can now send and receive encrypted messages from any office PC and from their home PC by dialing into the firm’s network. —Law office This document is authorized for use only by james WU in MIE 218 Winter 21 Galle taught by Robert Galle, University of California - Irvine from Jan 2021 to Jul 2021. For the exclusive use of j. WU, 2021. -6- UV2505 The SecureNet’s SecureBase gives us an easy-to-use, easy-to-manage, and practical security strategy for our most valuable customers. We chose SecureNet for their plug-and-play email and document-security offering—a premium service we can put into action immediately. —Internet service provider Financing History Once the merger was completed, Goodson presented SecureNet’s business plan to several Northern Virginia venture-capital firms. Looking back at the experience, Goodson recalled: “I must have called 25 firms and they all said the same things. The VCs claimed that my management team was young and had no entrepreneurial experience (see Exhibit 2). They were also turned off by our location.” Goodson’s initial attempts to attract venture capital were unsuccessful, so he focused his efforts on local investors. In July 2000, SecureNet completed a $250,000 seed round, selling 100,000 shares of common stock at $2.50 a share to a group of local investors. The seed round represented 14.1% of SecureNet’s equity. Two months later, SecureNet followed this round of financing with a $250,000 bridge loan, led by Trio LLC. The bridge loan required repayment of $500,000 upon completion of a Series A round within six months. See Exhibit 3 for the PreSeries A capitalization table. The bridge loan and the proposed $1.4 million Series A round of financing came from Cyrus Maston, a central Virginia angel investor who headed Trio. Maston, a lawyer by training, left his practice in 1997 to manage his father’s estate, worth some $200 million, and became an active investor in venture capital and real estate. Prior to that, he had been a successful executive in his own right in the mining and energy industries. To date, he had not achieved a great deal of success in his venture investments, as several of his portfolio companies were in liquidation or reorganization. Despite the disappointing results, Maston remained keen on SecureNet. In October 2000, Trio proposed a $1.4 million Series A round. Under the proposed terms, Trio would receive convertible preferred stock at $4.38 a share. The total number of shares to be issued in the round assumed that, in lieu of repayment, the entire bridge loan of $500,000 would convert into Series A shares at $4.38 a share. (Exhibit 4 contains the proposed Series A term sheet.) Although $1.4 million was a considerable step up in funding, Goodson was concerned about the adequacy of the funding in light of his firm’s current high-resource demands. Goodson described SecureNet’s use of cash at the time: For the most part, the money was spent on operating expenses. We were burning through about $75,000 a month just to make payroll and pay the rent. Add in product-development costs, legal fees, and technology-related expenses, and you’ve got a burn rate approaching $150,000 a month.6 6 Funds were needed solely for operating expenses. There was no need for additional capital expenditures. This document is authorized for use only by james WU in MIE 218 Winter 21 Galle taught by Robert Galle, University of California - Irvine from Jan 2021 to Jul 2021. For the exclusive use of j. WU, 2021. -7- UV2505 Exhibits 5, 6, and 7 show the historical income statement, balance sheet, and financial projections of SecureNet, respectively. This document is authorized for use only by james WU in MIE 218 Winter 21 Galle taught by Robert Galle, University of California - Irvine from Jan 2021 to Jul 2021. For the exclusive use of j. WU, 2021. -8- UV2505 Market Conditions Market conditions were mixed in the fall of 2000. The NASDAQ had reached record highs in late 1999 an ...
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