Dropbox Financing

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event, can be converted into equity. Often times the early investor is rewarded by getting more equity than he would objectively be entitled to, to compensate his early investment at an often very risky stage.

Uncapped and capped notes: Capped notes protect investors from dilution. With a capped note entrepreneurs have to limit their valuation for a following round of fundraising to a predetermined amount (so this is an extension of the convertible debt option), so that investors are certain they will own a predetermined share of the company when that round of funding comes. Uncapped notes are more favourable for entrepreneurs since they do not have to limit their next round of funding to a predetermined amount.

Preferred stocks: These stocks are more valuable than regular stocks. The holders of these stocks get paid before the holders of regular stocks get paid, so for investors it is always preferable to obtain preferred stocks instead of regular ones.

Liquidation preferences: This is simply the order in which people get paid when shares get sold (IPO, acquisition or bankruptcy). Investors will always try to make sure if a venture goes south, they recoup as much value as they can. (Includes whether the stock is preferred or not, and whether there is participation or not)

Participating preferred and non-participating preferred: A specification on the preferred stock, that determines whether or not an early investor gets, besides his original invested amount, a pro-rata share of the proceeds when a company goes public or gets acquired.

Pro-rata rights: Protects an investor from dilution by offering him to re-invest in the company if they decide to go through another round of funding. The investor should be able to invest an amount that protects his share of the company percentagewise.

Board control: Probably the most important term of fundraising is whether or not the investor gets a seat at the board of the company, being able to co-determine how the company works, and even take over control if they would ever control a majority of board seats.

We believe the most important term for Dropbox is board control. Since they hold 2 of 3 board seats (Houston and Ferdowsi), adding another board member would mean they no longer have absolute control over their own company. Since they have a very clear vision of where they want to go, and how they want to get there, adding an additional board seat would be completely out of the question.

Another very important term for Dropbox is the post-money valuation. They do not see this round of funding as a valuation optimization exercise, they are willing to sacrifice valuation in order to get company-favourable terms. It is very important they collect the money they need to do business, while making sure they do not raise too much, so they do not find themselves outside their comfort zone. They want to collect the money they need to implement their strategic plans, but they only want to under strict conditions. Besides these strategic initiatives they want to implement, they also want to stay in charge of potential exit strategies, so they will only collect money from investors who agree on not having provisions that limit Dropbox in choosing an exit strategy.

A last term that is of major importance for Dropbox is the liquidation preferences. Dropbox wants each financing to be equivalent in status, meaning that even the Series B investors won’t be able to influence when Dropbox goes public, and neither will they be able to influence the pricing of an IPO.

Question 4: Which criteria would be most important for Dropbox when selecting investors with whom to partner? Name your top three investors and thoroughly explain your choice. We expect names of specific and existing venture capital funds, private equity funds or strategic investors, not general descriptions such as “a specialized early stage fund”.

The most important criteria for Dropbox when selecting new investors is that they do not demand any voting board seats, since this would cause Houston and Ferdowsi to lose the ability to outvote the external investors.

Other very relevant criteria were: Knowledge of other similar companies and their problems. Investors who were involved with other companies like Dropbox would be able to point out some issues the relatively young company may have overlooked. The ability to help Dropbox hire the right people is another important asset an investor has to be able to bring to the table. Since investors dealt with a lot of companies in the same sector, and since they knew a lot of people working in the sector, they were going to be very important is suggesting people when Dropbox had to hire new ones. A final criterion was the reputation of the investors. Dropbox was looking to establish steady, long-term, and committed relationships with future investors. They will only consider investors with impeccable reputations. Any investors who have international activities will have an extra advantage since Dropbox is on the verge of going global.

One of our suggested investors is Salesforce. They are focused on cloud based applications, which would give Dropbox the insights and the guidance it needs to understand the market, and help with attracting new people. Salesforce also emphasises that they do more than just give money, they invest in every sense of the word and really offer a partnership which helps companies to become more competitive and accelerate their growth. Since they are internationally active, they check all Dropbox’ boxes and could be a really good fit.

Emergence Capital is another possible investor. Being a top Silicon Valley venture capital firm, they have a great reputation and excellent knowledge of the market since they focus on enterprise cloud and software as a service (SaaS) applications. Their premier talent network could help Dropbox in their search of new people, and their expertise in go-to-market strategies for enterprise cloud software could help them tremendously as well in this stage. They have previously supported and familiarized themselves with the freemium business model as well.

A last potential investor could be Bessemer Venture Partners. With their focus on cloud computing companies, and 6 offices around the world, they would be an excellent fit for Dropbox. While guiding them through the international journey, they could use their well-established local network to help Dropbox find the people they need.

Question 5: What exit route and timing would you propose to Dropbox investors?

Because of the fact that Dropbox raised funds from outside investors, exit is inevitable. These investments are driven by the desire to realize