Stanford Technology Ventures Program (STVP) STVP-1998-006 Rev. August 31, 2001 Yahoo 1996: Softbank Asks for a Strategic Stake In early 1996, Yahoo! was at one of the most crucial crossroads in its short history. Their second round of venture financing had closed less than three months before, and the company’s potential Initial Public Offering (IPO) was still at least several months away. Masayoshi Son, the founder and CEO of Japanese media conglomerate Softbank, had participated in the second round of financing, investing $2 million for a 5% share of Yahoo! In addition, to allow for rapid growth, Yahoo! was hoping to drive the sale of advertising on the Yahoo! website through Softbank’s already-established sales force. In February of 1996, Masayoshi Son asked to purchase a strategic stake in Yahoo! – at least another 30% of the company. Masayoshi Son asked for a meeting with Yahoo! to discuss his proposal. Because he missed much of the American food he had gotten used to while attending college at Berkley, he suggested that they hold the meeting at Yahoo!’s offices over pizza. The players included Masayoshi-Son and several of his associates, Yahoo! founders Jerry Yang and David Filo, Yahoo! president and CEO Tom Koogle, and Michael Moritz, a venture capitalist from Sequoia Capital. Moritz recalled the meeting: The meeting was held on Pioneer Way, which was Yahoo!’s first real office, about 3,000 or 4,000 square feet. It was a rainy night, and we had a makeshift conference table, some borrowed chairs and used furniture. Masayoshi Son came in, having flown across the country. He had started the day in Boston. He came in with 3 or 4 other guys from Softbank, all of whom looked pretty exhausted. Masayoshi Son was looking pretty chipper.1 As Masayoshi Son savored his second slice of pizza, he looked around the table and explained his interest in a strategic partnership between Softbank and Yahoo!. 1 Moritz, Michael, Sequoia Capital, personal interview, November 10, 1998. Thanks to Michael Moritz for his thoughtful description of several key events from the early history of Yahoo! This case was prepared by Matthew S. Garman and Michael K. Chang, graduate students at Stanford University’s School of Engineering, and Thomas J. Kosnik, Consulting Professor, Stanford School of Engineering, as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1998 by Stanford University. To order copies or request permission to reproduce materials, call 1-650-723-2973, or email Professor Tom Kosnik, Director of Case Development, Stanford Technology Ventures Program, at kosnik@stanford.edu. 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 Stanford Technology Ventures Program. 1 STVP-1998-006 Yahoo! 1996: Softbank Asks for a Strategic Stake As an investor in Yahoo!, I have been pleased with the company’s progress and I see a lot of potential. However, in order for Softbank to consider itself a strategic partner in Yahoo! rather than just a minority investor, we need to own 30% to 50% of the company. What do you think Yahoo! is worth? Michael Moritz knew that Yahoo! was going to be on a tight budget until their IPO. Yahoo! could really use this increase in funding as well as the institutional support that Softbank could provide. He also knew that Yahoo!’s value had been continually increasing during the past couple of months. Selling so large a stake in the company so close to the IPO would raise issues of control for Yahoo!’s management, and dilute the ownership of the founders and the early investors like Sequoia Capital. Neither Yahoo’s founders nor Sequoia were eager to sell such a large stake in the company at a time when the public offering seemed imminent. He answered: $500 million. Masayoshi Son was a bit taken aback . I’m speechless! You are not even making any profits yet. How could your valuation be so high? Perhaps the real question is whether or not Yahoo! and Sequoia are willing to part with 30-50% of ownership of Yahoo! in order to gain Softbank as a partner… As the meeting broke up, the Yahoo! management team promised Masayoshi Son that they would consider his proposal very seriously, and let him know how much of the company they were willing to offer to Softbank, and in what price range. The issues that faced Jerry Yang, David Filo, and Michael Moritz were clear, but far from easy to resolve: • How much was Yahoo! worth? • How much, if any were Yahoo!’s founders and Sequoia Capital willing to sell to a private investor to insure they had sufficient funds for an IPO? • How much capital could Yahoo! effectively deploy before the IPO to continue its race for leadership in its category? Taking too much money prior to the IPO could actually adversely affect the valuation when Yahoo! goes public. • Was Softbank the right strategic partner? • What steps could Yahoo!’s management take to insure that loss of majority ownership did not mean loss of control over Yahoo!’s destiny? Introduction of Yahoo! Yahoo! was an internet site that provided a hierarchically organized list of links to sites on the World Wide Web. It was started in 1993 by Jerry Yang and David Filo, two graduate students at the Stanford School of Engineering. They began categorizing web sites as a hobby, originally calling it “Jerry’s Guide to the World Wide Web”. They soon changed the name to Yahoo!, and opened the site up to the general public. Yahoo! offered a way for internet users to 2 Yahoo! 1996: Softbank Asks for a Strategic Stake STVP-1998-006 easily navigate and explore the Web. Users could click through multiple topic and category headings until they found a list of direct links to web sites related to their interest. In addition, Yahoo! offered a central place where people could go to just to see what was out there. By the fall of 1994, Yahoo! was receiving more than 2 million hits per day. Yahoo!’s First Round of Financing It soon become apparent that if Yahoo! was to continue to grow, they would have to look for some outside funding. After countless presentations in front of possible corporate partners, angel investors and venture capitalists, Yahoo! accepted an offer for venture financing from Sequoia Capital, one of Silicon Valley’s oldest and most respected venture capital firms. Sequoia had previously invested in companies such as Apple Computer, Oracle, Electronic Arts, Cisco Systems, and Arbor Software, so they were very knowledgeable and well connected in the technology industry. They offered approximately $1,000,000 to Yahoo! at an assessed valuation of $4,000,000, giving Sequoia a corresponding 25% ownership stake in Yahoo!. Choosing venture capital financing over corporate sponsorship allowed Yang and Filo to not only keep a substantial portion of ownership in their creation, but also allowed them to tap into Sequoia’s network of contacts, including possible management candidates. This proved to be a particularly valuable asset as they tried to mold a successful company. Using the Money Once the venture deal was finalized, the money was quickly put to work. The first order of business was to develop the Yahoo! management and staff so that the company was positioned to take full advantage of its enormous growth potential. Tim Brady was quickly hired as Yahoo!’s third employee. Brady was a graduate of the Harvard Business School, and was the author of Yahoo!’s original business plan. Brady soon became responsible for overseeing the marketing, operation and business development that was necessary to successfully launch Yahoo! into the commercial market. The next two new hires were David Lobo and Sriniji Srinivasan. Lobo was a talented engineer who quickly began contributing to the development of the web site. Srinivasan was hired as Yahoo!’s first official “surfer”. She was the first employee dedicated to categorizing web sites into the Yahoo! hierarchy. As the surfer division grew, Srinivasan was put in charge of the cataloguer division and was given responsibility for the design and maintenance of Yahoo!’s overall organization and classification scheme. Hiring a New CEO and The Changing Role of the Founders With so many new employees joining Yahoo!, it quickly became apparent that a new and experienced CEO was becoming a top priority. From May 1995 to July 1995, Yahoo! hired an interim President and CEO, Philip Monego, to manage the company while Yahoo!’s founders and Michael Moritz, the partner leading Sequoia’s investment in Yahoo!, searched for a permanent CEO. In August 1995, after interviewing a half-dozen candidates, Moritz, Yang, and Filo hired Timothy Koogle to be Yahoo!’s sixth employee. Koogle possessed over twelve years of experience in technology management, along with a B.S. in mechanical engineering from the University of Virginia and a M.S. and Engr.D. in mechanical engineering from Stanford. In addition to his impressive qualifications, Yang was particularly impressed with Koogle because 3 STVP-1998-006 Yahoo! 1996: Softbank Asks for a Strategic Stake he sensed that, “he was willing to put up with a lot of change,” which had been a constant force throughout Yahoo! development. They also felt that Koogle had the necessary skills to lead Yahoo! through multiple stages of growth, capable of guiding the company for many years to come. 2 Hiring Koogle marked a shift in the role of Yahoo! founders, as Koogle took over the management of the company. Filo began to concentrate his efforts on working with the engineering team, while Yang was free to focus on the vision, partnering and the development of Yahoo!, and its future role in the computing world. Growing the Business and Establishing the Brand With the management team starting to materialize and with a new CEO firmly in place, Yahoo! started focusing its full force toward growing the business. One of the concepts that Yahoo! was able to recognize early on was the importance of branding. It was the company’s mission to have the name Yahoo! be synonymous with the internet. As Yang put it, “The success of this company is built on our brand recognition.” Yahoo! reinforced it’s emphasis on branding in January of 1996, when they hired Karen Edwards as their Director of Brand Management. Toward the end of 1995 to the outside observer, it appeared that Yahoo was settling into a fairly comfortable role as the predominant guide to the Internet. They had successfully raised capital through venture financing, and were at the time one of the most visible, most recognized sites on the net with no direct competitors. However, Yahoo! was not a company that felt it could rest on its laurels. Said Yang: As of today, there is no one out there competing with us directly, but there are a lot of people working on it. We talked to AOL in March. They tried to buy us, and we said no, and they said, “We will crush you in two months.” They haven’t yet, but they certainly own the browsers and you have to be aware of that…. We are a zero-revenue company right now, so I don’t think we’re in a position to be comfortable about anything.3 Yahoo! was receiving a significant portion of its traffic due to an alliance they held with Netscape. In 1995, Netscape agreed to make Yahoo the default link from the “Internet Directory” button on their Navigator web browser. Yahoo! then made it their mission to transform these new customers into loyal users. To do this, Yahoo! decided that it was time to unveil some new features to their site. Additionally, Tim Koogle decided that is was time for Yahoo! to start generating some revenue. Yahoo!’s New Look in August 1995 In August 1995, Yahoo! debuted several new features on their site. The most obvious change was the introduction of advertising. Yahoo! placed small banner ads along the top portion or their search pages. Many people at Yahoo! worried about the adverse reaction that some of their users would have to the presence of advertising, however the backlash was fairly 2 Reid, Architects of the Web 1997 3 Red Herring October 1995 Found You on Yahoo 4 Yahoo! 1996: Softbank Asks for a Strategic Stake STVP-1998-006 minimal. Several users sent them email, claiming that the company had “sold out”. However most users realized that Yahoo! was a business, and thus did not blame them for trying to make some money. According to Tim Brady, Yahoo!, “put a lot of time into making the ads unobtrusive and interesting, trying to intelligently integrate them.”4 Yahoo had been in talks with the British news service Reuters since October of 1994. Reuters had wanted to partner with Yahoo!, both to provide current news stories on Yahoo!’s site and to help build Reuters’ online presence. After almost a year of discussion, this service was finally introduced on the new Yahoo! site in August. This too was a major step in the evolution of the site. The Reuters news service was the first time that Yahoo! offered more functionality than that of a web site cataloguer. Now people could come to Yahoo!, not only as a place to find other sites, but as a place to read the up to the minute news. Yahoo! began to unveil more and more features in rapid succession. They introduced features such as local weather reports and national yellow and white pages. All of these features were introduced with the idea of trying to continue to build viewership and increase advertising revenue. Yahoo! had become not just a site through which people traveled to other sites, it had become a destination in and of itself. Also on the minds of the management team was the possibility that Yahoo! would be filing its IPO soon. “When Yahoo! prepared to go public, the (public relations) strategy had to change. Yahoo had to present itself as a grown-up, serious company,” says Karen Edwards. “We needed to convince the press that advertising on the Internet was a viable business… We started placing more emphasis on the capable and experienced financial management team that Yahoo had acquired.”5 Second Round Financing With the addition of these new services and with several more projects waiting in the wings, Yahoo! needed more venture financing if they were going to continue to grow. They decided to try and raise a second round of venture financing, and in November 1995, Sequoia Capital, Open Text Corporation, Reuters New Media, Softbank Corporation, Ziff-Davis Publishing and The Capital Group participated in Yahoo!’s second round of financing, acquiring a combined twelve percent of the company. Reuters New Media purchased 2.5% of the company in the second round, while Sequoia and the Japanese media conglomerate Softbank provided an additional $1,000,000 and $2,000,000 respectively. Yahoo!’s market valuation at this point had increased to $40,000,000, giving Softbank a 5% stake in Yahoo!. This gave Yahoo! approximately $5 million dollars in additional funding, which they used to continue to introduce new features on their site and build up their brand recognition through intense marketing campaigns. However after the second round was completed, many people inside the company wondered if $5 million would be enough money to allow Yahoo! to accomplish everything that it wanted to before their impending IPO. 4 Red Herring October 1995 Found You on Yahoo 5 Red Herring The Evolution of an Internet Startup’s PR Strategy 5 STVP-1998-006 Yahoo! 1996: Softbank Asks for a Strategic Stake Potential Competitors in the Marketplace Time was of the essence, as competition was really starting to heat up. Yahoo! was essentially filling two roles in the internet market space. One role was to act like an internet portal site. The idea behind the portal is that a person would come to a single site like Yahoo! that would then conveniently lead them to everything else that they would need. Yahoo! was the pioneer in this space and had built quite a following, however there were several big companies that were interested in taking over this space. These competitors included Netscape, AOL and Microsoft. (See Exhibits 5-10) Netscape was one of the most visited sites on the web, and with the proliferation of their popular browser, they had an advantage in this market. All Netscape browsers were automatically configured to open to the Netscape home page when they loaded. This gave Netscape a huge advantage. Yahoo! had to convince people to switch away from using the Netscape portal site while Netscape only had to convince customers to stay. In addition, Netscape had another advantage that soon became apparent. Netscape originally had granted Yahoo! the rights to link to the Internet Directory button on the Netscape browser. In December of 1995 however, Netscape decided that they would rather have the button link to their own site and left Yahoo! on their own. In addition, Netscape had a lot of money to work with. They went through a very successful IPO in August on 1996 that had brought a great increase in cash flow to the company. They could afford to keep up with their high levels of spending to improve their site, and Yahoo! had to find a way to keep up. Another potential portal competitor was AOL. AOL had become a leading service provider for the home markets. They launched a widespread and very expensive marketing campaign in which they distributed free AOL CD-ROM discs to potential customers all across the country. AOL distributed their own browser with their internet service that was configured to open to the AOL home site. This gave AOL an advantage over Yahoo! as well, because while a person had to physically switch to the Yahoo! site, and AOL user was automatically taken to the AOL page. AOL had also gone through a successful IPO in 1995 and had extensive capital available to build their installed base and improve their portal site as well. The final competitor that Yahoo! had to look at in this space was Microsoft. Microsoft was in the process of developing and launching their own portal site. They also had a built in advantage, much like Netscape and AOL. They have developed the Internet Explorer browser that could be distributed with all new Windows systems. Much like Netscape’s browser, Internet Explorer was configured to open to the Microsoft home page. Microsoft also had the resources to become a major player. Microsoft had a huge cash base to work from, and thus also was considered a major competitor with Yahoo!. Search Engine Competitors The second set of competitors that Yahoo! faced came in the form of the start-up search engine companies such as Excite, Lycos and Infoseek. (See Exhibits 11-16) These were all start-up companies that had developed complex search algorithms to efficiently search the internet based on key words or phrases. Many of these companies were very well funded from top-tier venture capital firms, much like Yahoo!. In fact, several of these companies had already gone public and were enjoying the increased cash flow that came from their successful IPOs. These companies 6 Yahoo! 1996: Softbank Asks for a Strategic Stake STVP-1998-006 were increasing their efforts to build brand awareness and capture market share in the search market. Yahoo! offered a much different method of searching with their hierarchical file structure, however these companies still represented a threat. Many of the early web users had used Yahoo! to search for something if they sort of knew what they were looking for, but did not know the exact address. Now Yahoo! was loosing market share to these well-funded start-ups that allowed users to search the entire web using just keywords. Softbank and Masayoshi Son Softbank Corporation was a large Japanese holding company formed in 1981 by Masayoshi Son. The son of Korean immigrants, he moved to the United States in 1973 to study English. Son graduated from the University of California at Berkley in 1980 with a B.A. in Economics. After graduation, Son decided to move back to Japan where he started Softbank. Softbank started out selling various computer products, and soon became the largest distributor of packaged software and personal computer peripherals in Japan. Son quickly expanded his holdings, and in 1988 Softbank formed its first non-Japanese subsidiary, Softbank America. In 1990, Softbank formed a joint venture with Novell Inc, forming Novell Japan. This led to subsequent investments with companies such as Canon, Fujitsu, NEC, Sony and Toshiba. In 1994, Softbank embarked on a joint venture with Cisco along with 12 other Japanese firms, to form Nihon Cisco Systems. Later that year Softbank went public, listing on the Tokyo Stock Exchange. By 1996, Softbank had made significant investments into the world of multimedia, purchasing a majority share in the Ziff-Davis Publishing Company and by acquiring COMDEX and several other companies. Softbank reported worldwide revenues of over 171 trillion yen for FY 1995.6 (See Exhibit 4) Softbank and Their Interest in Yahoo! Softbank Corporation first started to show an interest in Yahoo! when, “Masayoshi Son learned of Yahoo! through Sequoia-he sat on the Board of Cisco Systems with Don Valentine, a Sequoia partner-and became intrigued with Yahoo!’s business.”7 Masayoshi Son was very interested in the possibilities the internet provided, and was intrigued by the unique position that was held by Yahoo! at the time. Softbank was “quietly and in some cases, not so quietly, building a portfolio of internet investments intended to guarantee the company a role of internet power broker. The strategy (was) based on three firm rules: invest early and often; don't invest in two companies that compete with each other; and look for synergies between different investments.”8 Softbank felt that Yahoo! could be a key component to their internet portfolio, and thus was eager to participate in Yahoo!’s second round of financing. 6 In 1996 $1:140 Yen 7 Reid, Architects of the Web 261 8 CNET News.com Tim Clark August 17, 1996 7 STVP-1998-006 Yahoo! 1996: Softbank Asks for a Strategic Stake As for Yahoo!, Softbank offered them much more than money. It was very difficult for US firms at the time to penetrate the Japanese market. Japan presented a very enticing market for Yahoo!, as Japan was very well connected to the internet and thus made it a strong candidate for Yahoo! expansion. However, David Filo was quick to point out that Yahoo! was a very personalized hierarchy system. They would need people that really knew the country and the culture well if they were going to make Yahoo! Japan a reality. Fortunately, Softbank was very well connected in Japan, and had the ability to significantly help Yahoo! in getting the project off the ground. Softbank also offered Yahoo! advantages outside Japan. The leverage of Softbank’s established worldwide sales force, which was already calling on advertisers for Softbank’s magazines and other internet holdings, meant Yahoo would get exposure to potential advertisers much more quickly that was possible if Yahoo! had to build its sales force from scratch. In addition, there could be increased exposure in Softbank’s family of computer-related publications and trade shows around the world. Softbank also had an established reputation that could lend credibility and bargaining power to Yahoo!’s position as a young company when dealing with advertisers and other internet partners. Masayoshi Son’s Request for Greater Ownership Like all deals that appear too good to be true, this one had a catch. Masayoshi Son said that he considered Softbank’s 5% stake in Yahoo! to be nothing more than an investment. If Softbank was going to help Yahoo! penetrate Japanese markets, Softbank and Yahoo! would have to become partners. This required that Softbank hold at least a 30% stake in Yahoo!. Son said that this was the minimum level at which he could consider Yahoo! a partner. This deal provided several benefits to Yahoo!. This would give them more than enough operating money until the upcoming IPO. They would be able to complete all of the projects that were planned and continue their aggressive marketing to build the Yahoo! brand. It also provided them the vehicle by which they could expand into Japan. Japan represented a giant potential market, and Softbank could give Yahoo! the opportunity to take advantage of it. Unfortunately there were also some big negatives, especially for the current majority stakeholders. The IPO was only a few months away, and Yahoo! was facing increased competition from competitors. While IPOs provided operating cash to the company and cash liquidity to present stockholders of the private company by allowing stock to be traded on public markets, it also provided a greater public awareness of the company. Yahoo’s biggest competitors such as Excite, Lycos, Infoseek and AOL had all gone public or were planning to do so in the coming months. Going public was a way for the company to legitimize itself in the eyes of the public, and Yahoo! could not afford to lose any ground to its competitors in name recognition or market share. In order to prepare for the IPO though, Yahoo! had to float at least 10% of its stock for the filing. This held important ramifications for the current Yahoo stakeholders regarding Softbanks’s bid for 30% ownership. Softbank’s share, combined with the 10% that needed to be floated, left 60% to be divided among the founders, VCs, current employees, and options for future employees. In order to accommodate Softbank’s request to increase its percentage ownership in Yahoo! and satisfy an initial public offerings general requirement for a float of at least 10%, Yang, 8 Yahoo! 1996: Softbank Asks for a Strategic Stake STVP-1998-006 Filo, and Sequoia Capital would have to sell their own shares in Yahoo! to Softbank. This was particularly difficult, since it meant giving up ownership, and potentially huge profits, as the IPO was only a few months away, and thus a chance to finally cash in on all of their hard work. In an October 1995 Red Herring interview, Yang said that, “I like to leverage strategic relationships for future financing, rather than raising money. Dave and I still have control of the company and that’s important.” If the Softbank deal were to go through, Jerry, Dave and Sequoia Capital would each be left with approximately a 17% share of the company. Pressure to Make Initial Public Offering While Yahoo! had received first round funding from Sequoia, a second-round from assorted partners, and had offers for substantially more funding from Softbank, the public markets offered the possibility of even greater capital with which to grow the business. Working with Goldman, Sachs & Co., Yahoo! was preparing an IPO prospectus that it planned to file in March or April of 1996. An initial public offering would provide Yahoo! a number of benefits. First it would increase the equity capital available. Second, it would create a common market for the company’s common stock, allowing the company to access the resources of the public equity market. The public market would also provide liquidity for Yahoo!’s existing shareholders, by creating a way for them to trade their shares for cash Additionally, an IPO would provide Yahoo! with publicity, visibility and credibility, which would be important for Yahoo! to compete effectively against competitors who were already public or planning to file their own IPOs. Finally, Yahoo! was trying to improve its market position relative to the other internet search and internet media companies with which it competed. Yahoo! planned to use the capital generated from an IPO to fund a number of strategic initiatives. First, money would be used to fund Yahoo!’s participation in Netscape’s “Premier Provider” program. Second, in order to increase its revenues and grow its brand, Yahoo! had to expand sales and marketing operations. Third, in order to provide competitive and innovative services to its users, Yahoo! had to continue new product development. Yahoo!’s business also required hardware to operate, which entailed developing an improved networking and computer infrastructure. Yahoo! was also considering entry into the e-commerce market. They had had preliminary talks with Visa about developing a joint venture for a Yahoo! marketplace where they could sell a wide variety of products on-line. While these things all took lots of money to develop, they were essential to Yahoo!’s continued growth. The Softbank Proposal Masayoshi Son had returned to California to watch a golf tournament that was being held at the nearby Pebble Beach golf club. While in town, he engaged in several negotiation sessions with Yahoo!, during which both sides agreed that a fair price for a 30% share in Yahoo! was $63.75 million. However, the majority shareholders in Yahoo! had yet to decide whether they wanted to sell or not. Michael Moritz took this proposal back to Yang and Filo to try to convince them to sell some of their shares to Softbank. He did not really want to sell any of Sequoia’s shares in Yahoo!, and thought it would be better for Jerry and Dave to sell some of theirs. He reasoned: 9 STVP-1998-006 Yahoo! 1996: Softbank Asks for a Strategic Stake I thought Yahoo! was a good investment. However, it didn’t really matter to me financially if Yahoo! succeeded or failed. I wasn’t as dependent, in the grand scheme of things, as I had lots of other stuff to fall back on if Yahoo! didn’t work out. Jerry and David didn’t have anything to fall back on, so why not have them take some money off the table. They would still keep most of the ownership that that they had, but take something off the table, so that you can continue to afford to take great risks with the company, rather than having 100% of your net worth tied up in Yahoo!. Moritz then cited several examples of entrepreneurs had had become too cautious in their business because everything they had was tied up in the company. I gave them this example of this guy who thought he was on to the next great thing, a guy early in the history of the video game business. Someone offered to buy some of his shares but he refused. He was sure that his company was on the eve of an IPO and he didn’t want to lose any more equity. Unfortunately the IPO never happened and the company went bankrupt and the founder lost everything. I told Jerry and Dave, ‘Don’t let that happen to you.’ The second example I gave them was of Scott Cook from Intuit. He took some money off the table just before an IPO because he felt that he was getting too cautious in the way that he was running Intuit. He found that he had 100% of his net worth was wrapped up in the company and that it was making him too risk averse to make the best decisions.9 Yang and Filo were not convinced. They had never founded Yahoo! just to make money, so they were not really worried about losing everything. The them, the experience alone made the whole business worthwhile. Yang and Filo were also extremely concerned with ensuring that their interests remained in line with Sequoia’s interests. They wanted to make sure that everyone was working toward the same goals. With that in mind, Jerry and Dave told Moritz that they would not sell any of their shares unless Sequoia also sold some of theirs. Decision Time As the time neared for Yahoo! to decide on whether to file an IPO, several decisions needed to be made. Masayoshi Son was anxious to hear an answer to his proposal, and in the fast paced world of internet development, it was important that Yahoo! not lose any time. The first decision was: should Yahoo! accept an offer from Softbank? If so, how much? If they wanted to really gain Softbank as a partner, they would need to sell 30% of the company to the Japanese conglomerate. Jerry, Dave and Michael Moritz also had to decide if they were willing to sell their shares, and if so how many shares each of them was willing to sell. This deal would give Yahoo! more than enough money to last until the IPO and would give them access to significant contacts in the Japanese market that were necessary if they were to develop Yahoo! Japan. However the deal could end up costing the founders and Sequoia a lot of money, personally. One option was for Yahoo! to try to sell a smaller percentage to Softbank and try to 9 Moritz, Michael, personal interview, November 10, 1998. 10 Yahoo! 1996: Softbank Asks for a Strategic Stake STVP-1998-006 go at the Japanese market alone. A second possibility involved shopping the market to see what other Japanese investors were available. Perhaps they could find another investor that would give Yahoo! a more favorable deal. The second decision was regarding the possibility of an upcoming IPO. What was an appropriate offering price for the Yahoo! stock? Demand appeared to be relatively high, so one option was to price the stock at a high opening value, to try to get the most money possible for the company. Another option was to price the stock below the expected price, which could lead to investor goodwill and could make Yahoo! look better in the eyes of the public as its stock price increased. How might these alternatives be viewed by potential stockholders, compared with the IPO performances of Yahoo!’s competitors? Jerry and Dave were facing some of the toughest decisions of their entrepreneurial careers. What should they do? 11 STVP-1998-006 Yahoo! 1996: Softbank Asks for a Strategic Stake Exhibit 1 Profiles of Selected Yahoo! Employees and Partners Michael Moritz, Partner, Sequoia Capital Moritz was a general partner at Sequoia Capital since 1988 and focused on information technology investments. Moritz served as a Director of Flextronics International and Global Village Communication, as well as several private companies. Between 1979 and 1984, Moritz was employed in a variety of positions by Time, Inc. Moritz had an M.A. degree in history from Oxford University and an MBA from the Wharton School. Jerry Yang, Chief Yahoo! and Director Yang was a Taiwanese native who grew up in San Jose, CA. He co-created the Yahoo! online guide in April 1994 and co-founded Yahoo!, Inc. in April 1995. Yang took a leave of absence from Stanford University’s electrical engineering Ph.D. program and received his BS and MS degree in electrical engineering from Stanford University. David Filo, Chief Yahoo! Filo, a native from Moss Bluff, LA., co-created the Yahoo! online guide in April 1994, and took a leave of absence from Stanford University's electrical engineering Ph.D. program in April 1995 to co-found Yahoo!, Inc. Filo received a BS degree in computer engineering from Tulane University and a MS degree in electrical engineering from Stanford University. Masayoshi Son, President and Chief Executive Officer for Softbank Son founded Softbank Corporation in 1981, and serves as its President and CEO. He was born in Tosu City, Saga Prefecture, Japan in 1957 and earned a B.A. in economics from the University of California at Berkeley in 1980. Prior to founding Softbank, Son invented and patented a multi- lingual pocket translater, which later became the Sharp Wizard. Softbank is the largest Japanese distributor of packaged software and peripherals for personal computers. In 1988, Masayoshi Son established its first non-Japanese subsidiary, Softbank America, to represent all of Softbank’s dealings in North America. Tim Koogle, President and Chief Executive Officer Koogle had over 14 years of experience in executive management positions within the high technology industry. Prior to joining Yahoo!, Koogle was President of Intermec Corporation, a Seattle-based manufacturer of automated data collection and data communications products, from 1992 to 1995. During that time, he also served as corporate Vice President of Intermec’s parent company, Western Atlas. Prior to Intermec, Koogle spent almost nine years with Motorola, Inc., where he held a number of executive management positions. Koogle holds a BS degree in Mechanical Engineering from the University of Virginia and MS and Engr. D. degrees in mechanical engineering from Stanford University. Jeffrey Mallett, Chief Operating Officer Jeff's 10-year track record in the consumer high tech industry included positions with both start- ups and major corporations. Prior to joining Yahoo!, Jeff was Vice President and General Manager of Novell's Word Perfect consumer division, from 1993 to 1995. Prior to that, Mallet was a member of the founding team of Reference Software International where he held various positions from 1988 to 1992, including Vice President, Sales and Marketing. From 1985 to 1987, Mallet held the position of Director, Sales and Marketing, at IPT Corp., a privately held telecommunications company. Mallet holds a degree in Business Administration from Santa Rosa College. 12 Yahoo! 1996: Softbank Asks for a Strategic Stake STVP-1998-006 Exhibit 1- cont. Profiles of Selected Yahoo! Employees and Partners Gary Valenzuela, Senior V.P. of Finance & Administration and Chief Financial Officer Valenzuela had over 16 years of experience in finance within the high technology industry. Prior to joining Yahoo!, Valenzuela was CFO, Senior Vice President of Finance & Administration, and Chief Financial Officer of TGV Software, Inc. Previous to TGV, Valenzuela held the position of Senior Vice President of Finance and Administration for Pyramid Technology Corporation. Valenzuela was a Certified Public Accountant and held a BS degree in Business Administration and Accounting from San Jose State University. Farzad Nazem, Senior V.P. of Product Development & Operations, Chief Technical Officer Nazem had over 11 years of experience in executive and technical positions. Prior to Yahoo!, Nazem held the position of Vice President of the Media and Web Server Division for Oracle Corporation. Previously, Nazem held various technical positions for SYDIS, Inc. and Rolm Corporation. Farzad held a BS in Computer Science from California Polytechnic State University. Anil Singh, Vice President of Advertising Sales Singh had over 10 years of sales experience developing business and managing sales operations for high tech start-ups and computer industry corporations involved with the PC, networking and communications revolution. Prior to joining Yahoo!, Singh was Vice President of Sales for Socket Communications, a mobile computing company, where he built U.S. sales channels and key OEM partnerships. Singh had also held executive sales positions with Novell, Mountain and Acer, and Convergent Technologies. Singh held a BS degree in Computer Science from the University of London. Timothy Brady, Vice President of Production As Yahoo!’s third employee, Brady played the role of managing all marketing, operation and business development to launch Yahoo! commercially. Prior to joining Yahoo!, Brady spent three years with Motorola’s Semiconductor Division in Tokyo as product marketing manager of the 16- bit microcontroller product line. Tim held a Master of Business Administration degree from Harvard University and a B.S. degree in electrical engineering from Stanford University. Karen Edwards, Vice President of Brand Marketing Edwards joined Yahoo! in January 1996 and formed the brand management team responsible for advertising, research, promotions and public relations for Yahoo!'s global brand and programming. Prior to Yahoo!, Karen worked at Twentieth Century Fox Home Entertainment, as a director of business operations in France, Spain and Italy, and director of marketing for North America. Her earlier experience includes brand management at the Clorox Company, account management at BBDO for Apple Computer, and public affairs at Chevron USA. She is a graduate of the Harvard Business School and Stanford University. Srinija Srinivasan, Vice President, Editor-in-Chief Srinija managed Yahoo!’s team of cataloguers and was responsible for the design and maintenance of Yahoo!’s overall classification and organization scheme. Prior to joining Yahoo!, Srinija was involved with the Cyc Project, a ten-year artificial intelligence effort to build a database of human commonsense knowledge, via two companies Microelectronics and 13 STVP-1998-006 Yahoo! 1996: Softbank Asks for a Strategic Stake Computer technology Corporation (MCC) and Cycorp. Srinija held a B.S. with distinction from Stanford University in Symbolic Systems. 14 E-Commerce Partnerships at Yahoo! STVP-1998-003 Exhibit 2 Yahoo!’s Consolidated Balance Sheets December 31, 1995 ASSETS Current assets: Cash and cash equivalents $ 5,297,000 Accounts receivable, net of allowance of $82,000 815,000 Total current assets 6,112,000 Property and equipment, net 186,000 Total assets $ 6,298,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 20,000 Accrued expenses and other current liabilities 520,000 Deferred revenue 174,000 Due to related parties 134,000 Total current liabilities 848,000 Shareholders’ equity: Convertible Preferred Stock, $0.001 par value; none and 7,738.072 issued and outstanding 8,000 Preferred Stock, $0.001 par value; none issued and outstanding -- Common Stock, $0.001 par value; 26,577,175 and 10,252,726 issued and outstanding -- Additional paid-in capital 6,076,000 Accumulated deficit (634,000) Total shareholders’ equity 5,450,000 Total liabilities and shareholders’ equity $ 6,298,000 15 STVP-1998-003 E-Commerce Partnerships at Yahoo! Exhibit 3 Yahoo’s Consolidated Statement of Operations March 5, 1995 (Inception) to December 31, 1995 Net revenues $ 1,363,000 Cost of revenues 183,000 Gross profit 1,180,000 Operating expenses: Sales and marketing 738,000 Product development 242,000 General and administrative 880,000 Total operating expenses 1,860,000 Loss from operations (680,000) Investment income, net 46,000 Minority interests in operations of consolidated subsidiaries  Net loss $ (634,000) Net loss per share $ (0.03) Weighted average common shares and equivalents 22,541,000 16 E-Commerce Partnerships at Yahoo! STVP-1998-003 Exhibit 4 Softbank Corporation Financial Summary Year ending March 1996 Sales (Y mil) 171,101.0 Net Income (Y mil) 5,794.0 Profit Margin 3.4% Earnings per share (Y) 86.96 Dividends per share (Y) 5.89 Number of share outstanding (thousands) 68,020 17 STVP-1998-003 E-Commerce Partnerships at Yahoo! Exhibit 5 Netscape’s Consolidated Balance Sheets December 31, 1995 ASSETS Current assets: Cash and cash equivalents $ 55,172,000 Short-term investments 129,426,000 Accounts receivable, net of allowance of $8,335,000 in 1997 and $4,896,000 in 1996 153,191,000 Deferred tax assets 37,336,000 Other current assets 19,961,000 Total current assets 395,086,000 Property and equipment, net 131,093,000 Long-term investments 76,698,000 Other assets 29,943,000 Total assets $ 632,820,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 40,081,000 Accrued compensation and related liabilities 23,193,000 Other accrued liabilities 18,266,000 Income taxes payable 2,709,000 Deferred revenue 106,170,000 Accrued merger related charges 8,911,000 Accrued restructuring charges 3,685,000 Current portion of long-term obligations and installment notes payable 535,000 Total current liabilities 203,550,000 Long-term obligations and installment notes payable 215,000 Commitments and contingencies Shareholders’ equity: Preferred Stock, $0.0001 par value; issuable in series; 5,000,000 shares authorized; no shares issued and outstanding  Common Stock, $0.0001 par value; 200,000,000 shares authorized; 97,984,300 and 87,940,920 issued and outstanding 10,000 Additional paid-in capital 549,186,000 Deferred compensation (3,671,000) Accumulated deficit (119,201,000) Unrealized gain on available-for-sale investments 3,433,000 Accumulated translation adjustment (702,000) Total shareholders’ equity 429,055,000 Total liabilities and shareholders’ equity $ 632,820,000 18 E-Commerce Partnerships at Yahoo! STVP-1998-003 Exhibit 6 Netscape’s Consolidated Statement of Operations Year Ended December 31, 1995 Revenues: Product revenues $ 77,489,000 Service revenues 7,898,000 Total revenues 85,387,000 Cost of revenues: Cost of product revenues 9,177,000 Cost of service revenues 2,530,000 Total cost of revenues 11,707,000 Gross profit 73,680,000 Operating expenses: Sales and marketing 43,679,000 Research and development 26,841,000 General and administrative 11,336,000 Property rights agreement and related charges 500,000 Purchase in-process research and development  Merger related charges 2,033,000 Restructuring charges  Total operating expenses 84,389,000 Operating income (loss) (10,709,000) Interest and other income, net 4,594,000 Equity in net losses of joint ventures  Income (loss) before income taxes $ (6,115,000) Provision (benefit) for income taxes 498,000 Net income (loss) (6,613,000) Basic income (loss) per share $ (0.16) Diluted income (loss) per share $ (0.16) Shares used in computing basic income (loss) per share 40,627,000 Shares used in computing diluted income (loss) per share 40,627,000 Share price (Dec 29, 1995) $ 139.00 19 STVP-1998-003 E-Commerce Partnerships at Yahoo! Exhibit 7 AOL’s Consolidated Balance Sheets June 30, 1995 ASSETS Current assets: Cash and cash equivalents $ 45,877,000 Short-term investments in marketable securities 18,672,000 Trade accounts receivable 32,176,000 Other receivables 11,381,000 Prepaid expenses and other current assets 25,527,000 Total current assets 133,633,000 Property and equipment, net 70,919,000 Other assets: Product development costs, net 18,949,000 Deferred subscriber acquisition costs, net 77,229,000 License rights, net 5,579,000 Other assets 9,121,000 Deferred income taxes 35,627,000 Goodwill, net 54,356,000 Total assets $ 405,413,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Trade accounts payable $ 84,640,000 Other accrued expenses and liabilities 23,509,000 Deferred revenue 20,021,000 Accrued personnel costs 2,863,000 Current portion of long-term debt 2,329,000 Total current liabilities 133,362,000 Long term liabilities: Notes payable 17,369,000 Deferred income taxes 35,627,000 Other liabilities 2,243,000 Total liabilities 188,601,000 Shareholders’ equity: Common Stock, $0.01 par value; 100,000,000 shares authorized; 76,728,268 issued and outstanding at June 30, 1995 767 Additional paid-in capital 252,668,000 Accumulated deficit (36,623,000) Total shareholders’ equity 216,812,000 Total liabilities and shareholders’ equity $ 405,413,000 20 E-Commerce Partnerships at Yahoo! STVP-1998-003 Exhibit 8 AOL’s Consolidated Statement of Operations Year Ended June 30, 1995 Online service revenues $ 344,309,000 Other revenues 49,981,000 Total revenues 394,290,000 Costs and expenses: Cost of revenues 229,724,000 Marketing 77,064,000 Product development 14,263,000 General and administrative 42,700,000 Acquired research and development 50,335,000 Amortization of goodwill 1,653,000 Total costs and expenses 415,739,000 Income (loss) from operations (21,449,000) Other income (expense), net 3,074,000 Merger expenses (2,207,000) Income (loss) before provision for income taxes (20,582,000) Provision for income taxes (15,169,000) Net income (loss) $ (35,751,000) Net income (loss) per share $ (0.51) Weighted average shares outstanding 69,550,000 Share price (Dec. 29, 1995) $ 37.50 21 STVP-1998-003 E-Commerce Partnerships at Yahoo! Exhibit 9 Microsoft’s Consolidated Balance Sheets December 31, 1995 ASSETS Current assets: Cash and short-term investments $ 8,966,000,000 Accounts receivable 980,000,000 Other 427,000,000 Total current assets 10,373,000,000 Property , plant, and equipment 1,465,000,000 Equity investments 2,346,000,000 Other assets 203,000,000 Total assets $ 14,387,000,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 721,000,000 Accrued compensation 336,000,000 Income taxes payable 466,000,000 Unearned revenue 1,418,000,000 Other 669,000,000 Total current liabilities 23,456,000 Minority interest  Put warrants  Commitments and contingencies Shareholders’ equity: Convertible preferred stockshares authorized 100,000,000 and 0; shares issued and outstanding 13,000,000 and 0 980,000,000 Common Stock and paid-in capitalshares authorized 4,000,000,000; shares issued and outstanding 1,194,000,000 and 1,204,000,000 4,509,000,000 Retained earnings 5,288,000,000 Total shareholders’ equity 10,777,000,000 Total liabilities and shareholders’ equity $ 14,387,000,000 22 E-Commerce Partnerships at Yahoo! STVP-1998-003 Exhibit 10 Microsoft’s Consolidated Statement of Operations Year Ended December 31, 1995 Revenues $ 5,937,000,000 Operating expenses: Cost of revenue 877,000,000 Research and development 860,000,000 Sales and marketing 1,895,000,000 General and administrative 267,000,000 Total operating expenses 3,899,000,000 Operating income 2,038,000,000 Interest income 191,000,000 Other expenses (62,000,000) Income before income taxes 2,167,000 Provision for income taxes 714,000,000 Net income $ 1,453,000,000 Preferred stock dividends  Net income available for common shareholders 1,453,000,000 Earnings per share $ 1.16 Weighted average shares outstanding 1,254,000,000 Share price (Dec. 29, 1995) $ 87.75 23 STVP-1998-003 E-Commerce Partnerships at Yahoo! Exhibit 11 Excite’s Consolidated Balance Sheets December 31, 1995 ASSETS Current assets: Cash and cash equivalents $ 760,000 Short-term investments 358,000 Restricted investments 452,000 Accounts receivable, net 338,000 Prepaid expenses and other current assets 207,000 Total current assets 2,115,000 Property and equipment, net 1,450,000 Intangible assets, net 190,000 Other assets 46,000 Total assets $ 3,801,000 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Notes payable, current portion $ 899,000 Accounts payable 1,111,000 Accrued compensation 428,000 Capital lease obligations, current portion 213,000 Deferred revenues 105,000 Other accrued liabilities 237,000 Total current liabilities 2,993,000 Notes payable 587,000 Capital lease obligations 408,000 Commitments and contingencies Shareholders’ equity: Redeemable convertible preferred stock, no par value; issuable in series: 4,000 shares authorized at December 31, 1995; 1,890 shares issued and outstanding at December 31, 1995. 3,847,000 Common Stock no par value; authorized25,000 shares; Issued and outstanding2,448 shares at December 13, 1995. 3,530,000 Deferred compensation (631,000) Unrealized gain (loss) on available-for-sale investments 152,000 Accumulated deficit (7,085,000) Total shareholders’ equity (net capital deficiency) (4,034,000) Total liabilities and shareholders’ equity $ 3,801,000 24 E-Commerce Partnerships at Yahoo! STVP-1998-003 Exhibit 12 Excite’s Consolidated Statement of Operations Year Ended December 31, 1995 Revenues $ 953,000 Cost of revenues 228,000 Gross profit 725,000 Operating expenses: Research and development 2,810,000 Sales and marketing 1,648,000 Distribution license fees  General and administrative 2,326,000 Charge for purchased in-process technology 331,000 Total operating expenses 7,115,000 Operating loss (6,390,000) Equity share of losses of affiliated company  Interest income (expense) and other (45,000) Net loss $ (6,435,000) Basic and diluted net loss per share $ (0.58) Shares used in computing net loss per share 11,070,000 Shares offered at Apr. 1996 IPO 2,000,000 IPO share price (Apr. 1996) $ 17 25 STVP-1998-003 E-Commerce Partnerships at Yahoo! Exhibit 13 Lycos’ Consolidated Balance Sheets July 31, 1995 ASSETS Current assets: Cash and cash equivalents $ 446,447 Accounts receivable 5,000 Total current assets 451,447 Property and equipment, less accumulated depreciation 77,708 License agreement, net 787,500 Total assets $ 1,316,655 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 44,074 Accrued expenses 6,355 Due to related parties 71,607 Total current liabilities 122,036 Deferred income taxes 50,000 Shareholders’ equity: Common Stock, $0.01 par value; 10,000,000 shares issued and outstanding at July 31, 1995 100,000 Additional paid-in capital 1,237,000 Deferred compensation (87,000) Accumulated deficit (105,381) Total shareholders’ equity 1,144,619 Total liabilities and shareholders’ equity $ 1,316,655 26 E-Commerce Partnerships at Yahoo! STVP-1998-003 Exhibit 14 Lycos’ Consolidated Statement of Operations Inception(June 1, 1995) to July 31, 1995 Net revenues $ 5,000 Cost of revenues 27,576 Gross profit (22,576) Operating expenses: Research and development 15,940 Sales and marketing 29,530 General and administrative 37,335 Total operating expenses 82,805 Operating loss (105,381) Investment income, net 79,000 Net loss $ (105,381) Basic and diluted net loss per share $ (0.01) Shares used in computing basic and diluted net loss per share 11,012,764 Shares offered at Apr. 1996 IPO 3,000,000 IPO share price (Apr. 1996) $ 16.00 27 STVP-1998-003 E-Commerce Partnerships at Yahoo! Exhibit 15 Infoseek’s Consolidated Balance Sheets December 31, 1995 ASSETS Current assets: Cash and cash equivalents $ 1,129,096 Short-term investments 1,129,096 Accounts receivable, less allowance for doubtful accounts of $41,500 in 1995 498,567 Other current assets 110,901 Total current assets 2,235,435 Property and equipment, net 2,812,557 Purchased technology, net of accumulated amortization 74,632 Total assets $ 5,122,624 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Accounts payable $ 1,222,585 Accrued payroll and related expenses 70,768 Accrued royalties 35,736 Other accrued liabilities 575,767 Short-term obligations 238,453 Total current liabilities 2,143,309 Long-term obligations 687,596 Shareholders’ equity: Convertible preferred stock, no par value; Issued and outstanding shares -- 15,580,294 in 1995 6,694,544 Common stock, no par value: Issued and outstanding shares -- 4,000,011 in 1995 2,410,333 Accumulated deficit (4,833,008) Deferred compensation (2,080,300) Notes receivable from shareholders (49,850) Total shareholders’ equity 2,141,719 Total liabilities and shareholders’ equity $ 5,122,624 28 E-Commerce Partnerships at Yahoo! STVP-1998-003 Exhibit 16 Infoseek’s Consolidated Statement of Operations Year Ended December 31, 1995 Total revenues $ 1,032,000 Cost of revenues 614,000 Gross profit 418,000 Operating expenses: Research and development 1,175,000 Sales and marketing 1,488,000 General and administrative 1,148,000 Recurring and other charges  Total operating expenses 3,811,000 Operating loss (3,393,000) Investment income, net 97,000 Net loss $ (3,296,000) Basic and diluted net loss per share $ (0.21) Shares used in computing basic and diluted net loss per share (pro forma in 1995) 15,535 Shares offered at June 1996 IPO 3,450,000 IPO share price (June 1996) $ 12 29


































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































































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