[Chapter 17: Agreement Reached]
Less than five minutes passed. Maybe because they anticipated the reactions from people outside or because the agreement had already been finalized, the big shots inside suddenly quieted down. Then, laughter and casual chatter resumed. No one could have imagined that just minutes ago, these same people had been arguing heatedly.
Soon after, Michael Moritz came out of the conference room. Clearly, the errand was his to run. Considering the others inside were all company heads and he was the only second-generation core member still being groomed, who else could it be?
"All right, folks, the team inside has finished their discussions. The results are in -- this is the fastest investment decision I've ever witnessed. Yahoo really broke new ground with this one."
"Oh, that's great! We all want a good outcome, right?" David replied with a smile.
"Michael, why are you the one running errands?" John joked from the side.
"Haha..."
As expected, hearing John's playful jab and seeing Moritz's helpless, speechless look made everyone burst into laughter. Soon after, they all went back inside the small conference room.
---
"Welcome back, guys. You're lucky; we've agreed in principle to your financing plan," said Intel's CEO Andy Grove.
Jerry Yang and others were visibly excited.
"Okay, guys, I haven't finished yet. We agreed in principle, but we have some differences regarding the equity distribution and Yahoo's valuation. So, we need to negotiate a bit.
First, the $500 million valuation is too high. Our valuation is $350 million.
Second, 20% equity is too low. We want more shares -- at least 30%.
Lastly, if the financing succeeds, we'll all fully support Yahoo's rise to becoming a major internet powerhouse.
Alright, take some time to discuss," Grove said as he led the way out of the conference room.
Well, now it was the big shots' turn to leave, leaving Leighton and the others inside the room, exchanging looks.
---
"$350 million is too low, and we can't give away too much equity. If we gave away too much in the first round, who knows what'll happen in the second round? After two rounds of funding, our company might not even belong to us anymore.
If we do give away a lot of shares, we need to set some restrictions -- a portion of shares could have dividend rights without voting rights, to ensure control over Yahoo.
We definitely don't want to end up like Steve Jobs at Apple, getting kicked out.
Also, about their two points, it's clear the valuation is still negotiable. They actually care more about equity. I suspect they want more shares to be distributed; that's their real goal."
John laid out his thoughts first. After all, he had seen too many founders forced out of their own companies.
Following John's words, Jerry, David, and the others nodded in agreement. This was before they made it big, so everyone carefully weighed their options, setting various conditions based on the general framework.
Once they had a framework, conditions were easy to set -- what's dangerous is not thinking ahead. After a few demands were put forward, they reached a consensus.
In the future, once Yahoo went public, Jerry Yang and the other founders quickly stepped back from management -- partly because internal boardroom conflicts limited their control, and partly due to Silicon Valley's corporate culture.
Many founders cashed out large sums and transitioned into venture capital roles, leaving day-to-day operations to professional managers.
Famous examples include the founders of Netscape and Yahoo themselves, who established venture firms in Silicon Valley.
Of course, some were smarter and protected their control when raising funds -- Google and Facebook's founders exemplified this.
They set clever terms during funding rounds, ensuring they retained control despite holding fewer shares. Their boardroom influence was dominant.
John wanted to emulate those companies, keeping control firmly in the hands of the core founders.
---
As expected, when the negotiation heating up, John stayed on the sidelines while Jerry Yang and Tim Draper took the lead.
One side pushed for a lower valuation but more equity, while the other wanted to keep the valuation high and limit equity dilution. It was quite lively.
Eventually, they reached a valuation agreement at $400 million, then the equity issue was addressed.
The investors wanted at least 30% equity; Jerry and his team thought that was too much and only agreed to 20%. Jerry then proposed a split of voting versus non-voting shares, agreeing that 20% would have voting rights and 10% would not. That sealed the deal for a $100 million funding round.
A bit more equity was contributed by Jerry Yang and David Filo themselves -- each giving up an additional 2.5% shares, cashing out $10 million to improve their living situations. After all, they had been students and struggled before.
This extra share was non-voting.
The 2.5% shares went to Silicon Valley venture capital giants Kleiner Perkins Caufield & Byers (KPCB) and Sequoia Capital.
John, familiar with later developments, refused to cash out and preferred to seek bank loans instead -- that was his mindset.
...
In the end, five investment firms each poured in $20 million for 5% of the company, with 4% being voting shares.
Meanwhile, KPCB and Sequoia got 7.5% shares, paying an extra $10 million to Jerry Yang and David Filo.
John's stake was diluted to 15%, Zach Johnson held 3.5%, Jerry Yang 27.5%, and David had 24%.
With everything finalized, Zach represented Yahoo and the venture capital legal teams drafted the financing documents. Jerry represented Yahoo, and the investors' representatives signed off, guaranteeing the $100 million within three days.
At the same time, they agreed to send people to Yahoo's board and promised to aid Yahoo's growth.
For example, America Online committed to helping Yahoo establish a free personal email system, while the other firms would provide support in human resources and technical talent -- one of Yahoo's biggest priorities.
---
With the signing, the Yahoo financing was formally complete, and applause filled the small conference room.
Outside in the parking garage, staff erupted in cheers, especially Yahoo employees.
As the group left the conference room, everyone in the garage stood up and watched.
Jerry Yang stepped forward.
"Everyone, I'm proud to announce the company's valuation is now $400 million, with $120 million raised, including $100 million for company development and $20 million cashed out. The agreement is official."
No sooner had Jerry finished than the crowd cheered wildly.
"Also, for the ten Yahoo employees, after discussion among the founders, 4% equity was set aside, giving each employee 0.4% shares. It's not much yet, but I hope everyone understands and keeps working hard."
This was the previously agreed distribution -- a total of 5% employee shares, with Tim Koogle getting 1%, and the rest split evenly among employees.
Originally, they planned to wait until the next funding round to distribute shares, but John thought that if the next round was an IPO, it made sense to assign shares now.
As expected, upon Jerry's announcement, the ten Yahoo employees all cheered and shouted, knowing their shares were already worth over a million dollars based on the current valuation, and confident it would only rise.
Naturally, the other employees from various companies looked on with envy.
Of the 5% employee shares, John contributed 1%, Jerry and David each gave 2%, per their suggestion.
So, finally, shares stood at: John 14%, Jerry Yang 25.5%, David Filo 22%, Zach Johnson steady at 3.5%, employees 5%, and venture capitalists holding 30%.
---
Shortly after Jerry's announcement, a huge banner was displayed on Yahoo's homepage, visible to everyone surfing the internet:
"Warm congratulations on Yahoo's successful first round of financing -- valued at $400 million with $120 million raised. Yahoo will continue to get better and better!!!"
With the banner up, news of the financing spread instantly, making Yahoo famous across the United States.
*****
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