Honest Tea

Corporate Finance and Public Policy

 Class Vote

• Should Goldman take money from the VC firm?

or

• Should Honest Tea continue to pursue angel

financing?
Is the Market Attractive?

• Market for “ready to drink teas” growing rapidly

• 9% from ’98 to ’99 (page 2)

• Bottled water market growing much faster

• See Exhibit 1
 Is Honest Tea a
Social Venture?
• Health Benefits of Tea vs. Carbonated Soft Drinks
and Alcohol

• Low Calories

• High in Antioxidants

• Organic Ingredients
 Other “Social” Aspects
• “Honest” Packaging

• Cultural Authenticity

• Socially Responsible

• Award for Best Sustainable Practices

• Statement of Social and Environmental Responsibility

• Exhibit 3

• Promote intl. standards for labor and environment

• Preference to economically disadvantaged communities

Other Social Aspects (cont.)
• Partnerships with minority tea estates

• Black South Africans

• Women-owned companies on Indian reservations

• Owner’s association with Social Investment

• Goldman was former VP of Calvert Social

Investment Fund

• socially responsible mutual funds

Characteristics of Market

• Large and growing quickly

• Barriers to Entry

• Brand

• Taste and Quality

 What has Honest Tea done
right?

• Built brand with limited capital outlay

• Secured free advertising - media coverage

• Low cost direct marketing

 Potential Expansion
Strategy?
• Regional

• firm up local presence and then sell to larger

beverage company

• National

• would require different type of marketing

• would require national distribution

What is money needed for?

financing losses!
• Primarily overhead

• Gross Margins expected to be large

• Over next two years, about $3M will be spent on

marketing/promotions and another $3M on salaries

• Bottling plant efficiencies may also be required

 Projections

• Projecting annual sales of $9M in 2001 and $16.9M

in 2002 (Exhibit 11)

• numbers appear to be reasonable

• given market growth

Financing Strategy to date

• Initial money from founders (Goldman and

Nalebuff)

• Then money was raised from family and friends

• tend to be less demanding and less valuation

sensitive than professional investors
Financing Strategy (cont.)
• Second round of financing also including capital from
customers

• Disadvantages to raising money from friends/family/

customers

• negotiating terms can be contentious

• individuals’ demands can become difficult

• little “added value” (in terms of product, sales,

experience, etc.)
 Multiples
• Because Honest Tea is not profitable, the only
relevant valuation technique are multiples

• Based on Exhibit 15, the average revenue multiple

for 1999 for other beverage companies is under .40

• Average EBITDA multiple is under 5.0

1999  MV  of   1999  MV  of  
1999  Sales Mul3ple 1999  EBITDA Mul3ple
Equity Equity

Triarc  Cos $853.97 $436.88 0.51 Triarc  Cos $123.03 $436.88 3.55

Saratoga $50.74 $26.60 0.52 Saratoga $4.87 $26.60 5.46

Na3onal   Na3onal  
$426.27 $151.10 0.35 26.89 $151.10 5.62
Beverage Beverage
Clearly  Canadian $36.60 $6.17 0.17   Clearly Canadian EBITDA
  is negative   so exclude  

0.39 4.88
Value based on Revenue
• Even at 50% of sales, and projected 2000 revenues
of $2.1 million, the implied valuation is only $1
million

• At more generous multiples of 2x and 3x revenue,

we could consider a maximum value between $4M
and $6M. (also ~5 x EBITDA forecast for 2002)

• How does this reconcile with the proposed pre-

money valuation of a new round at $13.1 M? and the
last fund raising at a $8.5M pre-money valuation?
 Simple Valuation
• Base Cash Flow off Net Income (Exhibit 11)

• No Depreciation or Taxes in P&L

• Estimate multiple growth scenarios

• Perform sensitivity analysis

• Calculate weighted average PV of cash flows-

assume 15% discount rate based on comparable
companies
 Probability 25% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Assumed  Growth 60% 60% 60% 25% 25% 25% 25% 25%

Net  Income -­‐$861,500 $1,105,100 $1,768,160 $2,829,056 $4,526,490 $5,658,112 $7,072,640 $8,840,800 $11,051,000 $13,813,750

High Terminal  Val 3% $460,458,333

Total  Cash  Flow -­‐$861,500 $1,105,100 $1,768,160 $2,829,056 $4,526,490 $5,658,112 $7,072,640 $8,840,800 $11,051,000 $474,272,083

NPV 15% $133,486,353

Probablity 40% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Assumed  Growth 25% 25% 25% 25% 10% 10% 10% 10%
Med. Net  Income -­‐$861,500 $1,105,100 $1,381,375 $1,726,719 $2,158,398 $2,697,998 $2,967,798 $3,264,578 $3,591,035 $3,950,139

Terminal  Val 3% $131,671,298

Total  Cash  Flow -­‐$861,500 $1,105,100 $1,381,375 $1,726,719 $2,158,398 $2,697,998 $2,967,798 $3,264,578 $3,591,035 $135,621,437

NPV 15% $40,948,785

Probability 35% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Assumed  Growth 20% 20% 20% 10% 10% 10% 10% 10%

Low Net  Income -­‐$861,500 $276,275 $331,530 $397,836 $477,403 $525,144 $577,658 $635,424 $698,966 $768,863

Terminal  Val 3% $25,628,754

Total  Cash  Flow -­‐$861,500 $276,275 $331,530 $397,836 $477,403 $525,144 $577,658 $635,424 $698,966 $26,397,617

NPV 15% $7,518,272

  WEIGHT  AVERAGE  VALUE $52,382,498

Potential Financing Sources

• Angel Investors

• Investors Circle (nonprofit national network of

Investors)

• Venture Capitalists
 Potential Venture Capital
Problems
• Existing Capital structure with warrants is complex

• Existing Shareholder base is complex

• VCs may want control of company

• VCs would demand board representation and strong

covenant protection

• Social Responsibility may not be high priority of

VCs
 Investor Circle Possibility

• Share social vision of owners

• Most of the members have previous business

experience

• Could bring “added value” to Honest Tea

 Warrant Issue
• Warrants

• A call option, issued by a company, that allows

the holder to buy a stated number of shares of
stock from the company at a stated price

• Generally distributed with debt, or preferred

stock to induce investors to buy securities at
lower cost
 Pricing of Shares
• Pricer Per Share is irrelevant for valuation of company

• Whether one issues 1000 shares at $5,000 per share

or 1 million shares at $5 per share does not impact
valuation of firm

• High price per share provides screening

mechanism for early investors

• Unless an investor can invest larger amounts of

money, they are unable to buy into financing round
 Honest Tea Warrants
• Honest Tea is offering a total of 54 share-and-
warrants packages valued at $37,000 each

• Each share and warrant package consists of the

following

• 1 share

• 1/2 share warrant at $50k exercise

• 1/2 share warrant at $75k exercise

A warrant is “in the money” when the exercise price is less than the current share price
 Based on Exhibit 12

Warrants and Ownership

Shares Warrants Warrants Warrants Warrants Warrants Warrants

$5,000 $10,000 $15,000 $25,000 $50,000 $75,000

Founders 80 0 80 80 80 56 63
Founders  
80 80 160 240 320 376 439
Cumula3ve
Employees/
4 4 3 1 7 1 1
Consultants
Empl/Consultant  
4 8 11 12 19 20 21
Cumula3ve
Seed  Investors 45 0 0 0 0 22 0
Cumula3ve  Seed  
45 45 45 45 45 67 67
Investors
First  Round  
48 0 0 0 0 24 0
Investors
Cumula3ve  First  
48 48 48 48 48 72 72
Round  Investors
Second  Round  
38 0 0 0 0 18.5 18.5
Investors
Cumula3ve  Second  
38 38 38 38 38 56.5 75
Round  Investors

Total  Cumula3ve  
215 219 302 383 470 591.5 674
Shares
Founders  
37% 37% 53% 63% 68% 64% 65%
Ownership  
 Founder Ownership
• Founder ownership increases substantially at
exit valuations

• because Goldman and Nalebuff own a greater

fraction of warrants outstanding at higher
exercise prices than they own the common
equity outstanding

• at higher valuations, founders get rewarded for

creating more value!!
Social Venture and Valuation

• Many social ventures are early stage and difficult to

value

• not public

• not profitable

• no premium and perhaps discount for social

goals
 Postscript
About 10 years ago, you could only find Honest Tea in small grocery stores and co-ops –
the kind of joints that also hawk kale chips and bulk-bin nutritional yeast.
Since then, the company has come far, having partnered with a beverage industry heavy-
hitter.

In 2008, Fortune 100 company Coca-Cola first paired up with Honest Tea by purchasing a
40% stake for about $43 million. Three years later, Coke exercised its right to purchase
the remaining 60% of the company for an undisclosed amount, although Honest Tea CEO
Seth Goldman reportedly bought back a significant amount of his personal equity.

http://www.wjla.com/articles/2015/04/-washington-business-
report-april-26-2015-113518.html
 Seth Goldman Quote
June 24, 2011

For obvious reasons, this is an investment opportunity that I wouldn’t dare offer in the
public markets.  But despite its scary fundamentals, Honest Tea proved to be a very
rewarding investment.   From 1998 to 2007 we raised $21 million in angel and
private equity before we sold to Coca-Cola this month for more than $100 million.

Mission-driven enterprises like Honest Tea …avoid the IPO route to

financing because they need investors who aren’t focused on quarterly
earnings, and understand that long-term decision-making will be in the
best interests of the brand as well as the planet.  But the public markets
don’t just have their limits on the fundraising side, it’s on the exit as well. 

Whereas the public markets wouldn’t know how to properly value our
long-term decision-making, acquisitions by strategic partners, especially
those that can help expand distribution, such as Coca-Cola for Honest
Tea, have delivered healthy returns to our investors, and healthy brands
to the American public.