Parenting Magazine: March 1986 1. Opportunity Recognition: How do you assess the business idea? 2.

How much money does Wolaner need? From whom should it be raised? 3. Is the proposed deal with time reasonable? What changes, if any, should be made to the terms? 4. What should Wolaner do?

The Time Line 1975-1985: Wolaner works in magazine publishing industry, ultimately as a publisher 2/85: Quits job, starts to raise seed capital Sells approx. 34.5% of company for $175,000 (valuation: $540,000) Direct mail market test (good results), Wolaner gets salary First contact with Time (see release p. 6) Out of money Meeting with Time senior executives; term sheet

8/85: 1/86: 2/86: 3/86:

What kind of investor would she prefer? Strategic or venture capitalist?

Management control, strategic direction

Goal of investment, conflicts of interest

Value added: experience, knowledge, support

Valuation of company Time Inc.: $3.2 MM + $1.8 MM = $5MM for 45% (or $5.5MM for 49%) = between $11 and $13MM VC valuation: $6.2MM EBIT at Y5 X 10 = $62MM Discount at 50% = approx. $8MM ROI?: If the company is worth $62MM at Y5: Time Inc has $28MM investment (@ 45%) or $30MM (@ 49%) = approx. 43% return. If VCs took 5/8 = 62.5 % of company, they have $38.75MM = approx. 50% return. If VCs wanted a 60% return, would need 10 times $ in 5 years, or $50mm. Would want c. 80% of company today.

The Term Sheet: Is the deal offered by Time Inc reasonable?

1. The Investment: Is this a $5MM/$5.5MM Investment?: $3.2 MM in May 86; $1.8 MM at July 31, 87 if benchmarks met. D. Financials contains special tax allocations what does that mean? If the benchmarks are not met, what happens? Time has option: - Wolaner buys Time out in 30 days. - If not, Time can sell or liquidate the business - If it liquidates, W gets trademark and the idea for the magazine - If Time invests $1.8 anyway, it takes management control and ownership goes up to 65% (taken out of Ws equity). What are the benchmarks? What incentives do they create?

2. Management/Governance Wolaner runs the business. Management Committee: 3 Wolaner, 2 Time Unanimous vote required for major items example of which are listed.

3. Exit/Dissolution Divorce Wolaner: locked in until 12/87, after which she can resign and get what? 18 months + $150K per point AND 5-year non-compete Time: Can sell at 9/87 if benchmarks not met. Buy-Out: Time has 6-month buy-out option (7/1/89 12/31/89) Starts approx. 3 years after investment significance? She gets what? FMV [XXX - .75(Times investment)] x 51% If XXX = EBIT X 10 $6.9MM 3.75MM = 3.15 X 51% = $1.6 MM $10MM 3 .75MM = 6.25 X 51% = $3.18MM $20MM 3.75MM = 16.25 X 51% = $8.3 MM $30MM 3.75MM = 26.25 X 51% = $13.4MM AND she stays on as publisher for 18 months. Shotgun: If no buyout, 3 months later Time can initiate it. How does it work? If Time initiates, they set a price and she has 120 days to buy them out for cash, or be bought out at their price. If she says she will buy them out and doesnt, the other party gets a 20% discount off the price. AND if Time shoots the gun, she stays on as publisher for 12 months.

What should Wolaner do? How would you advise her? - Whats her best alternative deal? - What kind of relationship does this term sheet suggest? Does she want to do business with Time? - Does she need the entire $5MM now? - If she continues to negotiate the term sheet, what terms must be renegotiated for a minimum acceptable deal?