424B4 1 b65345b4e424b4.htm CONSTANT CONTACT, INC. e424b4
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Filed pursuant to Rule 424(b)(4)
Registration No. 333-144381
Dated October 2, 2007
6,700,000 Shares
 
(CONSTANT CONTACT LOGO)
 
Common Stock
$16.00 per share
 
This is an initial public offering of our common stock. We are offering 5,829,839 shares and the selling stockholders identified in this prospectus are offering 870,161 shares.
 
Our common stock has been approved for listing on the Nasdaq Global Market under the symbol “CTCT.”
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 7.
 
                 
   
Per Share
    Total  
 
Price to the public
  $ 16.00     $ 107,200,000  
Underwriting discount
  $ 1.12     $ 7,504,000  
Proceeds, before expenses, to Constant Contact
  $ 14.88     $ 86,748,004  
Proceeds, before expenses, to the selling stockholders
  $ 14.88     $ 12,947,996  
 
We and the selling stockholders have granted an over-allotment option to the underwriters. Under this option, the underwriters may elect to purchase a maximum of 1,005,000 additional shares (370,006 from us and 634,994 from the selling stockholders) within 30 days following the date of this prospectus to cover over-allotments.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
 
 
 
 
CIBC World Markets Thomas Weisel Partners LLC
 
William Blair & Company Cowen and Company Needham & Company, LLC
 
The date of this prospectus is October 2, 2007


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Email marketing really is this easy. Constant Contact makes it Create easy to create, send, and track your email Build your list permission-based email messages More than 200 professional and send email templates that get attention and deliver results. List import wizard and tools Track Flexible one-screen editing Customizable mailing list the results Easy drag & drop interface sign-up form for your website Customize colors and fonts Open and click tracking Unsubscribe management Personalization Summary and List segmentation detailed reporting Easy send scheduling ConstantContact.com © 2007 Constant Contact. All rights reserved 07-0139

 


 


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Prospectus Summary
 
This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our financial statements and related notes, and the risk factors beginning on page 7, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms “Constant Contact,” “our company,” “we,” “us” and “our” in this prospectus to refer to Constant Contact, Inc.
 
Constant Contact
 
Overview
 
Constant Contact is the leading provider of on-demand email marketing solutions for small organizations, including small businesses, associations and non-profits, as determined by the size of our customer base. As of July 31, 2007, we had over 130,000 customers. Our customers use our email marketing product to more effectively and efficiently create, send and track professional and affordable permission-based email marketing campaigns. With these campaigns, our customers can build stronger relationships with their customers, clients and members, increase sales and expand membership. Our email marketing product incorporates a wide range of customizable templates to assist in campaign creation, user-friendly tools to import and manage contact lists and intuitive reporting to track campaign effectiveness. In June 2007, we introduced an online survey product that complements our email marketing product and enables small organizations to easily create and send surveys and effectively analyze responses. We are committed to providing our customers with a high level of support, which we deliver via phone, chat, email and our website.
 
Our email marketing customer base has grown steadily from approximately 25,000 at the end of 2004 to over 130,000 as of July 31, 2007. We estimate that approximately two-thirds of our customers have fewer than ten employees and in the first half of 2007 our top 50 email marketing customers accounted for approximately 1% of our gross email marketing revenue. Our email marketing customers pay a monthly subscription fee that generally ranges between $15 per month and $150 per month based on the size of their contact lists and, in some cases, volume of mailings. For the first half of 2007, our average monthly revenue per email marketing customer was approximately $33. We believe that the simplicity of on-demand deployment combined with our affordable subscription fees and functionality facilitate adoption of our solution by our target customers while generating significant recurring revenue. From January 2005 through July 2007, at least 97.4% of our customers in a given month have continued to utilize our email marketing product in the following month. Since the first quarter of 2002, we have achieved 22 consecutive quarters of growth in customers and revenue.
 
We acquire our customers through a variety of paid and unpaid sources. Our paid sources include online marketing through search engines, advertising networks and other sites; offline marketing through radio advertising, local seminars and other marketing efforts; and contractual relationships with over 1,700 active channel partners, which include national small business service providers with broad reach such as Network Solutions, LLC, American Express Company and VistaPrint Limited as well as local small business service providers with narrow reach but high influence. Our channel partners refer customers to us through links on their websites and outbound promotions to their customers. Our unpaid sources of customer acquisition include referrals from our growing customer base, general brand awareness and the inclusion of a link to our website in the footer of more than 500 million emails currently sent by our customers each month. During the first half of 2007, approximately 56% of our new email marketing customers were generated through marketing programs and channel partners or were located in geographies where we do offline marketing. Accordingly, we believe that during the first half of 2007 approximately 44% of our new email marketing customers were generated through unpaid sources.
 
We were founded in 1995 and our on-demand email marketing product was first offered commercially in 2000. In 2006, our revenue was $27.6 million and our net loss was $7.8 million, and in the six months ended June 30, 2007 our revenue was $21.1 million and our net loss was $5.5 million.


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Industry Background
 
We believe that small organizations represent a large market for email marketing. Based on statistics compiled by the U.S. Small Business Administration and others, we believe that our email marketing product could potentially address the needs of more than 27.3 million small organizations in the United States. We believe that all small organizations could benefit by communicating regularly with their constituents and, further, that email marketing with our product is an effective and affordable method to facilitate this type of communication. As of June 2007, we had customers in at least 856 of the 1,004 standard industrial classification, or SIC, codes, which is a method the U.S. government uses to classify industries in the U.S.
 
To date, however, small organizations have been slower than large organizations to adopt email marketing. Many small organizations lack familiarity with the benefits of email marketing and an understanding of how to prepare, execute and measure a campaign. Similarly, they often do not have the technical expertise necessary to implement email marketing software or the financial resources to hire in-house staff or retain an outside agency to support the effort. We believe that existing alternatives, primarily the use of general email applications, are poorly suited to meeting the email marketing needs of small organizations. General email applications and services, such as Microsoft Outlook®, America Online® or Hotmail®, are designed for one-on-one emails and do not have the formatting, graphics or links needed to produce effective email marketing campaigns. The other major alternative is enterprise email marketing providers that offer sophisticated services for large organizations with sizeable marketing budgets and deliver services at a price and scale far beyond the scope of most small organizations. As a result, we believe there is a significant opportunity for an email marketing product tailored to the needs of small organizations.
 
Our Products and Services
 
We provide small organizations with a convenient, effective and affordable way to communicate with their constituents. Our email marketing product provides customers with the following features:
 
  •   Campaign Creation Wizard. A comprehensive, easy-to-use interface that enables our customers to create and edit email campaigns.
 
  •   Professionally Developed Templates. Pre-designed email message forms that help our customers to quickly create attractive and professional campaigns.
 
  •   Contact List Management. These tools help our customers build and manage their email contact lists.
 
  •   Email Tracking and Reporting. These features enable our customers to review and analyze the overall effectiveness of a campaign by tracking and reporting aggregate and individualized information.
 
  •   Email Delivery Management. These tools are incorporated throughout our email marketing product and are designed to maintain our high deliverability rates.
 
  •   Image Hosting. This feature enables customers to store up to five images for free, view and edit these images and resize them as necessary.
 
  •   Security and Privacy. We protect our customers’ data and require that our customers adopt a privacy policy to assist them in complying with government regulations and email marketing best practices.
 
In addition, we recently launched an online survey product to enable our customers to survey their customers, clients or members and analyze the responses. Our survey product provides customers with a survey creation wizard, over 40 different preformatted and customizable survey templates, list management capabilities and live customer support.


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Business Strengths
 
We believe that the following business strengths differentiate us from our competitors and are key to our success:
 
  •   Focus on Small Organizations
 
  •   Efficient Customer Acquisition Model
 
  •   High Degree of Recurring Revenue
 
  •   Consistent Commitment to Customer Service
 
  •   Software-as-a-Service Delivery
 
Growth Strategy
 
Our objective is to grow our market leadership through the following strategies:
 
  •   Acquire New Customers. We have increased the number of email marketing customers acquired in each of the past 12 quarters and aggressively seek to continue to attract new customers by promoting the Constant Contact brand and encouraging small organizations to try our products.
 
  •   Increase Revenue Per Customer. As of July 31, 2007, we had an email marketing customer base in excess of 130,000. We seek to increase revenue from each customer through add-on services that enhance our products, such as image hosting.
 
  •   Provide Additional Products. We plan to continue to invest in research and development to maintain our leadership position in email marketing and to develop and provide our customers with complementary products that are easy-to-use, effective and affordable, such as our recently launched survey product.
 
  •   Expand Internationally. Customers in over 110 countries and territories currently use our email marketing product, despite limited marketing efforts outside the United States, and we believe that opportunities exist to more aggressively market our products in English-speaking countries.
 
  •   Pursue Complementary Acquisitions. We follow industry developments and technology advancements and intend to evaluate and acquire technologies or businesses to cost-effectively enhance our products, access new customers or markets or both.
 
Corporate Information
 
We were incorporated in Massachusetts in August 1995 under the name Roving Software Incorporated. We reincorporated in Delaware in July 2000 and changed our name to Constant Contact, Inc. in December 2006. Our principal executive offices are located at Reservoir Place, 1601 Trapelo Road, Suite 329, Waltham, Massachusetts 02451, and our telephone number is (781) 472-8100. Our website address is www.constantcontact.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock.
 
Constant Contact®, Do-It-Yourself Email Marketing®, SafeUnsubscribe®, Email Marketing 101®, Email Marketing Hints & Tips® and other trademarks or service marks of Constant Contact appearing in this prospectus are the property of Constant Contact. This prospectus contains additional trade names, trademarks and service marks of other companies.


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The Offering
 
Common stock offered by us
5,829,839 shares
 
Common stock offered by the selling stockholders
870,161 shares
 
Common stock to be outstanding after the offering
27,085,362 shares
 
Use of proceeds
We intend to use our net proceeds from this offering for general corporate purposes, including the development of new products, the acquisition of new customers and capital expenditures. We also intend to use a portion of our net proceeds to repay outstanding debt, which was $3.1 million as of June 30, 2007. We may use a portion of our proceeds for the acquisition of, or investment in, businesses, technologies, products or assets that complement our business. We have no present understandings, commitments or agreements to enter into any acquisitions or make any investments. We will not receive any proceeds from the shares sold by the selling stockholders. See “Use of Proceeds” for more information.
 
Nasdaq Global Market symbol
CTCT
 
The number of shares of our common stock to be outstanding after this offering is based on the number of shares of common stock outstanding as of June 30, 2007, and excludes:
 
  •   1,951,485 shares of common stock issuable upon the exercise of stock options and warrants outstanding as of June 30, 2007 at a weighted average exercise price of $2.56 per share, of which options and warrants to purchase 585,908 shares of our common stock were exercisable as of June 30, 2007 with a weighted average exercise price of $1.97 per share; and
 
  •   831,124 shares of common stock available for future issuance under our equity compensation plans as of June 30, 2007.
 
Unless otherwise stated, all information contained in this prospectus gives effect to a 1-for-100 reverse stock split of our common stock that was effected on November 26, 2002 and a 1.3-for-1 stock split of our common stock that was effected on September 6, 2007, assumes no exercise by the underwriters of their over-allotment option, assumes the exercise of an outstanding warrant to purchase 120,000 shares of redeemable convertible preferred stock and gives effect to the automatic conversion of those preferred shares into 156,000 shares of our common stock upon the closing of this offering, gives effect to the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into 17,146,675 shares of our common stock upon the closing of this offering and gives effect to the restatement of our certificate of incorporation and amendment and restatement of our bylaws to be effective upon completion of this offering.
 
Entities affiliated with Commonwealth Capital Ventures and Greylock Partners, which are existing stockholders, have indicated an interest in purchasing up to an aggregate of $9 million of shares of our common stock in this offering at the initial public offering price. At the initial public offering price of $16.00 per share, these stockholders would purchase an aggregate amount of up to 562,500 shares of our common stock in this offering. However, because indications of interest are not binding agreements or commitments to purchase, these stockholders might not purchase any common stock in this offering. In addition, any such purchases would be subject to the allocation of shares by the underwriters.


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Summary Financial Information
 
The following tables present our summary statements of operations data for the three years ended December 31, 2006 and for the six months ended June 30, 2006 and 2007, and our summary historical, pro forma and pro forma as adjusted balance sheet data as of June 30, 2007. The summary statements of operations data for the three years ended December 31, 2006 are derived from our audited financial statements for the three years ended December 31, 2006 included elsewhere in this prospectus. The summary statements of operations data for the six months ended June 30, 2006 and 2007 and the summary balance sheet data as of June 30, 2007 have been derived from our unaudited financial statements included elsewhere in this prospectus. Our unaudited financial statements have been prepared on the same basis as the audited financial statements and notes thereto and, in the opinion of our management, include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the information for the unaudited interim periods. Our historical results for prior interim periods are not necessarily indicative of results to be expected for a full year or for any future period. You should read this data together with our financial statements and related notes included elsewhere in this prospectus and the information under “Selected Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
                                         
          Six Months Ended
 
    Year Ended December 31,     June 30,  
    2004     2005     2006     2006     2007  
    (in thousands, except per share and customer data)  
Statements of Operations Data:
                                       
Revenue
  $ 8,071     $ 14,658     $ 27,552     $ 11,829     $ 21,111  
Cost of revenue(1)
    2,211       3,747       7,801       3,354       5,837  
                                         
Gross profit
    5,860       10,911       19,751       8,475       15,274  
                                         
Operating expenses:(1)
                                       
Research and development
    2,140       3,355       6,172       2,774       4,971  
Sales and marketing
    3,385       7,460       18,592       7,084       12,795  
General and administrative
    856       1,326       2,623       1,079       2,371  
                                         
Total operating expenses
    6,381       12,141       27,387       10,937       20,137  
                                         
Loss from operations
    (521 )     (1,230 )     (7,636 )     (2,462 )     (4,863 )
Interest and other income (expense), net
    (34 )     (24 )     (203 )     (306 )     (631 )
                                         
Net loss
    (555 )     (1,254 )     (7,839 )     (2,768 )     (5,494 )
Accretion of redeemable convertible preferred stock
    (3,701 )     (5,743 )     (3,788 )     (3,270 )     (518 )
                                         
Net loss attributable to common stockholders
  $ (4,256 )   $ (6,997 )   $ (11,627 )   $ (6,038 )   $ (6,012 )
                                         
Net loss attributable to common stockholders per share:
                                       
Basic and diluted
  $ (4.37 )   $ (2.49 )   $ (3.38 )   $ (1.82 )   $ (1.59 )
Weighted average shares outstanding used in computing per share amounts:
                                       
Basic and diluted
    974       2,813       3,438       3,312       3,770  
                                         
Other Operating Data:
                                       
End of period number of customers(2)
    25,229       47,730       89,323       67,061       123,865  
 
(1) Amounts include stock-based compensation expense, as follows:
 
                               
Cost of revenue
  $   $   $ 25   $ 5   $ 32
Research and development
            27     4     50
Sales and marketing
    6         19     4     29
General and administrative
    17     17     12     2     92
                               
    $ 23   $ 17   $ 83   $ 15   $ 203
                               
 
(2) We define our end of period number of customers as email marketing customers that we billed directly during the last month of the period.


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The following table summarizes our balance sheet data as of June 30, 2007:
 
  •   on an actual basis;
 
  •   on a pro forma basis to reflect the automatic conversion of all outstanding shares of our redeemable convertible preferred stock into shares of common stock upon the closing of the offering and the assumed exercise of an outstanding warrant to purchase redeemable convertible preferred stock and subsequent automatic conversion of those shares of preferred stock into common stock; and
 
  •   on a pro forma as adjusted basis to reflect the pro forma adjustments above, as well as the receipt by us of estimated net proceeds of $85.1 million from the sale of 5,829,839 shares of common stock offered by us, at the initial public offering price of $16.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us and the payment by us of $3.1 million to repay our outstanding indebtedness as described under “Use of Proceeds.”
                         
    As of June 30, 2007  
                Pro Forma
 
    Actual     Pro Forma     as Adjusted  
    (in thousands)   
 
Balance Sheet Data:
                       
Cash, cash equivalents and short-term marketable securities
  $ 11,192     $ 11,252     $ 93,242  
Total assets
    19,345       19,405       101,395  
Deferred revenue
    8,047       8,047       8,047  
Redeemable convertible preferred stock warrant
    1,465              
Notes payable
    3,083       3,083        
Redeemable convertible preferred stock
    35,840              
Total stockholders’ equity (deficit)
    (34,379 )     2,986       88,059  


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Risk Factors
 
An investment in our common stock involves a high degree of risk. In deciding whether to invest, you should carefully consider the following risk factors. Any of the following risks could have a material adverse effect on our business, financial condition, results of operations or prospects and cause the value of our common stock to decline, which could cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information in this prospectus, including the financial statements and related notes.
 
RISKS RELATED TO OUR BUSINESS AND INDUSTRY
 
If we are unable to attract new customers and retain existing customers on a cost-effective basis, our business and results of operations will be affected adversely.
 
To succeed, we must continue to attract and retain a large number of customers on a cost-effective basis, many of whom have not previously used an email marketing service. We rely on a variety of methods to attract new customers, such as paying providers of online services, search engines, directories and other websites to provide content, advertising banners and other links that direct customers to our website and including a link to our website in substantially all of our customers’ emails. In addition, many of our new customers are referred to us by existing customers. If we are unable to use any of our current marketing initiatives or the cost of such initiatives were to significantly increase or our efforts to satisfy our existing customers are not successful, we may not be able to attract new customers or retain existing customers on a cost-effective basis and, as a result, our revenue and results of operations would be affected adversely.
 
Our business is substantially dependent on the market for email marketing services for small organizations.
 
We derive, and expect to continue to derive, substantially all of our revenue from our email marketing product for small organizations, including small businesses, associations and non-profits. As a result, widespread acceptance of email marketing among small organizations is critical to our future growth and success. The overall market for email marketing and related services is relatively new and still evolving, and small organizations have generally been slower than large organizations to adopt email marketing as part of their marketing mix. There is no certainty regarding how or whether this market will develop, or whether it will experience any significant contractions. Our ability to attract and retain customers will depend in part on our ability to make email marketing convenient, effective and affordable. If small organizations determine that email marketing does not sufficiently benefit them, existing customers may cancel their accounts and new customers may decide not to adopt email marketing. In addition, many small organizations lack the technical expertise to effectively send email marketing campaigns. As technology advances, however, small organizations may establish the capability to manage their own email marketing and therefore have no need for our email marketing product. If the market for email marketing services fails to grow or grows more slowly than we currently anticipate, demand for our services may decline and our revenue would suffer.
 
U.S. federal legislation entitled Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 imposes certain obligations on the senders of commercial emails, which could minimize the effectiveness of our email marketing product, and establishes financial penalties for non-compliance, which could increase the costs of our business.
 
In December 2003, Congress enacted Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or the CAN-SPAM Act, which establishes certain requirements for commercial email messages and specifies penalties for the transmission of commercial email messages that are intended to deceive the recipient as to source or content. The CAN-SPAM Act, among other things, obligates the sender of commercial emails to provide recipients with the ability to opt out of receiving future emails from the sender. In addition, some states have passed laws regulating commercial email practices that are significantly more


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punitive and difficult to comply with than the CAN-SPAM Act, particularly Utah and Michigan, which have enacted do-not-email registries listing minors who do not wish to receive unsolicited commercial email that markets certain covered content, such as adult or other harmful products. Some portions of these state laws may not be preempted by the CAN-SPAM Act. The ability of our customers’ constituents to opt out of receiving commercial emails may minimize the effectiveness of our email marketing product. Moreover, non-compliance with the CAN-SPAM Act carries significant financial penalties. If we were found to be in violation of the CAN-SPAM Act, applicable state laws not preempted by the CAN-SPAM Act, or foreign laws regulating the distribution of commercial email, whether as a result of violations by our customers or if we were deemed to be directly subject to and in violation of these requirements, we could be required to pay penalties, which would adversely affect our financial performance and significantly harm our business. We also may be required to change one or more aspects of the way we operate our business, which could impair our ability to attract and retain customers or increase our operating costs.
 
Evolving regulations concerning data privacy may restrict our customers’ ability to solicit, collect, process and use data necessary to conduct email marketing campaigns or to send surveys and analyze the results or may increase their costs, which could harm our business.
 
Federal, state and foreign governments have enacted, and may in the future enact, laws and regulations concerning the solicitation, collection, processing or use of consumers’ personal information. Such laws and regulations may require companies to implement privacy and security policies, permit users to access, correct and delete personal information stored or maintained by such companies, inform individuals of security breaches that affect their personal information, and, in some cases, obtain individuals’ consent to use personal information for certain purposes. Other proposed legislation could, if enacted, prohibit the use of certain technologies that track individuals’ activities on web pages or that record when individuals click through to an Internet address contained in an email message. Such laws and regulations could restrict our customers’ ability to collect and use email addresses, page viewing data, and personal information, which may reduce demand for our products.
 
As Internet commerce develops, federal, state and foreign governments may draft and propose new laws to regulate Internet commerce, which may negatively affect our business.
 
As Internet commerce continues to evolve, increasing regulation by federal, state or foreign governments becomes more likely. Our business could be negatively impacted by the application of existing laws and regulations or the enactment of new laws applicable to email marketing. The cost to comply with such laws or regulations could be significant and would increase our operating expenses, and we may be unable to pass along those costs to our customers in the form of increased subscription fees. In addition, federal, state and foreign governmental or regulatory agencies may decide to impose taxes on services provided over the Internet or via email. Such taxes could discourage the use of the Internet and email as a means of commercial marketing, which would adversely affect the viability of our products.
 
In the event we are unable to minimize our loss of existing customers or to grow our customer base by adding new customers, our operating results will be adversely affected.
 
From January 2005 through July 2007, at least 97.4% of our customers in a given month have continued to utilize our email marketing product in the following month. Such historic performance is not indicative of future performance, and there is no guarantee that new customers will demonstrate the loyalty our existing customers have exhibited in the past or that our existing customers will continue to use our products consistently. Our growth strategy requires us to minimize the loss of our existing customers and grow our customer base by adding new customers. Customers cancel their accounts for many reasons, including a perception that they do not use our product effectively, the service is a poor value and they can manage their email campaigns without our product. In some cases, we terminate an account because the customer fails to comply with our standard terms and conditions. We must continually add new customers to replace customers whose accounts are cancelled or terminated, which may involve significantly higher marketing expenditures


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than we currently anticipate. If too many of our customers cancel our service, or if we are unable to attract new customers in numbers sufficient to grow our business, our operating results would be adversely affected.
 
As we expand our customer base through our marketing efforts, our new customers may use our products differently than our existing customers and, accordingly, our business model may not be as efficient at attracting and retaining new customers.
 
As we expand our customer base, our new customers may use our products differently than our existing customers. For example, a greater percentage of new customers may take advantage of the free trial period we offer but choose to use another form of marketing to reach their constituents. If our new customers are not as loyal as our existing customers, our attrition rate will increase and our customer referrals will decrease, which would have an adverse effect on our results of operations. In addition, as we seek to expand our customer base, we expect to increase our marketing spend in order to attract new customers, which will increase our operating costs. There can be no assurance that these marketing efforts will be successful.
 
The market in which we participate is competitive and, if we do not compete effectively, our operating results could be harmed.
 
The market for our products is competitive and rapidly changing, and the barriers to entry are relatively low. With the introduction of new technologies and the influx of new entrants to the market, we expect competition to persist and intensify in the future, which could harm our ability to increase sales and maintain our prices.
 
Our principal competitors include providers of email marketing products for small to medium size businesses such as Vertical Response, Inc., CoolerEmail Inc., Broadwick Corporation (iContact, formerly Intellicontact), Emma, Inc., Got Corporation (Campaigner®), Lyris Technologies, Inc. and Topica Inc., as well as the in-house information technology capabilities of prospective customers. Competition could result in reduced sales, reduced margins or the failure of our email marketing product to achieve or maintain more widespread market acceptance, any of which could harm our business. In addition, there are a number of other vendors that are focused on providing email marketing products for larger organizations, including Acxiom Digital (a division of Acxiom Corporation), Alterian Inc., Epsilon Data Management LLC (a subsidiary of Alliance Data Systems Corporation), ExactTarget, Inc., Responsys Inc., Silverpop Systems Inc. and CheetahMail, Inc. (a subsidiary of Experian Group Limited). While we do not compete currently with vendors serving larger customers, we may face future competition from these providers if they determine that our target market presents an opportunity for them. Finally, in the future, we may experience competition from Internet service providers, or ISPs, advertising and direct marketing agencies and other large established businesses, such as Microsoft Corporation, Google Inc. or Yahoo! Inc., possessing large, existing customer bases, substantial financial resources and established distribution channels. If these companies decide to develop, market or resell competitive email marketing products, acquire one of our existing competitors or form a strategic alliance with one of our competitors, our ability to compete effectively could be significantly compromised and our operating results could be harmed. In addition, one or more of these ISPs or other businesses could decide to offer a competitive email marketing product at no cost or low cost in order to generate revenue as part of a larger product offering.
 
Our current and potential competitors may have significantly more financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their products. Our potential competitors may have more extensive customer bases and broader customer relationships than we have. In addition, these companies may have longer operating histories and greater name recognition than we have. These competitors may be better able to respond quickly to new technologies and to undertake more extensive marketing campaigns. If we are unable to compete with such companies, the demand for our services could substantially decline.


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If the delivery of our customers’ emails is limited or blocked, the fees we may be able to charge for our email marketing product may not be accepted by the market and customers may cancel their accounts.
 
ISPs can block emails from reaching their users. Recent releases of ISP software and the implementation of stringent new policies by ISPs make it more difficult to deliver our customers’ emails. We continually improve our own technology and work closely with ISPs to maintain our deliverability rates. If ISPs materially limit or halt the delivery of our customers’ emails, or if we fail to deliver our customers’ emails in a manner compatible with ISPs’ email handling or authentication technologies, then the fees we charge for our email marketing product may not be accepted by the market, and customers may cancel their accounts.
 
Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees whom we need to support our business.
 
Competition for highly skilled technical and marketing personnel is extremely intense, and we continue to face difficulty identifying and hiring qualified personnel in many areas of our business. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In particular, candidates making employment decisions, particularly in high-technology industries, often consider the value of any equity they may receive in connection with their employment. Any significant volatility in the price of our stock after this offering may adversely affect our ability to attract or retain highly skilled technical and marketing personnel.
 
In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements and the quality of our services and our ability to serve our customers could diminish, resulting in a material adverse effect on our business.
 
If economic or other factors negatively affect the small business sector, our customers may become unwilling or unable to maintain accounts with us, which could cause our revenue to decline and impair our ability to operate profitably.
 
Our email marketing and survey products are designed specifically for small organizations, including small businesses, associations and non-profits that frequently have limited budgets and are more likely to be significantly affected by economic downturns than their larger, more established counterparts. Small organizations may choose to spend the limited funds that they have on items other than our products. Moreover, if small organizations experience economic hardship, they may be unwilling or unable to expend resources on marketing, which would negatively affect the overall demand for our products and could cause our revenue to decline.
 
If we fail to promote and maintain our brand in a cost-effective manner, we may lose market share and our revenue may decrease.
 
We believe that developing and maintaining awareness of the Constant Contact brand in a cost-effective manner is critical to achieving widespread acceptance of our existing and future products and attracting new customers. Furthermore, we believe that the importance of brand recognition will increase as competition in our industry increases. Successful promotion of our brand will depend largely on the effectiveness of our marketing efforts and the effectiveness and affordability of our products for our target customer demographic. Historically, our efforts to build our brand have involved significant expense, and it is likely that our future marketing efforts will require us to incur additional significant expenses. Such brand promotion activities may not yield increased revenue and, even if they do, any revenue increases may not offset the expenses we incur to promote our brand. If we fail to successfully promote and maintain our brand, or if we incur substantial expenses in an unsuccessful attempt to promote and maintain our brand, we may lose our existing customers to our competitors or be unable to attract new customers, which would cause our revenue to decrease.


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We depend on search engines to attract a significant percentage of our customers, and if those search engines change their listings or our relationship with them deteriorates or terminates, we may be unable to attract new customers, which would adversely affect our business and results of operations.
 
Many of our customers located our website by clicking through on search results displayed by search engines such as Google and Yahoo!. Search engines typically provide two types of search results, algorithmic and purchased listings. Algorithmic listings cannot be purchased, and instead are determined and displayed solely by a set of formulas designed by the search engine. Purchased listings can be purchased by advertisers in order to attract users to their websites. We rely on both algorithmic and purchased listings to attract a significant percentage of the customers we serve to our website. Search engines revise their algorithms from time to time in an attempt to optimize their search result listings. If search engines on which we rely for algorithmic listings modify their algorithms, this could result in fewer customers clicking through to our website, requiring us to resort to other costly resources to replace this traffic, which, in turn, could reduce our operating and net income or our revenue, harming our business. If one or more search engines on which we rely for purchased listings modifies or terminates its relationship with us, our expenses could rise, or our revenue could decline and our business may suffer. The cost of purchased search listing advertising is rapidly increasing as demand for these channels continues to grow quickly, and further increases could have negative effects on our financial results.
 
The success of our business depends on the continued growth and acceptance of email as a communications tool, and the related expansion and reliability of the Internet infrastructure. If consumers do not continue to use email, demand for our email marketing products may decline.
 
The future success of our business depends on the continued and widespread adoption of email as a primary means of communication. Security problems such as “viruses,” “worms” and other malicious programs or reliability issues arising from outages and damage to the Internet infrastructure could create the perception that email is not a safe and reliable means of communication, which would discourage consumers from using email. Consumers’ use of email also depends on the ability of ISPs to prevent unsolicited bulk email, or “spam,” from overwhelming consumers’ inboxes. In recent years, ISPs have developed new technologies to filter unwanted messages before they reach users’ inboxes. In response, spammers have employed more sophisticated techniques to reach consumers’ inboxes. Although companies in the anti-spam industry have started to address the techniques used by spammers, if security problems become widespread or frequent or if ISPs cannot effectively control spam, the use of email as a means of communication may decline as consumers find alternative ways to communicate. Any decrease in the use of email would reduce demand for our email marketing product and harm our business.
 
Various private spam blacklists have in the past interfered with, and may in the future interfere with, the effectiveness of our products and our ability to conduct business.
 
We depend on email to market to and communicate with our customers, and our customers rely on email to communicate with their constituents. Various private entities attempt to regulate the use of email for commercial solicitation. These entities often advocate standards of conduct or practice that significantly exceed current legal requirements and classify certain email solicitations that comply with current legal requirements as spam. Some of these entities maintain “blacklists” of companies and individuals, and the websites, ISPs and Internet protocol addresses associated with those entities or individuals, that do not adhere to those standards of conduct or practices for commercial email solicitations that the blacklisting entity believes are appropriate. If a company’s Internet protocol addresses are listed by a blacklisting entity, emails sent from those addresses may be blocked if they are sent to any Internet domain or Internet address that subscribes to the blacklisting entity’s service or purchases its blacklist.
 
Some of our Internet protocol addresses currently are listed with one or more blacklisting entities and, in the future, our Internet protocol addresses may also be listed with these and other blacklisting entities. There can be no guarantee that we will not continue to be blacklisted or that we will be able to successfully remove


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ourselves from those lists. Blacklisting of this type could interfere with our ability to market our products and services and communicate with our customers and could undermine the effectiveness of our customers’ email marketing campaigns, all of which could have a material negative impact on our business and results of operations.
 
Any efforts we may make in the future to promote our services to market segments other than small organizations or to expand our product offerings beyond email marketing may not succeed.
 
To date, we have focused our business on providing our email marketing product for small organizations, but we may in the future seek to serve other market segments and expand our service offerings. We recently introduced our new survey product, which enables customers to create and send online surveys and analyze responses, and we are currently developing an add-on archiving service that will enable our customers to archive their past email campaigns. Any efforts to expand beyond the small organization market or to introduce new products beyond our email marketing product, including our survey product, may not result in significant revenue growth, may divert management resources from our existing operations and require us to commit significant financial resources to an unproven business, which may harm our financial performance.
 
Our customers’ use of our products to transmit negative messages or website links to harmful applications could damage our reputation, and we may face liability for unauthorized, inaccurate or fraudulent information distributed via our products.
 
Our customers could use our email marketing product to transmit negative messages or website links to harmful applications, reproduce and distribute copyrighted material without permission, or report inaccurate or fraudulent data. Any such use of our products could damage our reputation and we could face claims for damages, copyright or trademark infringement, defamation, negligence or fraud. Moreover, our customers’ promotion of their products and services through our email marketing product may not comply with federal, state and foreign laws. We cannot predict whether our role in facilitating these activities would expose us to liability under these laws.
 
Even if claims asserted against us do not result in liability, we may incur substantial costs in investigating and defending such claims. If we are found liable for our customers’ activities, we could be required to pay fines or penalties, redesign business methods or otherwise expend resources to remedy any damages caused by such actions and to avoid future liability.
 
Our existing general liability insurance may not cover all potential claims to which we are exposed or may not be adequate to indemnify us for all liabilities that may be imposed. Any imposition of liability that is not covered by insurance or is in excess of insurance coverage would increase our operating losses and reduce our net worth and working capital.
 
If we fail to enhance our existing products or develop new features, our products may become obsolete or less competitive and we could lose customers.
 
If we are unable to enhance our existing products or develop new products that keep pace with rapid technological developments and meet our customers’ needs, our business will be harmed. Creating and designing such enhancements and new products entail significant technical and business risks and require substantial expenditures and lead-time, and there is no guarantee that such enhancements and new products will be completed in a timely fashion or accepted by the market. If we cannot enhance our existing services or develop new products or if we are not successful in selling such enhancements and new products to our customers, we could lose customers or have difficulty attracting new customers, which would adversely impact our financial performance.


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Our relationships with our channel partners may be terminated or may not continue to be beneficial in generating new email marketing customers, which could adversely affect our ability to increase our customer base.
 
We maintain a network of over 1,700 active channel partners, which include national small business service providers such as Network Solutions, LLC, American Express Company and VistaPrint Limited as well as local small business service providers such as local web developers and marketing agencies, who refer customers to us through links on their websites and outbound promotion to their customers. Approximately 15% of our new email marketing customers in the first half of 2007 were generated from our channel partners. If we are unable to maintain our contractual relationships with existing channel partners or establish new contractual relationships with potential channel partners, we may experience delays and increased costs in adding customers, which could have a material adverse effect on us. The number of customers we are able to add through these marketing relationships is dependent on the marketing efforts of our partners, and a significant decrease in the number of gross customer additions generated through these relationships could adversely affect the size of our customer base and revenue.
 
Our growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage our growth, we may not be able to successfully implement our business plan.
 
We are currently experiencing a period of rapid growth in our headcount and operations, which has placed, and will continue to place, to the extent that we are able to sustain such growth, a significant strain on our management and our administrative, operational and financial reporting infrastructure.
 
Our success will depend in part on the ability of our senior management to manage this growth effectively. To do so, we must continue to hire, train and manage new employees as needed. If our new hires perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, or if we are not successful in retaining our existing employees, our business may be harmed. To manage the expected growth of our operations and personnel, we will need to continue to improve our operational and financial controls and update our reporting procedures and systems, which may include installing a new billing system. The addition of new employees and the capital investments that we anticipate will be necessary to manage our growth will increase our cost base, which will make it more difficult for us to offset any future revenue shortfalls by reducing expenses in the short term. If we fail to successfully manage our growth, we will be unable to execute our business plan.
 
If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.
 
Our future depends, in part, on our ability to attract and retain key personnel. Our future also depends on the continued contributions of our executive officers and other key technical personnel, each of whom would be difficult to replace. In particular, Gail F. Goodman, our Chairman, President and Chief Executive Officer, is critical to the management of our business and operations and the development of our strategic direction. The loss of the services of Ms. Goodman or other executive officers or key personnel and the process to replace any of our key personnel would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.
 
Any significant disruption in service on our website or in our computer systems, or in our customer support services, could reduce the attractiveness of our products and result in a loss of customers.
 
The satisfactory performance, reliability and availability of our technology and our underlying network infrastructure are critical to our operations, level of customer service, reputation and ability to attract new customers and retain existing customers. Our system hardware is collocated in a hosting facility located in Somerville, Massachusetts, owned and operated by Internap Network Services Corporation. Internap does not


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guarantee that our customers’ access to our products will be uninterrupted, error-free or secure. Our operations depend on Internap’s ability to protect their and our systems in their facilities against damage or interruption from natural disasters, power or telecommunications failures, air quality, temperature, humidity and other environmental concerns, computer viruses or other attempts to harm our systems, criminal acts and similar events. In the event that our arrangement with Internap is terminated, or there is a lapse of service or damage to the Internap facility, we could experience interruptions in our service as well as delays and additional expense in arranging new facilities. In addition our customer support services, which are located at our headquarters, would experience interruptions as a result of any disruption of electrical, phone or any other similar facility support services. Any interruptions or delays in access to our products or customer support, whether as a result of Internap or other third-party error, our own error, natural disasters or security breaches, whether accidental or willful, could harm our relationships with customers and our reputation. Also, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. These factors could damage our brand and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and cause customers to cancel their accounts, any of which could adversely affect our business, financial condition and results of operations.
 
Our disaster recovery system located at our headquarters in Waltham, Massachusetts does not provide real time backup, has not been tested under actual disaster conditions and may not have sufficient capacity to recover all data and services in the event of an outage at the Internap facility. In the event of a disaster in which the Internap facility is irreparably damaged or destroyed, we would experience interruptions in access to our products. Moreover, our disaster recovery system is located approximately 12 miles from the Internap facility and may be equally or more affected by any regional disaster affecting the Internap facility. Any or all of these events could cause our customers to lose access to our products.
 
If the security of our customers’ confidential information stored in our systems is breached or otherwise subjected to unauthorized access, our reputation may be harmed, we may be exposed to liability and we may lose the ability to offer our customers a credit card payment option.
 
Our system stores our customers’ proprietary email distribution lists, credit card information and other critical data. Any accidental or willful security breaches or other unauthorized access could expose us to liability for the loss of such information, time-consuming and expensive litigation and other possible liabilities as well as negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our software are exposed and exploited, and, as a result, a third party obtains unauthorized access to any of our customers’ data, our relationships with our customers will be severely damaged, and we could incur significant liability. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we and our third-party hosting facilities may be unable to anticipate these techniques or to implement adequate preventative measures. In addition, many states have enacted laws requiring companies to notify individuals of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness of our data security measures. Any security breach, whether actual or perceived, would harm our reputation, and we could lose customers.
 
While we believe that we are now in compliance with certain of the data protection policy documentation standards adopted by the major credit card issuers, if we fail to maintain our compliance with such data protection policy documentation standards, we could lose our ability to offer our customers a credit card payment option. Although this has not occurred to date, any loss of our ability to offer our customers a credit card payment option would make our products less attractive to many small organizations by negatively impacting our customer experience and significantly increasing our administrative costs related to customer payment processing.


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We rely on third-party computer hardware and software that may be difficult to replace or that could cause errors or failures of our service.
 
We rely on computer hardware purchased and software licensed from third parties in order to offer our products, including hardware from such large vendors as Oracle Corporation, International Business Machines Corporation, Dell Computer Corporation, Sun Microsystems, Inc. and EMC Corporation. This hardware and software may not continue to be available on commercially reasonable terms, or at all. If we lose the right to use any of this hardware or software or such hardware or software malfunctions, our customers could experience delays or be unable to access our services until we can obtain and integrate equivalent technology or repair the cause of the malfunctioning hardware or software. Any delays or failures associated with our services could upset our customers and harm our business.
 
If we are unable to protect the confidentiality of our unpatented proprietary information, processes and know-how and our trade secrets, the value of our technology and products could be adversely affected.
 
We rely upon unpatented proprietary technology, processes and know-how and trade secrets. Although we try to protect this information in part by executing confidentiality agreements with our employees, consultants and third parties, such agreements may be breached. Any unauthorized disclosure or dissemination of our proprietary technology, processes and know-how or our trade secrets, whether by breach of a confidentiality agreement or otherwise, may cause irreparable harm to our business, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise be independently developed by our competitors or other third parties. If we are unable to protect the confidentiality of our proprietary information, processes and know-how or our trade secrets are disclosed, the value of our technology and services could be adversely affected, which could negatively impact our business, financial condition and results of operations.
 
Our use of open source could impose limitations on our ability to commercialize our products.
 
We incorporate open source software into our products. Although we monitor our use of open source software closely, the terms of many open source licenses to which we are subject have not been interpreted by United States or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue sales of our products, or to release our software code under the terms of an open source license, any of which could materially adversely affect our business.
 
Given the nature of open source software, there is also a risk that third parties may assert copyright and other intellectual property infringement claims against us based on our use of certain open source software programs. The risks associated with intellectual property infringement claims are discussed immediately below.
 
If a third party asserts that we are infringing its intellectual property, whether successful or not, it could subject us to costly and time-consuming litigation or require us to obtain expensive licenses, and our business may be adversely affected.
 
The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. Third parties may assert patent and other intellectual property infringement claims against us in the form of lawsuits, letters or other forms of communication. These claims, whether or not successful, could:
 
  •   divert management’s attention;
 
  •   result in costly and time-consuming litigation;
 
  •   require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all;


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  •   in the case of open source software-related claims, require us to release our software code under the terms of an open source license; or
 
  •   require us to redesign our software and services to avoid infringement.
 
As a result, any third-party intellectual property claims against us could increase our expenses and adversely affect our business. In addition, many of our agreements with our channel partners require us to indemnify them for third-party intellectual property infringement claims, which would increase the cost to us resulting from an adverse ruling on any such claim. Even if we have not infringed any third parties’ intellectual property rights, we cannot be sure our legal defenses will be successful, and even if we are successful in defending against such claims, our legal defense could require significant financial resources and management time. Finally, if a third party successfully asserts a claim that our products infringe their proprietary rights, royalty or licensing agreements might not be available on terms we find acceptable or at all.
 
Providing our products to customers outside the United States exposes us to risks inherent in international business.
 
Customers in more than 110 countries and territories currently use our email marketing product, and we expect to expand our international operations in the future. Accordingly, we are subject to risks and challenges that we would otherwise not face if we conducted our business only in the United States. The risks and challenges associated with providing our products to customers outside the United States include:
 
  •   localization of our products, including translation into foreign languages and associated expenses;
 
  •   laws and business practices favoring local competitors;
 
  •   compliance with multiple, conflicting and changing governmental laws and regulations, including tax, email marketing, privacy and data protection laws and regulations;
 
  •   foreign currency fluctuations;
 
  •   different pricing environments;
 
  •   difficulties in staffing and maintaining foreign operations; and
 
  •   regional economic and political conditions.
 
We have incurred net losses in the past and expect to incur net losses in the future.
 
We have incurred net losses in the past and we expect to incur net losses in the future. As of June 30, 2007, our accumulated deficit was $40.0 million. Our recent net losses were $1.3 million for the year ended December 31, 2005, $7.8 million for the year ended December 31, 2006 and $5.5 million for the six months ended June 30, 2007. Our net losses have increased over recent periods because we have increased our sales and marketing expense to promote the Constant Contact brand and encourage new customers to try our products. We have not been profitable since our inception, and we may not become profitable. In addition, we expect our operating expenses to increase in the future as we expand our operations. If our operating expenses exceed our expectations, our financial performance could be adversely affected. If our revenue does not grow to offset these increased expenses, we may never become profitable. You should not consider recent revenue growth as indicative of our future performance. In future periods, we may not have any revenue growth, or our revenue could decline.
 
We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.
 
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, and rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the Nasdaq Stock Market, require public companies to meet certain corporate governance standards. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal


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and financial compliance costs and will make some activities more time-consuming and costly. For example, these rules and regulations may make it more expensive for us to obtain director and officer liability insurance coverage and more difficult for us to attract and retain qualified persons to serve as directors or executive officers. We estimate that our direct and incremental public company costs will be between $1.7 million and $2.2 million in 2008.
 
In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, for the year ending December 31, 2008, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal controls over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. In order to comply with Section 404, we may incur substantial accounting expense, expend significant management time on compliance-related issues, and hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities, which would require additional financial and management resources.
 
We do not have significant experience with our new accounting system and any errors in using the system or delays in preparing our quarterly or annual financial statements may result in our inability to accurately or timely prepare and file financial reports.
 
Prior to April 2007, our accounting system was not sufficient to permit compliance with our financial reporting requirements as a public company and the Sarbanes-Oxley Act. As a result, in April 2007, we purchased and migrated to a new accounting system, which we believe provides us with the ability to expand our accounting capabilities as our business grows while providing the necessary accounting controls needed for compliance with the Sarbanes-Oxley Act. As of the date of this prospectus, we have only used the new accounting system to prepare monthly financial reports for five monthly periods, April, May, June, July and August 2007 and for the quarter ended June 30, 2007. We have not yet used the new accounting system to prepare annual financial reports and our first audited financial statements utilizing our new accounting system will not be until the year ending December 31, 2007. Any errors or delays we experience in using the new system could adversely affect our ability to file our quarterly, annual or other reports with the SEC on a timely and accurate basis.
 
Our ability to use net operating loss carryforwards in the United States may be limited.
 
As of December 31, 2006, we had net operating loss carryforwards of $29.1 million for U.S. federal tax purposes and $22.5 million for state tax purposes. These loss carryforwards expire between 2007 and 2026. To the extent available, we intend to use these net operating loss carryforwards to reduce the corporate income tax liability associated with our operations. Section 382 of the Internal Revenue Code generally imposes an annual limitation on the amount of net operating loss carryforwards that may be used to offset taxable income when a corporation has undergone significant changes in stock ownership. This offering may result in, and prior financings may have resulted in, ownership changes that could limit our ability to utilize net operating loss carryforwards. To the extent our use of net operating loss carryforwards is significantly limited, our income could be subject to corporate income tax earlier than it would if we were able to use net operating loss carryforwards, which could have a negative effect on our financial results.


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Our quarterly results may fluctuate and if we fail to meet the expectations of analysts or investors, our stock price and the value of your investment could decline substantially.
 
Our quarterly operating results may fluctuate, and if we fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock could decline. Some of the important factors that could cause our revenue and operating results to fluctuate from quarter to quarter include:
 
  •   our ability to retain existing customers, attract new customers and satisfy our customers’ requirements;
 
  •   changes in our pricing policies;
 
  •   our ability to expand our business;
 
  •   the effectiveness of our personnel;
 
  •   new product and service introductions;
 
  •   technical difficulties or interruptions in our services;
 
  •   general economic conditions;
 
  •   the timing of additional investments in our hardware and software systems;
 
  •   regulatory compliance costs;
 
  •   costs associated with future acquisitions of technologies and businesses; and
 
  •   extraordinary expenses such as litigation or other dispute-related settlement payments.
 
Some of these factors are not within our control, and the occurrence of one or more of them may cause our operating results to vary widely. As such, we believe that quarter-to-quarter comparisons of our revenue and operating results may not be meaningful and should not be relied upon as an indication of future performance.
 
We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may dilute your ownership of our common stock.
 
We have historically relied on outside financing and cash from operations to fund our operations, capital expenditures and expansion. We may require additional capital from equity or debt financing in the future to:
 
  •   fund our operations;
 
  •   respond to competitive pressures;
 
  •   take advantage of strategic opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses; and
 
  •   develop new products or enhancements to existing products.
 
We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.
 
We may engage in future acquisitions that could disrupt our business, dilute stockholder value and harm our business, operating results or financial condition.
 
Although we currently do not have any acquisitions pending or planned, we have, from time to time, evaluated acquisition opportunities and may pursue acquisition opportunities in the future. We have not made any


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acquisitions to date and, therefore, our ability as an organization to make and integrate acquisitions is unproven. Moreover, acquisitions involve numerous risks, including:
 
  •   an inability to locate a suitable acquisition candidate or technology or acquire a desirable candidate or technology on favorable terms, if at all;
 
  •   difficulties in integrating personnel and operations from the acquired business or acquired technology with our existing technology and products and in retaining and motivating key personnel from the business;
 
  •   disruptions in our ongoing operations and the diversion of our management’s attention from their day-to-day responsibilities associated with operating our business;
 
  •   increases in our expenses that adversely impact our business, operating results and financial condition;
 
  •   potential write-offs of acquired assets and increased amortization expense related to identifiable assets acquired; and
 
  •   potentially dilutive issuances of equity securities or the incurrence of debt.
 
If we do complete an acquisition, we may not ultimately strengthen our competitive position or achieve our goals, or such an acquisition may be viewed negatively by our customers, stockholders or the financial markets.
 
RISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR COMMON STOCK
 
As a new investor, you will experience substantial dilution as a result of this offering and future equity issuances.
 
The initial public offering price per share is substantially higher than the pro forma net tangible book value per share of our common stock outstanding prior to this offering. As a result, investors purchasing common stock in this offering will experience immediate substantial dilution of $12.82 per share. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent outstanding options are ultimately exercised, there could be further dilution to investors in this offering. In addition, if the underwriters exercise their over-allotment option or if we issue additional equity securities, you will experience additional dilution.
 
Insiders will continue to have substantial control over us after this offering and will be able to influence corporate matters.
 
Upon completion of this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 29% of our outstanding common stock, or approximately 31% assuming entities affiliated with Commonwealth Capital Ventures and Greylock Partners purchase an aggregate of $9 million of shares of our common stock in this offering, assuming no exercise of the underwriters’ over-allotment option, compared to approximately 25% represented by the shares sold in this offering, assuming no exercise of the underwriters’ over-allotment option. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third party from acquiring control over us. For information regarding the beneficial ownership of our outstanding stock by our directors and executive officers, see “Principal and Selling Stockholders.”
 
Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.
 
Although we have not allocated the net proceeds we will receive from this offering for any specific purposes other than the repayment of certain debt, we expect to use our net proceeds for general corporate purposes,


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including capital expenditures, which may in the future include investments in, or acquisitions of, complementary businesses, services or technologies. Our management will have broad discretion concerning how we use our net proceeds from this offering, and you will not have the opportunity to influence our decisions on how to use our net proceeds from this offering. You will be relying on the judgment of our management regarding the application of these proceeds, and our management may not apply our net proceeds of this offering in ways that increase the value of your investment.
 
We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
 
We do not expect to pay cash dividends on our common stock, including the common stock issued in this offering. Any future dividend payments are within the absolute discretion of our board of directors and will depend on, among other things, our results of operations, working capital requirements, capital expenditure requirements, financial condition, contractual restrictions, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant. We may not generate sufficient cash from operations in the future to pay dividends on our common stock. See “Dividend Policy.”
 
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
 
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.
 
The market price of our common stock may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.
 
Prior to this offering there has been no public market for shares of our common stock, and an active public market for these shares may not develop or be sustained after this offering. The initial public offering price for our common stock will be determined through negotiations with the representatives of the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, the trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors. Some of the factors that may cause the market price of our common stock to fluctuate include:
 
  •   fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;
 
  •   changes in estimates of our financial results or recommendations by securities analysts;
 
  •   failure of any of our products to achieve or maintain market acceptance;
 
  •   changes in market valuations of similar companies;
 
  •   success of competitive products;
 
  •   changes in our capital structure, such as future issuances of securities or the incurrence of additional debt;


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  •   announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances;
 
  •   regulatory developments in the United States, foreign countries or both;
 
  •   litigation involving our company, our general industry or both;
 
  •   additions or departures of key personnel;
 
  •   investors’ general perception of us; and
 
  •   changes in general economic, industry and market conditions.
 
In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.
 
Future sales of shares by existing stockholders could cause our stock price to decline.
 
If our existing stockholders sell, or indicate their intention to sell, substantial amounts of our common stock in the public market after certain contractual lock-up agreements (as described below) expire, and other restrictions on resale lapse, the trading price of our common stock could decline below the initial public offering price. Based on shares outstanding as of June 30, 2007, upon completion of this offering, we will have outstanding 27,085,362 shares of common stock. Of these shares, 19,455,085 shares of common stock will be subject to a 180-day contractual lock-up with the underwriters. CIBC World Markets Corp. and Thomas Weisel Partners LLC, acting as representatives of the underwriters, may permit our officers, directors and other stockholders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements.
 
If we announce earnings results or other material news or a material event occurs during the last 17 days of the 180-day contractual lock-up period, or if prior to the expiration of the lock-up period, we announce that we will release earnings results during the 16-day period beginning on the last day of the lock-up period, the 180-day lock-up period will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the occurrence of the material news or event.
 
In addition, there will also be 735,820 shares of common stock subject to a 90-day contractual lock-up with us. We may release these shares from these restrictions at our discretion without the prior written consent of CIBC World Markets Corp. and Thomas Weisel Partners LLC.
 
After each of the lock-up agreements pertaining to this offering expire 90 or 180 days from the date of this prospectus, or such longer period described above, up to 20,190,905 shares will become eligible for sale in the public market, 15,451,585 of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act and, in certain cases, various vesting agreements. Entities affiliated with Commonwealth Capital Ventures and Greylock Partners, which are existing stockholders, have indicated an interest in purchasing up to an aggregate of $9 million of shares of our common stock in this offering at the initial public offering price. These shares, if purchased, would be subject to the 180-day lock-up agreement and would be eligible for sale in the public market upon expiration of the lock-up period. However, because indications of interest are not binding agreements or commitments to purchase, these stockholders might not purchase any common stock in this offering. In addition, any such purchases would be subject to the allocation of shares by the underwriters. In addition, after this offering, we intend to register approximately 4.5 million shares of our common stock that may be issued under our equity incentive plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to lock-up agreements, applicable vesting schedules and, for directors, executive officers and other affiliates, volume limitations under Rule 144. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.


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Some of our existing stockholders have demand and incidental registration rights to require us to register with the SEC up to 17,915,437 shares of our common stock subject to certain conditions following the offering. If we register these shares of common stock, the stockholders would be able to sell those shares freely in the public market.
 
See “Shares Eligible for Future Sale” for a discussion of the lock-up agreements and other transfer restrictions.
 
Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change of control of our company and may affect the trading price of our common stock.
 
We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change of control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change of control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and second amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our restated certificate of incorporation and second amended and restated bylaws, which will be in effect upon the closing of this offering:
 
  •   authorize the issuance of “blank check” preferred stock that could be issued by our board of directors to thwart a takeover attempt;
 
  •   establish a classified board of directors, as a result of which the successors to the directors whose terms have expired will be elected to serve from the time of election and qualification until the third annual meeting following their election;
 
  •   require that directors only be removed from office for cause and only upon a supermajority stockholder vote;
 
  •   provide that vacancies on our board of directors, including newly created directorships, may be filled only by a majority vote of directors then in office;
 
  •   limit who may call special meetings of stockholders;
 
  •   prohibit stockholder action by written consent, requiring all actions to be taken at a meeting of the stockholders; and
 
  •   require supermajority stockholder voting to effect certain amendments to our restated certificate of incorporation and second amended and restated bylaws.
 
For more information regarding these and other provisions, see “Description of Capital Stock—Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation.”


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Forward-Looking Statements
 
This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenue, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:
 
  •   our ability to attract and retain customers;
 
  •   our financial performance;
 
  •   the advantages of our products as compared to those of others;
 
  •   our ability to retain and hire necessary employees and appropriately staff our operations;
 
  •   regulatory developments;
 
  •   our intellectual property; and
 
  •   our estimates regarding future expenses, revenue, capital requirements and needs for additional financing.
 
We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the “Risk Factors” section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.
 
You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.


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Use of Proceeds
 
We estimate that the net proceeds from the sale of the shares of common stock we are offering at the initial public offering price of $16 per share will be approximately $85.1 million, or approximately $90.6 million if the underwriters exercise their over-allotment option in full. “Net proceeds” is what we expect to receive after paying the underwriting discount and other expenses of the offering. We will not receive any proceeds from the sale of shares by the selling stockholders.
 
We intend to use our net proceeds from this offering for general corporate purposes, including financing our growth, developing new products, acquiring new customers, funding capital expenditures, and potentially acquisitions and investments. We also intend to use a portion of our net proceeds to repay all of the outstanding debt under our term loan facility with Silicon Valley Bank. As of June 30, 2007, we had $3.1 million outstanding under the term loan facility. Under the terms of the facility, each advance we draw under the facility bears interest at the prime rate plus 2% but may be decreased to the prime rate plus 1.5% upon the occurrence of certain profitability events. Each advance is payable in monthly installments over three years from the date of the advance. The advances may be prepaid in whole or in part at any time without penalty. At June 30, 2007, the interest rate was 10.25%.
 
In addition, the other principal purposes for this offering are to:
 
  •   create a public market for our common stock;
 
  •   facilitate our future access to the public capital markets;
 
  •   increase our visibility in our markets;
 
  •   provide liquidity for our existing stockholders;
 
  •   improve the effectiveness of our equity compensation plans in attracting and retaining key employees; and
 
  •   enhance our ability to acquire other businesses, products or technologies.
 
We have not yet determined with any certainty the manner in which we will allocate our net proceeds. Management will retain broad discretion in the allocation and use of our net proceeds from this offering. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments, and the rate of growth, if any, of our business. For example, if we were to expand our operations more rapidly than anticipated by our current plans, a greater portion of our proceeds would likely be used for the construction and expansion of facilities, working capital and other capital expenditures. Alternatively, if we were to engage in an acquisition that contained a significant cash component, some or all of our proceeds might be used for that purpose.
 
Although we may use a portion of our proceeds for the acquisition of, or investment in, businesses, technologies, products or assets that complement our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments.
 
Pending specific utilization of our net proceeds as described above, we intend to invest our net proceeds of the offering in short-term investment grade and U.S. government securities.
 
Dividend Policy
 
We have never paid or declared any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the growth and development of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, and other factors our board of directors deems relevant.


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Capitalization
 
The following table sets forth our capitalization as of June 30, 2007:
 
  •   on an actual basis;
 
  •   on a pro forma basis to give effect to (i) the automatic conversion of all of our outstanding redeemable convertible preferred stock upon the closing of this offering; (ii) the filing of our certificate of amendment to our existing restated certificate of incorporation to increase the number of authorized shares of common stock and (iii) the assumed exercise of the warrant to purchase 120,000 shares of redeemable convertible preferred stock and subsequent automatic conversion of those preferred shares into 156,000 shares of common stock; and
 
  •   on a pro forma as adjusted basis to (i) give effect to the issuance and sale by us of 5,829,839 shares of common stock at the initial offering price of $16.00 per share after deducting the underwriting discount and estimated offering expenses payable by us, (ii) the payment by us of $3.1 million to repay our outstanding indebtedness as described under “Use of Proceeds” and (iii) the filing of our restated certificate of incorporation upon the closing of this offering to increase the number of authorized shares of common stock.
 
You should read the following table together with our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this prospectus.
 
                         
    As of June 30, 2007  
                Pro Forma as
 
    Actual     Pro Forma     Adjusted  
    (in thousands, except share data)  
          (unaudited)        
 
Redeemable convertible preferred stock warrant
  $ 1,465     $     $  
Notes payable
    3,083       3,083        
Redeemable convertible preferred stock
    35,840              
Stockholders’ equity (deficit):
                       
Common stock; $0.01 par value; 20,000,000 shares authorized and 3,952,848 shares issued and outstanding, actual; 40,000,000 shares authorized and 21,255,523 shares issued and outstanding, pro forma; 100,000,000 shares authorized and 27,085,362 shares issued and outstanding, pro forma as adjusted
    40       213       271  
Additional paid-in capital
    5,579       42,771       127,786  
Accumulated other comprehensive loss
    (2 )     (2 )     (2 )
Accumulated deficit
    (39,996 )     (39,996 )     (39,996 )
                         
Total stockholders’ equity (deficit)
    (34,379 )     2,986       88,059  
                         
Total capitalization
  $ 6,009     $ 6,069     $ 88,059  
                         
 
The table above does not include:
 
  •   96,844 shares of common stock issuable upon the exercise of warrants outstanding as of June 30, 2007 at a weighted average exercise price of $1.20 per share;


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  •   1,854,641 shares of common stock issuable upon the exercise of stock options outstanding as of June 30, 2007 at a weighted average exercise price of $2.63 per share, of which options to purchase 489,064 shares were exercisable as of June 30, 2007 at a weighted average exercise price of $2.12 per share; and
 
  •   831,124 shares of common stock available for future issuance under our equity compensation plans as of June 30, 2007.


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Dilution
 
If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share you will pay in this offering and the pro forma as adjusted net tangible book value per share of our common stock after this offering.
 
Our pro forma net tangible book value on June 30, 2007 was $1.0 million, or $0.05 per share of common stock. “Pro forma net tangible book value” is total assets minus the sum of liabilities and intangible assets and assumes the exercise of the redeemable convertible preferred stock warrant immediately prior to the closing of this offering, which results in an increase to assets of $60,000 and a reduction to liabilities of $1.5 million. “Pro forma net tangible book value per share” is pro forma net tangible book value divided by the total number of shares outstanding and assumes the conversion of all of our outstanding preferred stock into shares of our common stock immediately upon the closing of this offering.
 
After giving effect to adjustments relating to this offering, our pro forma as adjusted net tangible book value on June 30, 2007 would have been $86.1 million, or $3.18 per share. The adjustments made to determine pro forma as adjusted net tangible book value per share are the following:
 
  •   an increase in total assets to reflect our net proceeds of the offering as described under “Use of Proceeds”; and
 
  •   the addition of the number of shares offered by us pursuant to this prospectus to the number of pro forma shares outstanding.
 
The initial public offering price per share will significantly exceed the pro forma net tangible book value per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $12.82 per share. The following table illustrates the pro forma as adjusted increase in pro forma net tangible book value of $3.13 per share and the dilution (the difference between the initial public offering price per share and pro forma as adjusted net tangible book value per share) to new investors:
 
                 
Initial public offering price per share
          $ 16.00  
Pro forma net tangible book value per share as of June 30, 2007
  $ 0.05          
Increase per share attributable to sale of shares of common stock in this offering
    3.13          
                 
Pro forma as adjusted net tangible book value per share after giving effect to the offering
          $ 3.18  
                 
Dilution per share to new investors in the offering
          $ 12.82  
                 
 
If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value will increase to $3.34 per share, representing an immediate dilution of $12.66 per share to new investors.
 
If shares are issued in connection with the exercise of all outstanding options and warrants for common stock with exercise prices less than $3.18, you will experience further dilution of $0.10 per share. As of June 30, 2007, we had outstanding options and warrants to purchase 1,543,850 shares of common stock with exercise prices less than $3.18.


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The following table summarizes, on a pro forma basis as of June 30, 2007, giving effect to the assumed exercise of an outstanding warrant to purchase 120,000 shares of series B redeemable convertible preferred stock and the conversion of all outstanding redeemable convertible preferred stock into shares of common stock, the differences between the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering. The calculation below is based on the initial public offering price of $16.00 per share before the deduction of the underwriting discount and estimated offering expenses payable by us:
 
                                         
    Shares Purchased     Total Consideration     Average Price
 
    Number     Percent     Amount     Percent     Per Share  
 
Existing stockholders
    21,255,523       78 %   $ 38,608,731       29 %   $ 1.82  
New investors
    5,829,839       22       93,277,424       71       16.00  
                                         
Total
    27,085,362       100.0 %   $ 131,886,155     $ 100.0 %        
                                         
 
The tables above assume no exercise of warrants or options to purchase shares of common stock outstanding as of June 30, 2007. At June 30, 2007, there were 1,951,485 shares of common stock issuable upon exercise of outstanding warrants and options with a weighted average exercise price of $2.56 per share. The tables above also exclude 831,124 shares of common stock available for future issuance under our option plans at June 30, 2007.
 
If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to 6,199,845, or 23% of the total number of shares of common stock outstanding after this offering.


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Selected Financial Data
 
The selected statement of operations data for the year ended December 31, 2006 and the balance sheet data as of December 31, 2006 have been derived from our audited financial statements, which have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and are included elsewhere in this prospectus. The selected statements of operations data for each of the years ended December 31, 2004 and 2005, and the balance sheet data as of December 31, 2005 have been derived from our audited financial statements, which have been audited by Vitale, Caturano & Company Ltd., an independent registered public accounting firm, and are included elsewhere in this prospectus. The selected statements of operations data for each of the years ended December 31, 2002 and 2003 and the balance sheet data as of December 31, 2002, 2003 and 2004 have been derived from our audited financial statements, which have been audited by Vitale, Caturano & Company, Ltd., an independent registered public accounting firm, and are not included in this prospectus. The selected statements of operations data for the six months ended June 30, 2006 and 2007 and the balance sheet data as of June 30, 2007 have been derived from our unaudited financial statements and related notes, which are included in this prospectus. These unaudited financial statements include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) that management considers necessary for the fair statement of the financial information set forth in those statements. The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes included elsewhere in this prospectus. The historical results are not necessarily indicative of the results to be expected in any future period and the results for the six months ended June 30, 2007 should not be considered indicative of results expected for the full year.
 
                                                         
          Six Months
 
    Year Ended December 31,     Ended June 30,  
    2002     2003     2004     2005     2006     2006     2007  
    (in thousands, except per share and customer data)  
 
Statements of Operations Data:
                                                       
Revenue
  $ 1,934     $ 4,465     $ 8,071     $ 14,658     $ 27,552     $ 11,829     $ 21,111  
Cost of revenue(1)
    1,633       1,899       2,211       3,747       7,801       3,354       5,837  
                                                         
Gross profit
    301       2,566       5,860       10,911       19,751       8,475       15,274  
                                                         
Operating expenses:(1)
                                                       
Research and development
    1,694       1,653       2,140       3,355       6,172       2,774       4,971  
Sales and marketing
    1,815       2,549       3,385       7,460       18,592       7,084       12,795  
General and administrative
    601       640       856       1,326       2,623       1,079       2,371  
                                                         
Total operating expenses
    4,110       4,842       6,381       12,141       27,387       10,937       20,137  
                                                         
Loss from operations
    (3,809 )     (2,276 )     (521 )     (1,230 )     (7,636 )     (2,462 )     (4,863 )
Interest and other income (expense), net
    (43 )     (39 )     (34 )     (24 )     (203 )     (306 )     (631 )
                                                         
Net loss
    (3,852 )     (2,315 )     (555 )     (1,254 )     (7,839 )     (2,768 )     (5,494 )
Accretion of redeemable convertible preferred stock
    (220 )     (2,471 )     (3,701 )     (5,743 )     (3,788 )     (3,270 )     (518 )
                                                         
Net loss attributable to common stockholders
  $ (4,072 )   $ (4,786 )   $ (4,256 )   $ (6,997 )   $ (11,627 )   $ (6,038 )   $ (6,012 )
                                                         
Net loss attributable to common stockholders per share:
                                                       
Basic and diluted
  $ (33.86 )   $ (5.75 )   $ (4.37 )   $ (2.49 )   $ (3.38 )   $ (1.82 )   $ (1.59 )
Weighted average shares outstanding used in computing per share amounts:
                                                       
Basic and diluted
    120       832       974       2,813       3,438       3,312       3,770  
Other Operating Data:
                                                       
End of period number of customers(2)
    6,934       14,431       25,229       47,730       89,323       67,061       123,865  


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(1) Amounts include stock-based compensation expense, as follows:
 
                                                         
                                  Six Months
 
    Year Ended December 31,     Ended June 30,  
    2002     2003     2004     2005     2006     2006     2007  
    (in thousands)  
 
Cost of revenue
  $     –     $     –     $     –     $     –     $     25     $      5     $     32  
Research and development
                            27       4       50  
Sales and marketing
    7       6       6             19       4       29  
General and administrative
    22       17       17       17       12       2       92  
                                                         
    $ 29     $ 23     $    23     $    17     $    83     $     15     $    203  
                                                         
 
(2) We define our end of period number of customers as email marketing customers that we billed directly during the last month of the period.
 
                                                         
                                  As of
       
    As of December 31,     June 30,
       
    2002     2003     2004     2005     2006     2007        
    (in thousands)        
 
Balance Sheet Data:
                                                       
Cash, cash equivalents and short-term marketable securities
  $ 3,482     $ 2,114     $ 2,115     $ 2,784     $ 12,790     $ 11,192          
Total assets
    4,677       3,236       3,222       5,545       18,481       19,345          
Deferred revenue
    254       615       1,270       2,827       5,476       8,047          
Redeemable convertible preferred stock warrant
                            628       1,465          
Notes payable and capital lease obligation
    544       612       844       1,326       702       3,083          
Redeemable convertible preferred stock
    4,742       7,213       10,914       16,657       35,322       35,840          
Total stockholders’ deficit
    (1,366 )     (6,129 )     (10,287 )     (17,237 )     (28,629 )     (34,379 )        


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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
 
You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the “Risk Factors” section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
 
Overview
 
Constant Contact is the leading provider of on-demand email marketing solutions for small organizations, including small businesses, associations and non-profits, as determined by the size of our customer base. Our customers use our email marketing product to effectively and efficiently create, send and track professional and affordable permission-based email marketing campaigns. Our customers use these campaigns to build stronger relationships with their customers, clients and members, increase sales and expand membership. Our email marketing product incorporates a wide range of customizable templates to assist in campaign creation, user-friendly tools to import and manage contact lists and intuitive reporting to track campaign effectiveness. In June 2007, we introduced an online survey product that complements our email marketing product and enables small organizations to easily create and send surveys and effectively analyze responses. We provide our customers with a high level of support delivered via phone, chat, email and our website.
 
We provide our products on an on-demand basis through a standard web browser. This model enables us to deploy and maintain a secure and scalable application that is easy for our customers to implement at compelling prices. Our email marketing customers pay a monthly subscription fee that generally ranges between $15 per month and $150 per month based on the size of the customers’ contact lists and, in some cases, volume of mailings. Our survey product is similarly priced. During the first half of 2007, our average monthly revenue per email marketing customer was approximately $33. We believe that the simplicity of on-demand deployment combined with our affordable subscription fees and functionality facilitate adoption of our products by our target customers while generating significant recurring revenue. From January 2005 through July 2007, at least 97.4% of our customers in a given month have continued to utilize our email marketing product in the following month.
 
Our success is principally driven by our ability to grow our customer base. Our email marketing customer base has steadily increased from approximately 25,000 at the end of 2004 to over 130,000 as of July 31, 2007. We measure our customer base as the number of email marketing customers that we bill directly in the last month of a period. These customers include all types of small organizations including retailers, restaurants, day spas, law firms, consultants, non-profits, religious organizations, alumni associations and other small businesses and organizations. We add these customers through a variety of paid and unpaid sources. Our paid sources include online marketing through search engines, advertising networks and other sites; offline marketing through radio advertising, local seminars and other marketing efforts; and contractual relationships with over 1,700 active channel partners. Our unpaid sources of customer acquisition include referrals from our growing customer base, general brand awareness and the inclusion of a link to our website in the footer of more than 500 million emails currently sent by our customers each month. In 2006, our cost of customer acquisition, which we define as our total sales and marketing expense divided by the gross number of email marketing customers added in this period, was approximately $300 per email marketing customer, implying payback on a revenue basis in less than a year. This implied payback is calculated by dividing the $300 acquisition cost per email marketing customer by the average monthly revenue per email marketing customer, which implies a 9.1 month payback period.


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We were incorporated in Massachusetts in August 1995 under the name Roving Software Incorporated. We reincorporated in Delaware in July 2000 and changed our name to Constant Contact, Inc. in December 2006. Our on-demand product was first offered commercially in 2000. In 2006, our revenue was $27.6 million and our net loss was $7.8 million and, in the six months ended June 30, 2007, our revenue was $21.1 million and our net loss was $5.5 million.
 
Sources of Revenue
 
We derive our revenue principally from subscription fees from our email marketing customers. Our revenue is driven primarily by the number of paying customers and the subscription fees for our products and is not concentrated within any one customer or group of customers. In the first half of 2007, our top 50 email marketing customers accounted for approximately 1% of our gross email marketing revenue. We do not require our customers to commit to a contractual term; however, our customers are required to prepay for subscriptions on a monthly, semi-annual, or annual basis by providing a credit card or check for payment. Fees are recorded initially as deferred revenue and then recognized as earned revenue on a daily basis over the prepaid subscription period.
 
We also generate a small amount of revenue from professional services which primarily consist of the creation of customized templates for our customers. Revenue generated from professional services accounted for less than 3% of gross revenue for each of the years ended December 31, 2004, 2005 and 2006 and the six months ended June 30, 2006 and 2007.
 
Cost of Revenue and Operating Expenses
 
We allocate certain overhead expenses, such as rent, utilities, office supplies and depreciation of general office assets to cost of revenue and operating expense categories based on headcount. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category.
 
Cost of Revenue. Cost of revenue consists primarily of wages and benefits for software operations and customer support personnel, credit card processing fees, and depreciation, maintenance and hosting of our software applications underlying our product offerings. We allocate a portion of customer support costs relating to assisting trial customers to sales and marketing expense.
 
The expenses related to our hosted software applications are affected by the number of customers who subscribe to our products and the complexity and redundancy of our software applications and hosting infrastructure. We expect these expenses to increase in absolute dollars as we continue to increase our number of customers over time.
 
Research and Development. Research and development expenses consist primarily of wages and benefits for product strategy and development personnel. We have focused our research and development efforts on both improving ease of use and functionality of our existing products as well as developing new offerings. We primarily expense research and development costs. The small percentage of direct development costs related to software enhancements which add functionality are capitalized and depreciated as a component of cost of revenue. We expect that research and development expenses will increase in absolute dollars but decrease as a percentage of revenue as we continue to enhance and expand our product offerings.
 
Sales and Marketing. Sales and marketing expenses consist primarily of advertising and promotional costs, wages and benefits for sales and marketing personnel, partner referral fees, and the portion of customer support costs that relate to assisting trial customers. Advertising costs consist primarily of pay-per-click payments to search engines, other online and offline advertising media, including radio and print advertisements, as well as the costs to create and produce these advertisements. Advertising costs are expensed as incurred. Promotional costs consist primarily of public relations, memberships, and event costs. Our advertising and promotional expenditures have historically been highest in the fourth quarter of each year as this reflects a period of increased sales and marketing activity for many small organizations. In order to continue to grow our business and brand and category awareness, we expect that we will continue to commit


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substantial resources to our sales and marketing efforts. As a result, we expect that sales and marketing expense will increase in absolute dollars but decrease as a percentage of revenue as we continue to grow.
 
General and Administrative. General and administrative expenses consist primarily of wages and benefits for administrative, human resources, internal information technology support, finance and accounting personnel, professional fees, other taxes and other corporate expenses. We expect that general and administrative expenses will increase as we continue to add personnel in connection with the growth of our business. In addition, we anticipate that we will also incur additional personnel expense, professional service fees, including auditing and legal, and insurance costs related to operating as a public company. Therefore, we expect that our general and administrative expenses, in total, will increase in both absolute dollars and as a percentage of revenue as we continue to grow and operate as a public company.
 
During the six months ended June 30, 2007, we incurred approximately $700,000 of expenses related to our planned initial public offering, including professional fees and filing fees. We have capitalized most of these expenses. In addition, we have purchased and migrated to a new general ledger system at a capitalized cost of approximately $100,000, which better supports our implementation of the necessary accounting controls needed for compliance with Section 404 of the Sarbanes-Oxley Act. We have also engaged a professional services firm to help us prepare for the 2008 internal controls testing related to Section 404 of the Sarbanes-Oxley Act and we expect to incur approximately $300,000 of expense with this firm between July 2007 and December 2008 relating to the assessment, documentation and testing of our internal controls.
 
Critical Accounting Policies
 
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that the estimates, assumptions and judgments involved in the accounting policies described below have the greatest potential impact on our financial statements and, therefore, consider these to be our critical accounting policies. Accordingly, we evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See Note 2 to our financial statements included elsewhere in this prospectus for information about these critical accounting policies, as well as a description of our other significant accounting policies.
 
Revenue Recognition. We provide access to our products through subscription arrangements whereby a customer is charged a fee to access our solutions. Subscription arrangements include use of our software and access to our customer and support services, such as telephone support. We follow the guidance of the SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition in Financial Statements, and Emerging Issues Task Force, or EITF, Issue No. 00-03, Application of AICPA Statement of Position 97-2 to Arrangements that Include the Right to Use Software Stored on Another Entity’s Hardware, which applies when customers do not have the right to take possession of the software and use it on another entity’s hardware. When there is evidence of an arrangement, the fee is fixed or determinable and collectibility is deemed probable, we recognize revenue on a daily basis over the subscription period as the services are delivered.
 
We also offer professional services to our customers primarily for the design of custom email templates and training. Professional services revenue is accounted for separately from subscription revenue based on the guidance of EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, as those services have value on a standalone basis and do not involve a significant degree of risk or unique acceptance criteria and as the fair value of our subscription services is evidenced by their availability on a standalone basis. Professional services revenue is recognized as the services are performed.
 
Income Taxes. Income taxes are provided for tax effects of transactions reported in the financial statements and consist of income taxes currently due plus deferred income taxes related to timing differences between the basis of certain assets and liabilities for financial statements and income tax reporting. Deferred taxes are determined based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance


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for the net deferred tax assets is provided if, based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
 
Software and Website Development Costs. We follow the guidance of the American Institute of Certified Public Accountants Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, in accounting for the development costs of our on-demand products and website development costs whereby costs to develop functionality are capitalized. The costs incurred in the preliminary stages of development are expensed as incurred. Once an application has reached the development stage, internal and external costs, if direct and incremental, are capitalized until the software is substantially complete and ready for its intended use. Costs associated with the development of internal use software capitalized during the year ended December 31, 2006 and the six months ended June 30, 2007 were $516,000 and $224,000, respectively. Development costs eligible for capitalization for the years ended December 31, 2005 and 2004 were not material.
 
Redeemable Convertible Preferred Stock Warrant. We account for freestanding warrants and other similar instruments related to shares that are redeemable in accordance with Statement of Financial Accounting Standards, or SFAS, No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. Under SFAS No. 150, the freestanding warrant that is related to our redeemable convertible preferred stock is classified as a liability on the balance sheet. The warrant is subject to re-measurement at each balance sheet date and any change in fair value (as determined using the Black-Scholes option-pricing model) is recognized as a component of other income (expense), net. We will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrant. Determining the appropriate fair value model and calculating the fair value of the warrant require the use of subjective estimates and assumptions. The most significant input into the Black-Scholes option pricing model is the fair value of the Series B redeemable convertible preferred stock as of each measurement date. For example, if the estimate of the fair value of the Series B redeemable convertible preferred stock were increased by $1 as of a measurement date there would be a corresponding increase to the liability of $120,000 that would be included in the Statement of Operations as Other Expense.
 
Stock-Based Compensation. Effective January 1, 2006, we adopted SFAS No. 123R, or SFAS 123R, Share-Based Payment, a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and related interpretations. SFAS 123R supersedes Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. SFAS 123R requires all share-based compensation to employees, including grants of employee stock options, to be valued at fair value on the date of grant, and to be expensed over the applicable service period. We adopted this statement using the “Prospective” transition method which does not result in restatement of our previously issued financial statements and requires only new awards or awards that are modified, repurchased or canceled after the effective date to be accounted for under the provisions of SFAS 123R. Prior to January 1, 2006, we accounted for stock-based compensation arrangements according to the provisions of APB 25 and related interpretations. Pursuant to the income tax provisions included in SFAS 123R, we have elected the “short cut method” of computing the hypothetical pool of additional paid-in capital that is available to absorb future tax benefit shortfalls.
 
Determining the appropriate fair value model and calculating the fair value of stock-based payment awards require the use of highly subjective estimates and assumptions, including the estimated fair value of common stock, expected life of the stock-based payment awards and stock price volatility. During 2006, we used the Black-Scholes option-pricing model to value our option grants and determine the related compensation expense. The assumptions used in calculating the fair value in 2006 were a weighted average risk free interest rate of 4.82%, expected term of 6.1 years, expected volatility of 64.9% and no expected dividends. The assumptions used in calculating the fair value in the first six months of 2007 were a weighted average risk free interest rate of 4.81%, expected term of 6.1 years, weighted average expected volatility of 63.8% and no expected dividends. The fair value of our common stock was determined by our board of directors, taking into account our most recently available valuations. These assumptions represent management’s best estimates, but the estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use significantly different assumptions or estimates, our stock-based compensation could be materially different. The most significant input into the Black-Scholes option-pricing model used to value our option grants is the fair


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value of common stock. If the estimate of fair value of common stock were increased by $1 as of the date of each stock grant the resulting total fair value of the options granted in 2006 and the first six months of 2007 would have increased by $1.0 million, resulting in an increase to stock based compensation of $66,000 in 2006 and $97,000 for the first six months of 2007.
 
We have historically been a private company and lack company-specific historical and implied volatility information. Therefore, we estimate our expected volatility based on the historical volatility of our publicly traded peer companies and expect to continue to do so until such time as we have adequate historical data regarding the volatility of our traded stock price. The expected term of options has been determined utilizing the “simplified” method as prescribed by SAB No. 107, Share-Based Payment. The risk-free interest rate used for each grant is based on a U.S. Treasury instrument with a term similar to the expected term of the option. SFAS 123R requires that we recognize compensation expense for only the portion of options that are expected to vest. We have estimated expected forfeitures of stock options with the adoption of SFAS 123R to be zero. In developing a forfeiture rate estimate, we have considered our historical experience and determined our forfeitures to be de minimis. If there are forfeitures of unvested options, additional adjustments to compensation expense may be required in future periods.
 
The following table summarizes by grant date the number of shares subject to options granted between January 1, 2004 and June 30, 2007, the per share exercise price of the options and the per share estimated fair value of the options:
                         
    Number of Shares
  Per Share
  Per Share
    Subject to Options
  Exercise Price
  Estimated Fair
Grant Date
  Granted   of Option(1)   Value of Option(2)
 
Year ended December 31, 2004
    203,775     $ 0.04     $ 0.02  
Year ended December 31, 2005
    737,091     $ 0.06     $ 0.02  
Three months ended March 31, 2006
    230,741     $ 1.09     $ 0.70  
Three months ended June 30, 2006
    90,183     $ 2.90     $ 1.86  
Three months ended September 30, 2006
    151,941     $ 2.68     $ 1.70  
Three months ended December 31, 2006
    276,412     $ 3.05     $ 1.94  
January 18, 2007
    39,000     $ 3.05     $ 1.94  
March 2, 2007
    168,025     $ 4.12     $ 2.62  
Three months ended June 30, 2007
    211,204     $ 6.89     $ 4.32  
 
(1) The Per Share Exercise Price of Option represents the determination by our board of directors of the fair market value of our common stock on the date of grant, as determined taking into account our most recently available valuation of common stock.
 
(2) As described above, the Per Share Estimated Fair Value of Option was estimated for the date of grant using the Black-Scholes option-pricing model. This model estimates the fair value by applying a series of factors including the exercise price of the option, a risk free interest rate, the expected term of the option, expected share price volatility of the underlying common stock and expected dividends on the underlying common stock. Additional information regarding our valuation of common stock and option awards is set forth in Note 6 to our financial statements included elsewhere in this prospectus.
 
We have historically granted stock options at exercise prices equivalent to the fair value of our common stock as of the date of grant, as determined taking into account our most recently available valuation of common stock. Prior to 2006, our board of directors had estimated the fair value of our common stock on an annual basis, with input from management, as of the date of grant. Because there has been no public market for our common stock, our board of directors determined the fair value of our common stock by considering a number of objective and subjective factors, including peer group trading multiples, the amount of preferred stock liquidation preferences, the illiquid nature of our common stock and our size and lack of historical profitability. We believe our estimates of the fair value of our common stock were reasonable.
 
Commencing in 2006, we moved to quarterly contemporaneous common stock valuations so that the fair value of our common stock would reflect the impact of our progressive quarterly revenue growth. In the first quarter of 2006, our board of directors determined the fair value of our common stock by using the “guideline public company” method. The valuation considered numerous factors, including peer group trading multiples, the amount of preferred stock liquidation preferences, the illiquid nature of our common stock, our small size, our


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lack of historical profitability, our short-term cash requirements and the redemption rights of our redeemable convertible preferred stockholders. The companies used for comparison under the guideline public company method were selected based on a number of factors, including but not limited to, the similarity of their industry, business models and financial risk to those of ours.
 
Beginning in the second quarter of 2006, the quarterly common stock valuations were prepared using the “probability-weighted expected return” method. Under this methodology, the fair market value of our common stock is estimated based upon an analysis of future values assuming various outcomes. The share value is based on the probability-weighted present value of expected future investment returns considering each of the possible outcomes available to us as well as the rights of each share class. The possible outcomes considered were a sale of the company, an initial public offering, a dissolution and continued operation as a private company.
 
The private company scenario and sale scenario analyses utilized averages of the guideline public company method and the discounted future cash flow method. We estimated our enterprise value under the guideline public company method by comparing our company to publicly traded companies in our industry group. The companies used for comparison under the guideline public company method were selected based on a number of factors, including but not limited to, the similarity of their industry, business model, and financial risk to those of ours. We also estimated our enterprise value under the discounted future cash flow method, which involves applying appropriate discount rates to estimated cash flows that are based on forecasts of revenue, costs and capital requirements. Our assumptions underlying the estimates were consistent with the plans and estimates that we use to manage the business. The risks associated with achieving our forecasts were assessed in selecting the appropriate discount rates.
 
The initial public offering scenario analyses utilized the guideline public company method. We estimated our enterprise value under the guideline public company method by comparing our company to publicly traded companies in our industry group. The companies used for comparison under the guideline public company method were selected based on a number of factors, including, but not limited to, the similarity of their industry, business model, and financial risk to those of ours.
 
The dissolution scenario analyses assumed that our common stock had no value.
 
Finally, the present values calculated for our common stock under each scenario were weighted based on our management’s estimates of the probability of each scenario occurring. The resulting values represented the estimated fair market value of our common stock at each valuation date.
 
As discussed more fully in Note 6 to the financial statements included elsewhere in this prospectus, we granted stock options with a weighted average exercise price of $2.35 per share during 2006 and a weighted average exercise price of $5.42 for the six months ended June 30, 2007. We determined that the fair value of our common stock increased from $1.09 per share in the first quarter of 2006 to $9.60 on July 1, 2007. The following discussion describes the reasons for the difference between the fair value of our common stock during this period and the initial public offering price.
 
During the quarter ended March 31, 2006, we continued to operate our business in the ordinary course. We experienced increases in our number of customers and subscription revenue as well as increases in our operating expenses in support of growing the business, primarily due to increased marketing expenditures and the hiring of additional personnel. We also commenced development of a second product offering. Our business continued to operate at a loss. During this quarter we had no plans for an initial public offering in the near term because we did not believe that an initial public offering would be beneficial for a company of our small size. In May 2006, we calculated the fair value of our common stock as the per share value of each of the four scenarios multiplied by the estimated probabilities of each of the four scenarios. Based on this calculation the fair value of our common stock increased from $1.09 to $2.90 per share as of April 1, 2006.
 
During the quarters ended June 30, 2006 and September 30, 2006, we continued to operate our business in the ordinary course. Although we continued to experience increases in our number of customers and subscription revenue, we also increased our operating expenses in support of growing the business, primarily through increased marketing expenditures and by hiring additional personnel. We continued to focus research and


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development efforts on developing a second product offering and our business continued to operate at a loss. We raised additional capital with a $14.9 million placement of Series C redeemable convertible preferred stock to existing and new investors at a per share price of $5.95. We continued to believe that our small size, combined with our operating losses, did not put us in a position to complete an initial public offering in the near term. However, based on the successful placement of our preferred stock and our continued month over month revenue growth, we believed that the probability of an initial public offering increased and adjusted the scenario probabilities accordingly. Based on this calculation we determined in September 2006 that the fair value of our common stock decreased from $2.90 to $2.68 per share as of July 1, 2006 and we determined in November 2006 that the fair value of our common stock increased to $3.05 as of October 1, 2006.
 
During the quarter ended December 31, 2006, we continued to operate our business in the ordinary course. Both our customer and subscription revenue continued to grow while we continued to operate at a loss primarily due to increases in operating expenses to support the business and fund new marketing programs. We continued to expend resources on developing our second product. While reviewing our performance we determined that we may be approaching the size that would permit us to successfully launch an initial public offering. As a result, management and our board of directors began to consider the possibility of a potential initial public offering, although there were not yet discussions with any third parties regarding an offering. In calculating the fair value of our common stock we adjusted the scenario probabilities accordingly. In February 2007, based on this calculation the fair value of our common stock increased to $4.12 as of January 1, 2007 from $3.05 as of October 1, 2006.
 
During the quarter ended March 31, 2007, we initiated discussions with investment banks about a possible initial public offering. Again we adjusted the scenario probabilities accordingly. In May 2007, based on this calculation, we determined the fair value of our common stock to be $6.89 as of April 1, 2007.
 
During the quarter ended June 30, 2007, we engaged investment bankers, lawyers and accountants to start the process of preparing for an initial public offering and held our initial organizational meeting as well as launched the initial release of our survey product. We adjusted the scenario probabilities accordingly and, in August 2007, based on this calculation, we determined the fair value of our common stock to be $9.60 as of July 1, 2007.
 
Since July 1, 2007, we have filed a registration statement with the SEC for an initial public offering of our common stock.
 
Results of Operations
 
The following table sets forth selected statements of operations data for each of the periods indicated as a percentage of total revenue.
                                         
    Year Ended
    Six Months Ended
 
    December 31,     June 30,  
    2004     2005     2006     2006     2007  
 
Revenue
    100 %     100 %     100 %     100 %     100 %
Cost of revenue
    27       26       28       28       28  
                                         
Gross profit
    73       74       72       72       72  
                                         
Operating expenses:
                                       
Research and development
    27       23       22       23       23  
Sales and marketing
    42       51       67       60       61  
General and administrative
    11       9       10       9       11  
                                         
Total operating expenses
    80       83       99       92       95  
                                         
Loss from operations
    (7 )     (9 )     (27 )     (20 )     (23 )
Interest and other income (expense), net
    (0 )     (0 )     (1 )     (3 )     (3 )
                                         
Net loss
    (7 )%     (9 )%     (28 )%     (23 )%     (26 )%
                                         


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Comparison of Six Months Ended June 30, 2007 and 2006
 
Revenue. Revenue for the six months ended June 30, 2007 was $21.1 million, an increase of $9.3 million, or 78%, over revenue of $11.8 million for the six months ended June 30, 2006. The increase in revenue resulted primarily from an 84% increase in the number of average monthly email marketing customers offset by a slight decrease in average revenue per customer. Average monthly email marketing customers increased to 105,221 in the six months ended June 30, 2007 from 57,216 in the six months ended June 30, 2006, while average revenue per customer in the six months ended June 30, 2007 decreased to $33.44 from $34.46 in the six months ended June 30, 2006. We calculate our monthly average revenue per email marketing customer by first averaging the beginning and ending number of email marketing customers in a given month and then dividing this average customer number into the monthly revenue of that same month. We calculate our average revenue per email marketing customer per fiscal period by first averaging the beginning and ending number of email marketing customers for each month in the applicable fiscal period, then taking an average of these average customers and dividing this average of the averages into our revenue for the applicable fiscal period.
 
Cost of Revenue. Cost of revenue for the six months ended June 30, 2007 was $5.8 million, an increase of $2.4 million, or 74%, over cost of revenue of $3.4 million for the six months ended June 30, 2006. As a percentage of revenue, cost of revenue was 28% for the six months ended June 30, 2007 and 2006. The increase in absolute dollars primarily resulted from an 84% increase in the number of average monthly email marketing customers which resulted in increased hosting and operations expense and customer support costs. Of the increase in cost of revenue, $1.3 million resulted from increased personnel costs attributable to additional employees in our customer support and operations groups to support customer growth and to increase the quality and range of support options available to customers. Additionally, $550,000 resulted from increased depreciation, hosting and maintenance costs as we scaled and added capacity to our hosting infrastructure, and $390,000 related to increased credit card fees due to a higher volume of billing transactions.
 
Research and Development Expenses. Research and development expenses for the six months ended June 30, 2007 were $5.0 million, an increase of $2.2 million or 79%, over research and development expenses of $2.8 million for the six months ended June 30, 2006. The increase was primarily due to additional personnel related costs of $1.7 million as we increased the number of research and development employees to further enhance our products. Additional consulting and contractor fees of $370,000 also contributed to the increase due to the use of these resources to supplement our own personnel.
 
Sales and Marketing Expenses. Sales and marketing expenses for the six months ended June 30, 2007 were $12.8 million, an increase of $5.7 million, or 81%, over sales and marketing expenses of $7.1 million for the six months ended June 30, 2006. The increase was primarily due to increased advertising and promotional expenditures of $2.9 million as we expanded our multi-channel marketing strategy in order to increase awareness of our brand and products and to add new customers. Additional personnel related costs of $1.4 million also contributed to the increase as we added employees to accommodate the growth in sales leads and to staff our expanded marketing efforts.
 
General and Administrative Expenses. General and administrative expenses for the six months ended June 30, 2007 were $2.4 million, an increase of $1.3 million, or 120%, over general and administrative expenses of $1.1 million for the six months ended June 30, 2006. The increase was due primarily to additional personnel related costs of $655,000 as we increased the number of general and administrative employees to support our overall growth, as well as an increase in legal, insurance, accounting and other administrative costs, which reflected the increased scale and complexity of supporting our business.
 
Interest and Other Income (Expense), Net. Interest and other income (expense), net for the six months ended June 30, 2007 was $(631,000), an increase of $325,000, or 106%, from interest and other income (expense), net of $(306,000) for the six months ended June 30, 2006. The increase was due to a $471,000 increase in the expense related to the change in the fair value of the redeemable convertible preferred stock warrant primarily offset by a $166,000 increase in interest income from investments in marketable securities and cash equivalents. We account for an outstanding redeemable convertible preferred stock warrant as a liability held


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at fair market with changes in value recorded as a component of other expense. The increase in interest income was primarily due to an increase in the balance of investments and cash equivalents as a result of an equity funding which was completed in the second and third quarters of 2006.
 
Comparison of Years Ended December 31, 2006 and 2005
 
Revenue. Revenue for 2006 was $27.6 million, an increase of $12.9 million, or 88%, over revenue of $14.7 million for 2005. The increase in revenue resulted primarily from a 93% increase in the number of average monthly email marketing customers partially offset by a slight decrease in average revenue per customer. Average monthly email marketing customers in 2006 increased to 67,336 from 34,909 for 2005, while average revenue per customer for 2006 decreased to $34.10 from $34.99 in 2005.
 
Cost of Revenue. Cost of revenue in 2006 was $7.8 million, an increase of $4.1 million, or 108%, over cost of revenue of $3.7 million in 2005. As a percentage of total revenue, cost of revenue increased slightly to 28% from 26% in 2005. The increase primarily resulted from a 93% increase in the number of average monthly email marketing customers which resulted in increased hosting and operations expense and customer support costs. Of the increase in cost of revenue, $2.0 million related to increased personnel costs attributable to additional employees in our customer support and operations groups required to support customer growth and to increase the quality and range of support options available to customers. Additionally, $1.0 million resulted from increased depreciation, hosting and maintenance costs as we scaled and added capacity to our hosting infrastructure and $559,000 related to increased credit card fees due to a higher volume of billing transactions.
 
Research and Development Expenses. Research and development expenses in 2006 were $6.2 million, an increase of $2.8 million, or 84%, over research and development expenses of $3.4 million in 2005. The increase was primarily due to additional personnel related costs of $2.2 million as we increased the number of research and development employees to further enhance our products.
 
Sales and Marketing Expenses. Sales and marketing expenses in 2006 were $18.6 million, an increase of $11.1 million, or 149%, over sales and marketing expenses of $7.5 million in 2005. The increase was primarily due to increased advertising and promotional expenditures of $7.6 million as we expanded our multi-channel marketing strategy in order to increase awareness of our brand and products and to add new customers. Additional personnel related costs of $2.2 million also contributed to the increase as we added personnel to accommodate the growth in sales leads and to staff our expanded marketing efforts.
 
General and Administrative Expenses. General and administrative expenses in 2006 were $2.6 million, an increase of $1.3 million, or 98%, over general and administrative expenses of $1.3 million in 2005. The increase was primarily due to additional personnel related costs of $811,000 as we increased the number of general and administrative employees to support our overall growth and an increase in legal, accounting and insurance costs of $261,000, which reflected the increased scale and complexity of our professional service needs.
 
Interest and Other Income (Expense), Net. Interest and other income (expense), net in 2006 was $(203,000), an increase of $179,000 from interest and other income (expense), net of $(24,000) in 2005. The increase was due to a $588,000 increase in other expense related to the change in value of the redeemable convertible preferred stock warrant primarily offset by a $432,000 increase in interest income from investments in marketable securities and cash equivalents. We account for the redeemable convertible preferred stock warrant as a liability held at fair market value with changes in value recorded as a component of other expense. Interest income increased primarily due to an increase in investments and cash equivalents as a result of an equity funding that took place during the year.
 
Comparison of Years Ended December 31, 2005 and 2004
 
Revenue. Revenue for 2005 was $14.7 million, an increase of $6.6 million, or 82%, over revenue of $8.1 million for 2004. The increase in revenue resulted primarily from an 80% increase in the number of average monthly email marketing customers. Average monthly email marketing customers in 2005 increased to


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34,909 from 19,345 in 2004. The average revenue per email marketing customer was consistent from period to period.
 
Cost of Revenue. Cost of revenue in 2005 was $3.7 million, an increase of $1.5 million, or 69%, over cost of revenue of $2.2 million in 2004. As a percentage of total revenue, cost of revenue declined slightly to 26% in 2005 from 27% in 2004. The increase in absolute dollars primarily resulted from an 80% increase in the number of average monthly email marketing customers, which resulted in increased hosting and operations expense and higher customer support costs. Of the increase in cost of revenue, $667,000 related to increased personnel costs related to additional employees in our customer support and operations groups in order to support customer growth and to increase the quality and range of support options available to customers. Additionally, $402,000 resulted from increased depreciation, hosting and maintenance costs as we scaled and added to our hosting infrastructure and $257,000 related to increased credit card fees due to a higher volume of billing transactions.
 
Research and Development Expenses. Research and development expenses in 2005 were $3.4 million, an increase of $1.3 million, or 57%, over research and development expenses of $2.1 million in 2004. The increase was primarily due to additional personnel related costs of $955,000 as we increased the number of research and development employees to further enhance our products.
 
Sales and Marketing Expenses. Sales and marketing expenses in 2005 were $7.5 million, an increase of $4.1 million, or 120%, over sales and marketing expenses of $3.4 million in 2004. The increase was primarily due to increased advertising and promotional expenditure of $2.6 million as we introduced a multi-channel marketing program. The marketing program employed radio, online and print advertising concentrated in a few major metropolitan regions of the United States in an effort to increase awareness of email marketing and our brand within our targeted market of small organizations and add new customers. Personnel related costs of $1.1 million also contributed to the increase as we added employees to support the growth in sales leads and to staff our expanded marketing efforts.
 
General and Administrative Expenses. General and administrative expenses in 2005 were $1.3 million, an increase of $470,000, or 55%, over general and administrative expenses of $856,000 in 2004. The increase was due primarily to additional personnel related costs of $391,000 as we increased the number of general and administrative employees.
 
Interest and Other Income (Expense), Net. Interest and other income (expense), net in 2005 was $(24,000), a decrease of $10,000 from interest and other income (expense), net of $(34,000) in 2004. The decrease was due to lower interest expense resulting from principal reductions in our debt facility.


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Quarterly Results of Operations
 
The following table sets forth our unaudited operating results for each of the ten quarters in the period ended June 30, 2007. This information is derived from our unaudited financial statements, which in the opinion of management contain all adjustments necessary for a fair statement of such financial data. Historical results are not necessarily indicative of the results to be expected in future periods. You should read this data together with our financial statements and the related notes included elsewhere in this prospectus.
 
                                                                                 
    Three Months Ended  
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
 
    2005     2005     2005     2005     2006     2006     2006     2006     2007     2007  
    (in thousands, except per share and customer data)  
 
Statements of Operations Data:
                                                                               
Revenue
  $ 2,812     $ 3,318     $ 3,900     $ 4,628     $ 5,429     $ 6,400     $ 7,239     $ 8,484     $ 9,713     $ 11,398  
Cost of revenue(1)
    781       848       931       1,187       1,543       1,811       2,038       2,409       2,731       3,106  
                                                                                 
Gross Profit
    2,031       2,470       2,969       3,441       3,886       4,589       5,201       6,075       6,982       8,292  
                                                                                 
Operating Expenses:(1)
                                                                               
Research and development
    660       821       741       1,133       1,363       1,411       1,530       1,868       2,169       2,802  
Sales and marketing
    1,223       1,413       2,079       2,745       2,837       4,247       4,664       6,844       6,121       6,674  
General and administrative
    263       261       385       417       493       586       633       911       1,082       1,289  
                                                                                 
Total operating expenses
    2,146       2,495       3,205       4,295       4,693       6,244       6,827       9,623       9,372       10,765  
                                                                                 
Loss from operations
    (115 )     (25 )     (236 )     (854 )     (807 )     (1,655 )     (1,626 )     (3,548 )     (2,390 )     (2,473 )
Interest and other income (expense), net
    (8 )     (4 )     (5 )     (7 )     (150 )     (156 )     105       (2 )     (291 )     (340 )
                                                                                 
Net loss
    (123 )     (29 )     (241 )     (861 )     (957 )     (1,811 )     (1,521 )     (3,550 )     (2,681 )     (2,813 )
Accretion of redeemable convertible preferred stock
    (1,342 )     (1,357 )     (1,372 )     (1,672 )     (2,136 )     (1,134 )     (259 )     (259 )     (253 )     (265 )
                                                                                 
Net loss attributable to common stockholders
  $ (1,465 )   $ (1,386 )   $ (1,613 )   $ (2,533 )   $ (3,093 )   $ (2,945 )   $ (1,780 )   $ (3,809 )   $ (2,934 )   $ (3,078 )
                                                                                 
Net loss attributable to common stockholders per share:
                                                                               
Basic and diluted(2)
  $ (0.52 )   $ (0.50 )   $ (0.57 )   $ (0.89 )   $ (0.94 )   $ (0.88 )   $ (0.51 )   $ (1.06 )   $ (0.79 )   $ (0.81 )
                                                                                 
Other Operating Data:
                                                                               
End of period number of customers(3)
    29,356       34,179       39,878       47,730       57,195       67,061       76,861       89,323       104,265       123,865  
 
 
(1) Amounts include stock-based compensation expense, as follows:
 
                                                                                 
Cost of revenue
  $     $     $     $     $ 2     $ 3     $ 9     $ 11     $ 15     $ 17  
Research and development
                            1       3       6       17       21       29  
Sales and marketing
                            1       3       6       9       11       18  
General and administrative
    7       5       5             1       1       2       8       36       56  
                                                                                 
    $ 7     $ 5     $ 5     $     $ 5     $ 10     $ 23     $ 45     $ 83     $ 120  
                                                                                 
(2) Quarterly amounts may not add to full year amounts due to rounding.
 
(3) We define our end of period customers as email marketing customers that we billed directly during the last month of the period.


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As a percentage of revenue:
 
                                                                                 
    Three Months Ended  
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
 
    2005     2005     2005     2005     2006     2006     2006     2006     2007     2007  
 
                                                                                 
Statements of Operations Data:
                                                                               
Revenue
    100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %
Cost of revenue
    28       26       24       26       28       28       28       28       28       28  
                                                                                 
Gross Profit
    72       74       76       74       72       72       72       72       72       72  
                                                                                 
Operating Expenses:
                                                                               
Research and development
    23       25       19       25       25       22       21       22       23       22  
Sales and marketing
    44       42       53       59       53       67       64       81       63       67  
General and administrative
    9       8       10       9       9       9       9       11       11       10  
                                                                                 
Total operating expenses
    76       75       82       93       87       98       94       114       97       99  
                                                                                 
Loss from operations
    (4 )     (1 )     (6 )     (19 )     (15 )     (26 )     (22 )     (42 )     (25 )     (27 )
Interest and other income (expense), net
    (0 )     (0 )     (0 )     (0 )     (3 )     (2 )     1       (0 )     (3 )     (1 )
                                                                                 
Net loss
    (4 )%     (1 )%     (6 )%     (19 )%     (18 )%     (28 )%     (21 )%     (42 )%     (28 )%     (28 )%
                                                                                 
 
Revenue increased sequentially in each of the quarters presented primarily due to increases in the number of total customers.
 
Gross profit, in absolute dollars, also increased sequentially for the quarters presented primarily due to revenue growth.
 
Total operating expenses, in absolute dollars, increased sequentially for most of the quarters presented primarily due to increased sales and marketing expenses which resulted from increased marketing efforts and increased number of personnel. The decrease in operating expenses for the first quarter of 2007 was due to the decrease in marketing expenses from the fourth quarter of 2006 to the first quarter of 2007. This decrease was the result of the seasonality of our marketing expenses, which have been highest in the fourth quarter.
 
Liquidity and Capital Resources
 
Since our inception we have financed our operations primarily through the sale of redeemable convertible preferred stock, issuance of convertible promissory notes, borrowings under credit facilities and, to a lesser extent, cash flow from operations. At June 30, 2007, our principal sources of liquidity were cash and cash equivalents and short term marketable securities totaling $11.2 million and a $5.0 million term loan facility for the acquisition of property and equipment of which $2.2 million remained available for borrowing at June 30, 2007.
 
In February 2003, we entered into a term loan facility with Silicon Valley Bank that provided for a $350,000 term loan for the acquisition of property and equipment. During the period from August 2003 to September 2005, the facility was amended five times increasing the borrowing availability to $2.2 million. At December 31, 2006, there was no available borrowing capacity under the facility and, in March 2007, the facility was amended to establish additional borrowing availability of $5.0 million and to modify certain terms and covenants. As of June 30, 2007, $2.2 million remained available for borrowing. Each advance under the facility is payable in monthly installments over three years from the date of the advance. The advances bear interest at a rate of prime plus 2% (10.25% at June 30, 2007). The interest rate decreases to prime plus 1.5% upon the occurrence of a profitability event (defined as three consecutive months with a net profit of at least $1.00). The facility requires that we maintain financial covenants with respect to minimum net revenue and a total funded debt ratio. Borrowings are collateralized by substantially all of our assets and the advances may be prepaid in whole or in part at any time without penalty.
 
Our operating activities used cash of $1.1 million during the six months ended June 30, 2007 and $748,000 during the year ended December 31, 2006. Net cash provided by operating activities was $2.4 million and $189,000 during the years ended December 31, 2005 and 2004, respectively. Net cash outflows for the six


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months ended June 30, 2007 and year ended December 31, 2006 resulted primarily from operating losses and increases in current assets partially offset by increases in current liability accounts and non-cash charges for depreciation and amortization, changes in fair value of the warrant for redeemable convertible preferred stock and stock based compensation charges. Net cash inflows during 2005 and 2004 resulted primarily from operating losses offset by increases in current liability accounts and non-cash charges for depreciation and amortization. Operating losses were primarily due to increased sales and marketing efforts and additional employees company wide.
 
Changes in current assets consisted primarily of the increase in prepaid expenses and other current assets. Prepaid expenses and other current assets increased $588,000 for the six months ended June 30, 2007 primarily due to a prepaid software term license. Prepaid expenses and other current assets increased $255,000 in 2006 primarily due to increased volume of business.
 
The increases in current liability accounts consisted primarily of the following:
 
Changes in deferred revenue were as follows:
 
  •   during the six months ended June 30, 2007, deferred revenue increased $2.5 million from $5.5 million to $8.0 million;
 
  •   during 2006, deferred revenue increased $2.7 million from $2.8 million to $5.5 million;
 
  •   during 2005, deferred revenue increased $1.5 million from $1.3 million to $2.8 million; and
 
  •   during 2004, deferred revenue increased $655,000 from $615,000 to $1.3 million.
 
The increases in deferred revenue were due to continued growth in unearned prepaid subscriptions. The growth in subscriptions was primarily due to new customer growth.
 
Changes in accrued expenses and other current liabilities were as follows:
 
  •   during the six months ended June 30, 2007, accrued expenses increased $266,000 from $2.4 million to $2.7 million;
 
  •   during 2006, accrued expenses increased $1.9 million from $494,000 to $2.4 million primarily due to increased marketing efforts during the year, increased employee related costs due to personnel additions and increased costs directly attributable to revenue growth partially offset by the receipt of invoices and timing of payments;
 
  •   during 2005, accrued expenses increased $188,000 from $306,000 to $494,000; and
 
  •   during 2004, accrued expenses decreased $337,000 from $643,000 to $306,000.
 
Changes in accounts payable were as follows:
 
  •   during the six months ended June 30, 2007, accounts payable remained significantly unchanged at $2.6 million as of both December 31, 2006 and June 30, 2007;
 
  •   during 2006, accounts payable increased $1.1 million from $1.5 million to $2.6 million;
 
  •   during 2005, accounts payable increased $1.3 million from $176,000 to $1.5 million; and
 
  •   during 2004, accounts payable decreased $105,000 from $281,000 to $176,000.
 
The changes in accounts payable were due to increased expense levels, net of the impact of the timing of payments to vendors.
 
The following non-cash charges are added back as adjustments to reconcile net loss to net cash used in or provided by operating activities:
 
  •   change in fair value of warrant of $837,000 for the six months ended June 30, 2007 and $588,000 for the year ended December 31, 2006;
 
  •   depreciation and amortization expense of $1.1 million for the six months ended June 30, 2007 and $1.5 million, $591,000 and $447,000 for the years ended December 31, 2006, 2005 and 2004, respectively; and


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  •   stock-based compensation expense of $203,000 for the six months ended June 30, 2007 and $83,000, $17,000 and $23,000 for the years ended December 31, 2006, 2005 and 2004, respectively.
 
The change in fair value of the warrant to purchase Series B redeemable convertible preferred stock was due to the increase in the value of the underlying common stock into which this warrant is ultimately convertible. The warrant is subject to re-measurement at each balance sheet date and any change in fair value is recognized as a component of other expense until such time as the warrant is exercised or expires unexercised. The warrant expires on the earliest to occur of November 27, 2007 or immediately prior to the closing of a merger, sale of assets, or consolidation of us by another entity, or immediately prior to the closing date of an initial public offering of our common stock.
 
The increase in depreciation and amortization expense was due to increased purchases of property and equipment required to support the continued growth of the business.
 
The increase in stock based compensation was due to the adoption of SFAS 123R in January 2006.
 
As of December 31, 2006, we had federal and state net operating loss carry-forwards of $29.1 million and $22.5 million, respectively, which may be available to offset potential payments of future federal and state income tax liabilities which expire at various dates through 2026 for federal income tax purposes and through 2011 for state income tax purposes.
 
Net cash used in investing activities was $3.5 million for the six months ended June 30, 2007 and $7.7 million, $2.2 million and $494,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Net cash used in investing activities during the six months ended June 30, 2007 and the year ended December 31, 2006 consisted primarily of net cash paid to purchase marketable securities and property and equipment. Net cash used in investing activities during the years ended December 31, 2005 and 2004 consisted primarily of cash paid for the purchase of property and equipment. Property and equipment purchases consist of infrastructure for our products, capitalization of certain software development costs, computer equipment for our employees and equipment and leasehold improvements related to additional office space.
 
Net cash provided by financing activities was $1.8 million for the six months ended June 30, 2007. Net cash provided by financing activities was $14.4 million, $512,000 and $306,000 for the years ended December 31, 2006, 2005 and 2004, respectively. Net cash provided by financing activities for the six months ended June 30, 2007 consisted primarily of additional borrowings under the term loan facility partially offset by repayment of outstanding borrowings as well as payments of issuance costs of $630,000 for our contemplated initial public offering of common stock. These issuance costs have been capitalized and are included in prepaid expenses and other current assets as of June 30, 2007. Net cash provided by financing activities for the year ended December 31, 2006 consisted primarily of proceeds from the issuance of our Series C redeemable convertible preferred stock and, to a lesser extent, proceeds from the exercise of stock options and warrants, partially offset by repayment of outstanding borrowings under the term loan facility. Net cash provided by financing activities for the years ended December 31, 2005 and 2004 consisted primarily of new borrowings under the term loan facility partially offset by repayment of the borrowings and other capital lease obligations.
 
Our future capital requirements may vary materially from those now planned and will depend on many factors, including, but not limited to, development of new products, market acceptance of our products, the levels of advertising and promotion required to launch additional products and improve our competitive position in the marketplace, the expansion of our sales, support and marketing organizations, the establishment of additional offices in the United States and worldwide and the building of infrastructure necessary to support our growth, the response of competitors to our products and our relationships with suppliers and clients. Since the introduction of our on-demand email marketing product in 2000, we have experienced increases in our expenditures consistent with the growth in our operations and personnel, and we anticipate that our expenditures will continue to increase in the future.
 
We believe that our current cash and cash equivalents, marketable securities and funds available under our term loan facility will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months. Thereafter, we may need to raise additional funds through public or private financings or increased borrowings to develop or enhance products, to fund expansion, to respond to competitive pressures or to acquire complementary products, businesses or technologies. If required, additional


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financing may not be available on terms that are favorable to us, if at all. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced and these securities might have rights, preferences and privileges senior to those of our current stockholders. No assurance can be given that additional financing will be available or that, if available, such financing can be obtained on terms favorable to our stockholders and us.
 
During the last three years, inflation and changing prices have not had a material effect on our business and we do not expect that inflation or changing prices will materially affect our business in the foreseeable future.
 
Off-Balance Sheet Arrangements
 
We do not engage in any off-balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which include special purpose entities and other structured finance entities.
 
Contractual Obligations
 
The following table summarizes our contractual obligations at December 31, 2006 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
 
                                         
    Payments Due by Period  
          Less than
                More than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (in thousands)  
 
Notes payable
  $ 702     $ 449     $ 253     $     $  –  
Operating lease obligations
    3,387       836       1,846       705        
Contractual commitments
    900       561       339              
                                         
Total
  $ 4,989     $ 1,846     $ 2,438     $ 705     $  
                                         
 
In February 2007, we entered into the third amendment to our headquarters office lease to expand our existing premises. As a result, our future operating lease obligations will increase by $183,000, $372,000, $385,000 and $294,000 for 2007, 2008, 2009 and 2010, respectively. In July 2007, we entered into an agreement with a vendor to provide specialized space and related services in a second co-location hosting facility. As a result, our future contractual commitments will increase by approximately $34,000, $311,000, $845,000, $866,000, $888,000 and $755,000 for 2007, 2008, 2009, 2010, 2011 and 2012, respectively.
 
Changes in Accountants
 
On or about September 20, 2006, we dismissed Vitale, Caturano & Company Ltd., or Vitale, as our independent registered public accounting firm. Our audit committee participated in and approved the decision to change our independent registered public accounting firm. The reports of Vitale on the financial statements for the years ended December 31, 2004 and 2005 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. During the years ended December 31, 2004 and 2005 and through September 20, 2006, there were no disagreements with Vitale on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Vitale would have caused them to make reference thereto in their reports on the financial statements for such years. We requested that Vitale furnish us with a letter addressed to the SEC stating whether or not it agrees with the above statements. A copy of such letter, dated July 6, 2007, is filed as Exhibit 16.1 to the registration statement, of which this prospectus forms a part.


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We engaged PricewaterhouseCoopers LLP as our new independent registered public accounting firm as of December 26, 2006.
 
Quantitative and Qualitative Disclosures About Market Risk
 
Foreign Currency Exchange Risk. We bill our customers in U.S. dollars and receive payment predominantly in U.S. dollars. Accordingly, our results of operations and cash flows are not subject to fluctuations due to changes in foreign currency exchange rates.
 
Interest Rate Sensitivity. Interest income and expense are sensitive to changes in the general level of U.S. interest rates. However, based on the nature and current level of our marketable securities, which are primarily short-term investment grade and government securities, and our notes payable, we believe that there is no material risk of exposure.


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Business
 
Overview
 
Constant Contact is the leading provider of on-demand email marketing solutions for small organizations, including small businesses, associations and non-profits, as determined by the size of our customer base. As of July 31, 2007, we had over 130,000 customers. Our customers use our email marketing product to more effectively and efficiently create, send and track professional and affordable permission-based email marketing campaigns. With these campaigns, our customers can build stronger relationships with their customers, clients and members, increase sales and expand membership. Our email marketing product incorporates a wide range of customizable templates to assist in campaign creation, user-friendly tools to import and manage contact lists and intuitive reporting to track campaign effectiveness. In June 2007, we introduced an online survey product that complements our email marketing product and enables small organizations to easily create and send surveys and effectively analyze responses. We are committed to providing our customers with a high level of support, which we deliver via phone, chat, email and our website.
 
We provide our products on an on-demand basis through a standard web browser. This model enables us to deploy and maintain a secure and scalable application that is easy for our customers to implement at compelling prices. Our email marketing customers pay a monthly subscription fee that generally ranges between $15 per month and $150 per month based on the size of their contact lists and, in some cases, volume of mailings. Our survey product is similarly priced. For the first half of 2007, our average monthly revenue per email marketing customer was approximately $33. We believe that the simplicity of on-demand deployment combined with our affordable subscription fees and functionality facilitate adoption of our products by our target customers while generating significant recurring revenue. Since the first quarter of 2002, we have achieved 22 consecutive quarters of growth in customers and revenue.
 
Our email marketing customer base has grown steadily from approximately 25,000 at the end of 2004 to over 130,000 as of July 31, 2007. These customers include all types of small organizations including retailers, restaurants, day spas, law firms, consultants, non-profits, religious organizations, alumni associations and other small businesses and organizations. Customers in more than 110 countries and territories currently use our email marketing product. We estimate that approximately two-thirds of our customers have fewer than ten employees and in the first half of 2007, our top 50 email marketing customers accounted for approximately 1% of our gross email marketing revenue. Our customers have displayed a high degree of loyalty. From January 2005 through July 2007, at least 97.4% of our customers in a given month have continued to utilize our email marketing product in the following month.
 
We acquire our customers through a variety of paid and unpaid sources. Our paid sources include online marketing through search engines, advertising networks and other sites; offline marketing through radio advertising, local seminars and other marketing efforts; and contractual relationships with over 1,700 active channel partners, which include national small business service providers such as Network Solutions, American Express and VistaPrint as well as local small business service providers such as local web developers and marketing agencies, who refer customers to us through links on their websites and outbound promotions to their customers. Our unpaid sources of customer acquisition include referrals from our growing customer base, general brand awareness and the inclusion of a link to our website in the footer of more than 500 million emails currently sent by our customers each month. During the first half of 2007, approximately 56% of our new email marketing customers were generated through marketing programs and channel partners or were located in geographies where we do offline marketing. Accordingly, we believe that during the first half of 2007 approximately 44% of our new email marketing customers were generated through unpaid sources.


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Industry Background
 
Benefits of Email Marketing
 
Organizations are increasingly turning to email marketing as a means to communicate with their customers, clients and members. According to an October 2006 report entitled “The Email Marketing Vendor Landscape” by Forrester, a leading research provider, 94% of marketers currently use or were planning to use email marketing by the end of 2006, with 58% of those marketers outsourcing to a third party provider. Key benefits that drive adoption of email marketing include the following:
 
  •   Targeted. Email marketing enables organizations to tailor messages to specific audiences and enables recipients to respond through links to websites.
 
  •   Timely. The cycle from concept through design and execution for email marketing is much shorter than direct mail because there is no need to print and mail. Reducing cycle time allows organizations to rapidly respond to market conditions and opportunities.
 
  •   Efficient. Email marketing combines low cost with measurable responses leading to an attractive return on investment.
 
Constant Contact Market Opportunity
 
We believe email marketing is an excellent fit for small organizations. Small businesses and non-profits tend to rely heavily on repeat sales and referrals to grow their businesses and expand their membership bases, and email marketing is a cost effective way to reach these audiences.
 
Small organizations also represent a large market opportunity. The U.S. Small Business Administration estimated that there were 25.8 million small businesses in the United States in 2005, and in 2006 the National Center of Charitable Statistics estimated that there were approximately 1.5 million non-profits in the United States. Other small organizations that use email marketing include online auction sellers, independent musicians, community organizations, school districts, parent/teacher associations and sports leagues. Based on these estimates, we believe our email marketing product could potentially address the needs of more than 27.3 million small organizations domestically. We believe that all small organizations could benefit by communicating regularly with their constituents and, further, that email marketing with our product is an effective and affordable method to facilitate this type of communication. As of June 2007, we had customers in at least 856 of the 1,004 of the standard industrial classification, or SIC, codes, which is a method the U.S. government uses to classify industries in the U.S.
 
At the same time, small organizations have generally been slower than larger organizations to adopt email marketing as part of their marketing mix. We believe they face unique challenges when adopting email marketing including:
 
  •   Unfamiliar with Email Marketing. Many small organizations are not familiar with the benefits of email marketing and do not understand how to effectively build a permission-based contact list, develop an effective email marketing campaign and measure its effectiveness.
 
  •   Lack of Technical Expertise. Small organizations often do not have the technical expertise to implement email marketing software or to design and execute effective email marketing campaigns. For example, many small organizations do not have the marketing, graphic design or HTML coding skills to develop professionally formatted emails; may not follow or comprehend the evolving industry standards for sending bulk email; or may not understand how spam filtering technology may impact the delivery of their email communications.
 
  •   Limited Budgets. Small organizations typically have small marketing budgets. They generally cannot afford to hire in-house staff or engage an outside marketing agency to develop, execute and evaluate an email marketing campaign.


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We also believe most existing alternatives for email marketing are poorly suited to meet the needs of small organizations. Some of these existing alternatives include:
 
  •   General Email Applications. General email applications and services such as Microsoft Outlook, America Online or Hotmail are designed for one-to-one emails. They do not easily incorporate the formatting, graphics, and links necessary to produce professional-looking email marketing campaigns. They also limit the number of recipients per email and do not have the reporting capabilities to allow users to evaluate the effectiveness of their email marketing campaigns. Finally, they do not provide regulatory compliance tools to assist the sender in complying with anti-spam requirements.
 
  •   Enterprise Service Providers. These service providers, such as Epsilon Data Management LLC (a subsidiary of Alliance Data Systems Corporation), ExactTarget, Inc., Responsys Inc. and Silverpop Systems Inc. focus on large organizations with sizeable marketing budgets. While these providers offer sophisticated, Internet-based marketing services and tools with professional and customized execution and reporting, they deliver services at a price and scale that is far beyond the scope of most small organizations.
 
As a result, we believe there is an opportunity for an email marketing solution tailored to the needs of small organizations. These users seek an affordable, easy-to-use email marketing solution with a professional appearance and reliable performance.
 
Our Solution
 
We provide small organizations with a convenient, effective and affordable way to communicate with their constituents via email. Our email marketing solution delivers the following benefits to small organizations:
 
  •   Easy. We enable customers to easily create great looking email marketing campaigns without prior expertise in marketing, graphic design or HTML. Our product includes over 200 customizable templates intelligently organized to streamline creation of a professional-looking message. We also provide customers with tools that make it easy for them to import, build and manage contact lists and to monitor delivery and response. We further enhance our product with unlimited free customer support and daily webinars covering topics ranging from a general product tour to email marketing best practices.
 
  •   Fast. Because our product is accessed through the web, customers only need access to a PC and the Internet to begin using it to create and send their first email campaign. A customer can typically create and send their first campaign in less than one hour. Once a customer has loaded their contact list, created and sent their first campaign, our product becomes even faster to use as this information is stored and can be easily accessed for future use.
 
  •   Affordable. We offer our email marketing product on a subscription basis, eliminating the significant up-front license fee associated with traditional software. Instead, we encourage potential customers to try our product without charge for a 60-day period. After the free trial, customers can use our product for a subscription fee of as low as $15 per month with the amount of the fee increasing based on the number of unique contacts or email addresses in a customer’s contact list. We provide discounted pricing for both prepayments and non-profits. For the first half of 2007, our average monthly revenue per email marketing customer was approximately $33.
 
  •   Effective. Our product provides our customers with a highly effective way to reach their customers, clients and members. According to data measured by ReturnPath, Inc. for United States email addresses, approximately 97% of our customers’ emails were delivered past any spam filters or controls to their target email inboxes over the first seven months of 2007. We have made significant investments in systems and processes to reduce the number of our customers’ emails that are blocked as possible spam. In addition, to help ensure that customers’ emails are delivered, we have developed relationships with leading ISPs.


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  •   Measurable. Our email marketing campaign reports provide customers with information and data regarding each campaign. In addition to receiving aggregate data on email receipt, open rates and click-through rates per campaign, our customers can identify on an individual basis which contacts received and opened an email and which links in the email they clicked on. We also provide comparable metrics for our overall customer base. This feedback permits customers to alter the content or timing of their campaigns to capitalize on aspects of prior campaigns that were positively received by their constituents.
 
Business Strengths
 
We believe that the following business strengths differentiate us from competitors and are key to our success:
 
  •   Focus on Small Organizations. We have maintained a consistent and exclusive focus on small organizations, which has enabled us to design a full customer experience tuned to their unique needs. Through the website experience, product usability, affordable price point and personal touch of our communications consultants and support representatives, we work to ensure that small organizations feel that we are committed to their success. We continually invest in primary research to understand this market including usability studies, satisfaction surveys, focus groups and other research initiatives.
 
  •   Efficient Customer Acquisition Model. We believe that we have developed an efficient customer acquisition model that generates an attractive return on our sales and marketing expenditures. We utilize a variety of marketing channels to acquire new customers including online advertising, partner relationships, radio advertising, and online and in-person seminars and brand awareness. A Constant Contact “Try It Free” link is included in the footer of more than 500 million emails currently sent by our customers each month. In 2006, our cost of email marketing customer acquisition, which we define as our total sales and marketing expense divided by the gross number of email marketing customers added in the period, was approximately $300 per email marketing customer. For the first half of 2007, our average monthly revenue per email marketing customer was approximately $33, implying payback on a revenue basis in less than one year. This implied payback is calculated by dividing the $300 acquisition cost per email marketing customer by the $33 average monthly revenue per email marketing customer, which implies a 9.1 month payback period.
 
  •   High Degree of Recurring Revenue. We benefit from a high level of customer loyalty. From January 2005 through July 2007, at least 97.4% of customers in a given month have continued to use our email marketing product in the following month. We believe this represents a high level of retention, particularly given the transient nature of many small organizations. These customers provide us with a significant base of recurring revenue and generate new customer referrals.
 
  •   Consistent Commitment to Customer Service. We seek to provide our customers with a high level of support in order to encourage trials and ongoing usage of our product. We conduct online webinars and in-person events to educate potential customers about the benefits of email marketing. In addition, our communications consultants seek to contact all new U.S. and Canadian based customers to help them launch an initial campaign and address any questions or concerns. As a result, we believe we have a highly satisfied customer base. Since August 2003, our customer surveys indicate that more than 80% of our customers rate their overall experience with Constant Contact as above average or excellent.
 
  •   Software-as-a-Service Delivery. We provide our product on an on-demand basis, meaning that our customers can access and use our product through a standard web browser. This enables our customers to rapidly begin using our product with few up-front costs and limited technical expertise. It also enables us to serve additional customers with little incremental expense and to deploy new applications and upgrades quickly and efficiently to our existing customers.


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Growth Strategy
 
Our objective is to increase our market leadership through the following strategies:
 
  •   Acquire New Customers. We aggressively seek to continue to attract new customers by promoting the Constant Contact brand and encouraging small organizations to try our products. We have increased the number of customers acquired in each of the past 12 quarters. We acquire new customers through multiple acquisition channels including online advertising, partner relationships, radio advertising online and in person seminars and other marketing efforts as well as through referrals from existing customers and the Constant Contact link included in the footer of customer email campaigns. We consistently monitor the return on our advertising spending in terms of new customers generated and adjust our sales and marketing mix as appropriate.
 
  •   Increase Revenue Per Customer. As of July 31, 2007, we had an email marketing customer base in excess of 130,000. We seek to increase revenue from each customer through add-on services that enhance our products such as the hosting of our customers’ images and logos on our system. We are currently developing an add-on service that will enable our customers to archive their past email campaigns and make them available to their constituents.
 
  •   Provide Additional Products. We plan to continue to invest in research and development to maintain our leadership position in email marketing and to develop and provide our customers with complementary products that are easy-to-use, effective and affordable. Based on strong interest from our existing customers, we recently introduced our survey product, which enables customers to create and send online surveys and analyze responses. We believe that we have a significant opportunity to sell our newly launched survey product to our email marketing customers as a means for them to better understand the needs of their constituents. As new customers adopt our survey product, we will also have the opportunity to cross-sell our email marketing product.
 
  •   Expand Internationally. We currently sell our email marketing product to customers in over 110 countries and territories, despite limited marketing efforts outside of the United States. We believe that opportunities exist to more aggressively market our products in English-speaking countries, including Canada, the United Kingdom, Ireland, Australia and New Zealand. In addition, eventually we intend to offer our products in different languages, which will allow us to market our products in additional countries.
 
  •   Pursue Complementary Acquisitions. We follow industry developments and technology advancements and intend to evaluate and acquire technologies or businesses to cost-effectively enhance our products, access new customers or markets or both. We have no present understandings or agreements to acquire any of these technologies or businesses.
 
Our Products and Services
 
Email Marketing
 
Our email marketing product allows customers to easily create, send and track professional-looking email campaigns. Our product provides customers with the following features:
 
  •   Campaign Creation Wizard. This comprehensive, easy-to-use interface enables our customers to create and edit email campaigns. Through intuitive controls, customers can readily change colors, fonts, borders and backgrounds and insert images and logos to help ensure that their emails appear polished and professional. The wizard operates on a “what-you-see-is-what-you-get” basis whereby a customer can move paragraphs and blocks of content within the draft email quickly and view the message from the perspective of intended recipients.
 
  •   Professionally Developed Templates. These pre-designed email message forms help customers quickly create attractive and professional campaigns. Over 200 templates provide ideas as to the kinds of


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  emails customers can send, including newsletters, event invitations, business letters, promotions and announcements, and demonstrate, through the use of color and format, the creativity and professionalism of a potential campaign. Our advanced editing functionality enables customers to easily modify the templates. We also provide templates designed to appeal to specific vertical markets. For example, we offer a restaurant template that includes a pre-formatted menu section.
 
  •   Contact List Management. These tools help customers build and manage their email contact lists. Our contact list building tools include file and spreadsheet import functionality as well as a software plug-in to import contact lists maintained in Microsoft’s Outlook® and Outlook Express®. We also provide HTML programming code for a “Join My Mailing List” box that can be included on the customer’s web site and used to gather new contacts. Our list management tools enable a customer to target or segment contacts for all or specific campaigns and monitor email addresses to which previous campaigns could not be delivered. In addition to their constituents’ names and email addresses, several additional customizable fields are available for the purposes of personalizing email messages. Unsubscribe requests are automatically processed to help ensure ongoing compliance with government regulations and email marketing best practices.
 
  •   Email Tracking and Reporting. These features enable our customers to review and analyze the overall effectiveness of a campaign by tracking and reporting aggregate information including how many emails were delivered, how many were opened, and which links were clicked on. These features also enable our customers to identify on an individual basis which contacts received an email, opened an email and clicked on particular links within the message.
 
  •   Email Delivery Management. These tools are incorporated throughout our product and are designed to maintain our high deliverability rates. Some of these tools are readily apparent to our customers, such as in-depth delivery tracking. Others are delivered through back-office processes, such as a spam content check and address validation. To further improve the percentage of emails delivered, we work closely with ISPs on spam prevention issues. We also include processes and verifications that greatly increase compliance with anti-spam standards.
 
  •   Image Hosting. We enable customers to store up to five images for free, view and edit these images and resize them as necessary for use in their email campaigns. Up to approximately 1,200 images (25 megabytes) can be stored for an additional $5.00 per month. By adding images to an email message, a customer can make the campaign more compelling or visually appealing.
 
  •   Security and Privacy. We protect our customers’ data at a higher level than we believe many of our customers do themselves. We do not use our customers’ confidential information, including their contact lists, except to provide our product, nor do we share, sell or rent this information. In addition, we require that our customers adopt a privacy policy to assist them in complying with government regulations and email marketing best practices.
 
Survey
 
Our recently launched online survey product enables customers to survey their customers, clients or members and analyze the responses. By selecting one of our customizable templates and editing or entering their own questions, our customers can easily create a professionally formatted survey. Similar to our email marketing product, our survey product includes a survey creation wizard, over 40 different preformatted and customizable survey templates, list management capabilities and live customer support.
 
Our survey product incorporates a real-time and comprehensive reporting function that enables our customers to analyze overall survey results and specific answers submitted by individual respondents. The survey product includes powerful analytic features that enable our customers to segment results based on survey responses, easily edit filters for “what if” analysis and view the results in intuitive, easy-to-understand graphical and detailed data formats. Results can be exported to an Excel file for additional analysis. Our customers can identify the respondents associated with filtered results and create a unique contact list of these respondents who can then be targeted with a specific message or follow-up campaign.


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Customer Support
 
We provide extensive free customer support to all customers. Communication consultants seek to contact U.S. and Canadian based trial customers by phone to answer any questions and to help them launch their first campaign. Additional assistance is available via phone, chat or email. Our customer support employees answer approximately 1,300 calls per day with an average wait time of less than two minutes. Our phone and chat support team is located at our headquarters in Waltham, Massachusetts while we outsource our email support to a third party based in Bangalore, India. We complement our customer support with free daily product tours offered via our website, an archive of frequently asked questions (FAQs) and webinars that explain the benefits of email marketing.
 
Our customer service and support group is responsible for enforcing our permission and prohibited content policies. We work closely with customers who have higher than average spam complaint rates or bounced emails, and with customers whose emails are flagged by our system as possibly including prohibited content or spam, to assist them in complying with our policies. If we cannot resolve outstanding concerns, we terminate our agreement with the customer. From January 2005 through July 2007, involuntary terminations have averaged less than 0.5% of our customer base each month.
 
As of July 31, 2007, we had 100 employees working in customer service and support.
 
Professional Services
 
Although the majority of our customers select the “do-it-yourself” approach, we also offer professional services to customers who would like their email campaigns and surveys prepared for them. Our service offerings range from a low-cost, getting started service to full-service email and survey campaign creation.
 
Pricing
 
We price our email marketing product based upon the number of unique email addresses in a customer’s account. Set forth below are the first several pricing tiers:
 
         
Number of Unique Email Addresses
  Monthly Fixed Pricing
 
Up to 500
  $ 15.00  
501-2,500
  $ 30.00  
2,501-5,000
  $ 50.00  
5,001-10,000
  $ 75.00  
10,001-25,000
  $ 150.00  
 
Customers in these pricing tiers may send an unlimited number of emails per month. During the first half of 2007, approximately 80% of our email marketing customers were in our two lowest pricing tiers, $15.00 and $30.00 per month. We offer additional pricing tiers for large list customers. These large list customers are limited as to the number of emails they can send per month for a fixed monthly fee, with overage charges assessed on emails exceeding the monthly limit.
 
Our survey product is similarly priced based on tiers of unique email addresses with customers allowed an unlimited number of surveys a month. However, if a customer receives survey responses in a given month that exceed the number of unique email addresses in their account, they will incur additional charges. In addition, customers may purchase a bundle of both our email marketing and survey products at a discount of 50% off the list price of the second product.
 
We offer our premium image hosting services for $5.00 per month for customers with less than 350,000 unique email addresses. We offer discounted rates to non-profits and for six- and twelve-month prepayment options.


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The Constant Contact Customer Experience
 
We are committed to helping small organizations use the power of email marketing to reach their constituencies. When our customers first connect with us, they may be experienced email marketers or, more likely, thinking about using email campaigns for the first time. The Constant Contact customer experience is designed to first make sure that every customer is successful in sending their initial email campaign and then to retain customers and generate referrals. We have designed our email marketing product to be easy to learn and have added a wide variety of tools designed to assist customers in using our product.
 
Getting Started
 
Every customer experience starts with a free 60-day trial. The only requirement for the free trial is that the potential customer must enter a valid email address that we verify before they can send their initial campaign. We do not require credit card information during the 60-day trial. The trial is a fully-featured experience that is limited to 100 email contacts. Immediately after signing up, the customer receives a welcome email with helpful information on getting started and an invitation to participate in a free online tour, which we host daily. Within the next few days, one of our communications consultants seeks to call U.S. and Canadian based customers to answer questions and discuss how to use email marketing effectively for the organization. All of our customer support resources are available during the free trial period. At the conclusion of the 60-day trial (or earlier if the customer’s contact list exceeds 100 contacts), we ask the customer to provide credit card information in order to begin billing for their continued use of our product.
 
Designing an Email Campaign
 
Our email campaign creation wizard guides our customers through an intuitive workflow process to set up an email campaign. There are more than 200 customizable templates that provide for an assortment of different campaigns, including newsletters, event invitations, promotions, announcements, business letters and more. For a more targeted audience, we provide special template packages for restaurants, associations, religious organizations, retailers and holidays. Our product creates email campaigns in HTML and text formats simultaneously and allows reviewing and editing in each mode. Creation of HTML and text emails is necessary so that recipient is able to display the email message in the best format supported by the recipient’s email program or device.
 
Our customizable templates assist the customer to define the layout and format of an email campaign. They are designed and tested to appear professional. Default content and intelligent pre-population of content, such as customer name, logo, and website links, start the customer off with a basic email campaign. Within the template, a customer can easily:
 
  •   edit, delete or format content;
 
  •   change the color and fonts;
 
  •   add clickable and trackable links to websites;
 
  •   upload, resize and store images and logos;
 
  •   reposition sections of the campaign using a drag and drop interface; and
 
  •   add additional blocks of content—articles, products and events.
 
At any time, a customer can preview the email campaign (in both HTML and text formats) and send a test version to themselves and a small group of others for review. We also provide spell check capability and a spam content test to identify content that might reduce deliverability.


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Uploading and Building an Email Contact List
 
The next step in executing an email marketing campaign is to build an email contact list. Our customers can upload a contact list they have in an email program address book or manually enter a contact list directly into our product. Customers are given explicit and easy to follow instructions to get their contact lists into our product. If customers do not have a contact list or if they want to build upon an existing contact list, they can add our “Join My Mailing List” sign-up box to their websites. Customers can keep their contacts in multiple lists for targeting their campaigns. We charge customers only for the number of unique email contacts in their account.
 
As a customer is adding or uploading a list, they are clearly notified of our permission policies and educated as to the types of lists that are acceptable under our standard terms and conditions.
 
Sending and Monitoring an Email Campaign
 
Once a customer designs a campaign and selects the contact list to receive it, they may send the campaign immediately or choose a future date and time for it to be sent automatically. When a campaign is sent, we notify the customer by email. The customer can then track the results of the campaign, including how many of the emails were delivered, how many recipients opened the email and which links in the email were clicked. In the case of undeliverable emails, the customer can review why the email was not delivered and take appropriate steps. Finally, the customer can monitor if any recipients unsubscribed from their mailing list.
 
Once a customer has sent their first email campaign, our product becomes even easier to use because prior campaigns are available as a starting point for use in future campaigns.
 
Paying for Constant Contact
 
Once the free trial is over (after 60 days or earlier if the trial customer enters more than 100 email contacts), trial customers are prompted to enter credit card information and pick a payment plan in order to continue to use our email marketing product. Customers can pay month-to-month, or pre-pay 6 or 12 months to receive a discount of 10% or 15%, respectively. Customers may also choose and pay for add-on services, such as our premium image hosting. Customers may pay by check if they prepay for 6 or 12 months. If a customer is not ready to sign up for a payment plan after the trial period, they may continue to use their account after the trial period to build their contact list; however, they cannot send another email campaign until they select a payment plan.
 
Customer Service Experience
 
We are committed to providing a high level of customer service. We offer phone, chat and email support for customers from 9 AM to 9 PM (eastern time) weekdays and email-only support on weekends. We also have an extensive self-service knowledgebase located on our website. The majority of our customers use our toll-free phone number as their preferred support channel. Our goal is to have a live support representative on the phone with the customer in less than 2 minutes, a target we generally achieve. Our customer support representatives are well-trained, knowledgeable and committed to helping our customers.
 
Customers that want additional assistance in getting started or designing a unique email template can utilize our professional services team for an incremental fee.
 
In 2006, we launched an online community for both trial and paying customers where they can share their experiences and ask questions of other customers. As of July 31, 2007, we had in excess of 12,000 members of the community with numerous forums that include “members networking with members” and “dos and don’ts for email marketing.”


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We offer our customers a variety of ongoing forums to learn more about the benefits of email marketing and Constant Contact. We offer training seminars both online and in-person within eight geographic regions across the United States and distribute a monthly Email Marketing Hints & Tips newsletter.
 
Customers
 
We have maintained a consistent and exclusive focus on small organizations. In this market, as of July 31, 2007, we served a large and diverse group of over 130,000 email marketing customers. This customer base is primarily comprised of business-to-business users, business-to-consumer users and non-profits and associations. We serve a wide range of business-to-business customers including law firms, accountants, marketing and public relations firms, recruiters and independent consultants. They typically use our product to illustrate their subject matter knowledge by communicating their recent activities and to educate their audiences by sending informational newsletters and announcements about their company or industry. We also serve a diverse base of business-to-consumer customers including on- and off-line retailers, restaurants, realtors, travel and tourism businesses and day spas. These customers typically use our product to promote their offerings with the goal of generating regular, repeat business from their customers and prospects. Finally, we serve a variety of non-profits and associations, including religious organizations, alumni associations, and other non-profits. They typically use our product to maintain regular communications with their members and inform them about news and events pertaining to their groups, as well as to drive event attendance, volunteer participation and fundraising efforts.
 
We estimate that approximately two-thirds of our customers have fewer than ten employees. For the first half of 2007, our average monthly revenue per email marketing customer was approximately $33, including email marketing revenue, image hosting revenue, survey revenue, and professional services revenue. We have low customer concentration as our top 50 customers in email marketing revenue in the first half of 2007 accounted for approximately 1% of our gross email marketing revenue.
 
We measure customer satisfaction on a monthly basis by surveying our customers. Based on these surveys, we believe that our overall customer satisfaction is strong. Another indication of our strong customer satisfaction is our low attrition rate. From January 2005 through July 2007, at least 97.4% of our customers in a given month have continued to utilize our email marketing product in the following month.
 
Sales and Marketing
 
Our sales and marketing efforts are designed to attract potential customers to our website, to enroll them in a free trial, to convert them to paying customers and to retain them as ongoing paying customers. We believe there are significant opportunities to increase the number of customers who try our products through additional sales and marketing initiatives. We employ sophisticated strategies to acquire our customers by using a combination of paid and unpaid sources and sales and marketing conversion resources. We also invest in public relations and thought leadership to build our overall brand and visibility. We are constantly seeking new methods to reach and convert more customers.
 
Paid Sources
 
Online Advertising. We advertise online through pay-per-click spending with search engines (including Google and Yahoo!) and banner advertising with online advertising networks and other websites likely to be frequented by small organizations. We are able to identify customers generated through these efforts because they click on our advertisements before visiting our site, and we measure effectiveness based on the number of customers acquired. Approximately 31% of our new email marketing customers in the first half of 2007 were generated from online advertising.
 
Channel Partners. We have contractual relationships with over 1,700 active online channel partners who refer customers to us through links on their websites and outbound promotions to their customers. These channel partners include large companies with broad reach including Network Solutions, LLC, American Express Company and VistaPrint Limited as well as smaller companies with narrow reach but high influence such as


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local web designers and marketing agencies. Most of our channel partners either share a percentage of the cash received by us or receive a one-time referral fee. Two website design and hosting companies, Web.com, Inc. and Website Pros, Inc., bundle our services and provide them directly to their customers. These channel partners pay us monthly royalties, which contributed less than one percent of our total revenue during the first half of 2007. Approximately 15% of our new email marketing customers in the first half of 2007 were generated from our channel partners.
 
Offline Advertising. We advertise offline in print and radio. Our radio advertising is designed to build awareness of the Constant Contact brand and drive market awareness. Our print advertising is comprised of national publications such as Entrepreneur as well as local business publications in our geographically targeted metro regions. We currently advertise offline in eight metro regions and measure our new customer acquisition in these markets by comparing our performance in similar markets where we do not advertise.
 
Unpaid Sources
 
Word-of-Mouth Referrals. We frequently hear from new customers that they heard about us from a current customer. In our regular customer surveys, we ask our customers how likely they are to refer Constant Contact to a friend or colleague. Throughout 2006 and in the first half of 2007, 46% or more of our email marketing customers responding to this question gave us a 10 on a 10 point scale. We also offer our paying customers a referral incentive consisting of a $30 credit for them and for the customer they referred. Even though we offer this incentive, the majority of referral customers do not use the incentive program.
 
Footer Click-Throughs. Customers also come to us by clicking on the Constant Contact link included in the footer of more than 500 million emails currently sent by our customers each month. In the first half of 2007, approximately 4,000, or 8%, of our new email marketing customers came from a footer click-through.
 
Sales Efforts
 
Communications Consultants. We employed a team of 38 phone-based sales professionals as of July 31, 2007 who seek to call U.S. and Canadian based trial customers to assist them in their initial use of Constant Contact and encourage conversion.
 
Local Evangelism. As of July 31, 2007, we employed a team of eight regional development directors who are focused on educating small organizations as to the benefits of email marketing in their local markets. These employees are located across the United States and typically provide free local seminars to chambers of commerce and other small business groups about email marketing and related topics.
 
Distance Learning. We offer free online webinars to prospects and customers on a wide variety of topics designed to educate them about the benefits of email marketing, teach them how to be great email marketers and guide them in the use of our products.
 
Other Marketing Initiatives
 
Press Relations and Thought Leadership. We leverage our broad customer base as a survey panel to assess small business expectations around major press cycles such as Mother’s Day and Valentine’s Day. We publish the results and seek to get print and radio coverage of our results. We also publish email marketing best practices and advice through our Email Marketing Hints & Tips newsletter and a monthly column in Entrepreneur.com. These efforts enhance our brand awareness and industry leadership.
 
Website Marketing. We continuously measure both website visitor-to-trial conversion and trial-to-paying conversion. We test messaging, graphics and layout alternatives in order to improve website conversion. We also seek to customize the website with vertical or usage-specific messaging whenever possible. We carefully analyze trial customer usage to understand and overcome barriers to conversion.
 
Vertical Marketing. Our vertical marketing group develops marketing programs for certain markets that have demonstrated an affinity for our products. These programs are currently focused on restaurants and food services, franchises, religious organizations, and travel and tourism.


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Community. In August of 2006, we launched a user community with discussion boards, a resource center, member spotlights and other features. As of July 31, 2007, the user community had more than 12,000 participants and more than 5,000 posts on the discussion boards.
 
In the year ended December 31, 2006, we spent $18.6 million on sales and marketing. Our cost of customer acquisition during this period was approximately $300 per email marketing customer, defined as our total sales and marketing expense divided by the gross number of email marketing customers added in the period.
 
Technology
 
Our on-demand products use a central application and a single software code base with unique accounts for each customer. As a result, we are able to spread the cost of providing our products across our entire customer base. In addition, because we have one central application, we believe we can scale our business faster than traditional software vendors. Scalability is achieved through advanced use of application partitioning to allow for horizontal scaling across multiple sets of applications. This enables individual application subsystems to scale independently as required by volume and usage.
 
Our system hardware is co-located in a hosting facility located in Somerville, Massachusetts, owned and operated by Internap Network Services Corporation under an agreement that expires in January 2009. The facility provides around-the-clock security personnel, video surveillance and biometric access screening, and is serviced by onsite electrical generators, fire detection and suppression systems. The facility has multiple Tier 1 interconnects to the Internet. We have entered into an agreement with Sentinel Properties-Bedford, LLC to operate a second co-location hosting facility located in Bedford, Massachusetts. We expect the second hosting facility to be operational in the fourth quarter of 2007.
 
We own all of the hardware deployed in support of our platform. We continuously monitor the performance and availability of our products. We have a highly available, scalable infrastructure that utilizes load-balanced web server pools, redundant interconnected network switches and firewalls, replicated databases, and fault-tolerant storage devices. Production data is backed up on a daily basis and stored in multiple locations to ensure transactional integrity and restoration capability.
 
Changes to our production environment are tracked and managed through a formal maintenance request process. Production baseline changes are handled much the same as software product releases and are first tested on a quality system, then verified in the staging environment, and finally deployed to the production system.
 
Research and Development
 
We have made substantial investments in research and development, and expect to continue to do so as a part of our strategy to continually improve the ease of use of our existing products as well as develop new offerings. As of July 31, 2007, we had 101 employees working in engineering and product strategy. Our product management and strategy team, which directs our research and development efforts, includes a market analyst, product managers, and website and user interface designers. This group also performs competitive and market analysis as well as systematic product usability testing. Our research and development expense totaled $2.1 million for 2004, $3.4 million for 2005 and $6.2 million for 2006.
 
Competition
 
The market for email marketing vendors is fragmented, competitive and evolving. We believe the following are the principal competitive factors in the email marketing market:
 
  •   product functionality, performance and reliability;
 
  •   integrated solutions;
 
  •   customer support and education;
 
  •   deliverability rates;
 
  •   product scalability;


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  •   ease of use; and
 
  •   cost.
 
The email marketing market is divided into two segments—vendors who are focused on the small to medium size business, or SMB, market and vendors who are focused on the enterprise market. We primarily compete with vendors focused on the SMB market and, based on customer count, we are the market leader. Some of the vendors who are focused on the SMB market, together with the customer counts of such vendors as most recently made available by such vendors, include: Vertical Response, Inc. (30,000 customers), Broadwick Corporation (iContact, formerly Intellicontact) (approximately 13,000 customers), CoolerEmail Inc. (10,000 customers), Got Corporation (Campaigner) (10,000 customers), Emma, Inc. (6,000 customers), Lyris Technologies, Inc. (5,000 customers) and Topica Inc. (4,000 customers). These vendors typically charge a low monthly entry fee or a low fee per number of emails sent.
 
Vendors that are focused on the enterprise market include Acxiom Digital (a division of Acxiom Corporation), Alterian Inc., Epsilon Data Management LLC (a subsidiary of Alliance Data Systems Corporation), ExactTarget, Inc., Responsys Inc., Silverpop Systems Inc. and CheetahMail, Inc. (a subsidiary of Experian Group Limited). We believe enterprise email marketing vendors can charge their customers $25,000 or more per month and provide a full-service model, which generally includes an account executive and creative team who often assist with content development. While we currently do not generally compete with vendors focusing on enterprise customers, we may face competition from them in the future.
 
We may also face future competition in the email marketing market from new companies entering our market, which may include large, established companies, such as Microsoft Corporation, Google Inc. or Yahoo! Inc. Barriers to entry into our market are relatively low, which allows new entrants to enter the market without significant impediments and large, established companies to develop their own competitive products or acquire or establish cooperative relationships with our competitors.
 
In addition, these companies may have significantly greater financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their products. These potential competitors may be in a stronger position to respond quickly to new technologies and may be able to undertake more extensive marketing campaigns. These competitors may have more extensive customer bases and broader customer relationships than we do. In addition, these competitors may have longer operating histories and greater name recognition than we do. Moreover, if one or more of our competitors were to merge or partner with another of our competitors or a new market entrant, the change in competitive landscape could adversely affect our ability to compete effectively.
 
Government Regulation
 
The Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, or CAN-SPAM Act, establishes requirements for commercial email and specifies penalties for commercial email that violates the Act. In addition, the CAN-SPAM Act gives consumers the right to require emailers to stop sending them commercial email.
 
The CAN-SPAM Act, which became effective January 1, 2004, covers email sent for the primary purpose of advertising or promoting a commercial product, service, or Internet web site. The Federal Trade Commission, a federal consumer protection agency, is primarily responsible for enforcing the CAN-SPAM Act, and the Department of Justice, other federal agencies, State Attorneys General, and Internet Service Providers also have authority to enforce certain of its provisions.
 
The CAN-SPAM Act’s main provisions include:
 
  •   prohibiting false or misleading email header information;
 
  •   prohibiting the use of deceptive subject lines;
 
  •   ensuring that recipients may, for at least 30 days after an email is sent, opt out of receiving future commercial email messages from the sender, with the opt-out effective within 10 days of the request;


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  •   requiring that commercial email be identified as a solicitation or advertisement unless the recipient affirmatively permitted the message; and
 
  •   requiring that the sender include a valid postal address in the email message.
 
The CAN-SPAM Act also prohibits unlawful acquisition of email addresses, such as through directory harvesting, and transmission of commercial emails by unauthorized means, such as through relaying messages with the intent to deceive recipients as to the origin of such messages.
 
Violations of the CAN-SPAM Act’s provisions can result in criminal and civil penalties, including statutory penalties that can be based in part upon the number of emails sent, with enhanced penalties for commercial emailers who harvest email addresses, use dictionary attack patterns to generate email addresses, and/or relay emails through a network without permission.
 
The CAN-SPAM Act acknowledges that the Internet offers unique opportunities for the development and growth of frictionless commerce, and the CAN-SPAM Act was passed, in part, to enhance the likelihood that wanted commercial email messages would be received. We believe we are a leader in developing policies and practices affecting our industry and that our permission-based email marketing model and our anti-spam policy are compatible with current CAN-SPAM Act regulatory requirements. We are a founding member of the Email Sender and Provider Coalition, or ESPC (http://www.espcoalition.org), a cooperative industry organization founded to develop and implement industry-wide improvements in spam protection and solutions to prevent inadvertent blocking of legitimate commercial email. We maintain high standards that apply to all of our customers, including non-profits and political organizations, whether or not they are covered by the CAN-SPAM Act.
 
The CAN-SPAM Act preempts, or blocks, most state restrictions specific to email, except for rules against falsity or deception in commercial email, fraud and computer crime. The scope of these exceptions, however, is not settled, and some states have adopted email regulations that, if upheld, could impose liabilities and compliance burdens in addition to those imposed by the CAN-SPAM Act.
 
Moreover, some foreign countries, including the countries of the European Union, have regulated the distribution of commercial email and the online collection and disclosure of personal information. Foreign governments may attempt to apply their laws extraterritorially or through treaties or other arrangements with U.S. governmental entities.
 
Our customers may be subject to the requirements of the CAN-SPAM Act, and/or other applicable state or foreign laws and regulations affecting email marketing. If our customers’ email campaigns are alleged to violate applicable email laws or regulations and we are deemed to be responsible for such violations, or if we were deemed to be directly subject to and in violation of these requirements, we could be exposed to liability.
 
Our standard terms and conditions require our customers to comply with laws and regulations applicable to their email marketing campaigns and to implement any required regulatory safeguards. We take additional steps to facilitate our customers’ compliance with the CAN-SPAM Act, including the following:
 
  •   new customers signing up for our services must agree that they will send email through our service only to persons who have given their permission;
 
  •   when an email contact list is uploaded, the customer must certify that it has permission to email each of the addressees;
 
  •   when an individual indicates that they want to be added to a mailing list, they may receive a confirmation email and may be required to confirm their intent to be added to the contact list, through a process called double opt-in;
 
  •   we electronically inspect all of our customers’ email contact lists to check for spam traps, dictionary attack patterns and lists that fail to meet our permission standards; and
 
  •   for customers with large email address lists, we conduct list review interviews to verify that the list is properly acquired and permission-based and that the proposed messages meet our content standards.


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  Campaigns using such lists are conducted in stages, so that we can terminate the campaign early if the list generates an unusually high number of complaints.
 
Intellectual Property
 
Our intellectual property rights are important to our business. We rely on a combination of copyright, trade secret, trademark, patent and other rights in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary technology, processes and other intellectual property. We have filed a patent application and are in the process of filing a second application.
 
Although the protection afforded by copyright, trade secret, trademark and patent law, written agreements and common law may provide some advantages, we believe that the following factors help us to maintain a competitive advantage:
 
  •   the technological skills of our research and development personnel;
 
  •   frequent enhancements to our products;
 
  •   continued expansion of our proprietary content; and
 
  •   high levels of customer service.
 
Others may develop products that are similar to our technology. We enter into confidentiality and other written agreements with our employees, consultants and partners, and through these and other written agreements, we attempt to control access to and distribution of our software, documentation and other proprietary technology and other information. Despite our efforts to protect our proprietary rights, third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop a product with the same functionality as our product. Policing unauthorized use of our products and intellectual property rights is difficult and nearly impossible on a worldwide basis. Therefore, we cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our technology or intellectual property rights.
 
“Constant Contact®” is a registered trademark in the United States and in the European Union. We also hold trademarks and service marks identifying certain of our products or features of our products.
 
Employees
 
As of July 31, 2007, we employed a total of 296 employees. None of our employees is represented by a labor union. We have not experienced any work stoppages and believe that our relations with our employees are good.
 
Facilities
 
Our corporate headquarters, including our principal administrative, marketing, technical support and research and development departments, is located in Waltham, Massachusetts. We lease approximately 50,000 square feet under an agreement that expires in September, 2010. As of July 31, 2007, all of our employees were based in this location with the exception of 10 employees who work out of their homes. If we require additional space, we believe that we will be able to obtain such space on acceptable, commercially reasonable terms.
 
Legal Proceedings
 
We are not currently subject to any legal proceedings. From time to time, we have been party to litigation matters arising in connection with the normal course of our business, none of which has or is expected to have a material adverse effect on us.


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Management
 
Our executive officers and directors and their ages and positions as of July 31, 2007 are set forth below:
 
             
Name
  Age  
Position(s)
 
Gail F. Goodman
  46   Chairman, President and Chief Executive Officer
Ellen Brezniak
  48   Vice President, Product Strategy
Nancie Freitas
  46   Vice President and Chief Marketing Officer
Eric S. Groves
  44   Senior Vice President, Sales and Business Development
Thomas C. Howd
  47   Vice President, Services
Robert P. Nault
  43   Vice President and General Counsel
Daniel A. Richards
  47   Vice President, Engineering
Steven R. Wasserman
  51   Vice President and Chief Financial Officer
Thomas Anderson(3)
  44   Director
Robert P. Badavas(1)
  54   Director
John Campbell(2)
  59   Director
Michael T. Fitzgerald(1)(2)
  54   Director
Patrick Gallagher(2)(3)
  35   Director
William S. Kaiser(1)(3)
  51   Director
 
(1) Member of the audit committee.
 
(2) Member of the compensation committee.
 
(3) Member of the nominating and corporate governance committee.
 
Gail F. Goodman. Ms. Goodman has served as our Chief Executive Officer since April 1999, as a member of our board of directors since May 1999 and as Chairman of our board of directors since November 1999. Prior to joining us, Ms. Goodman served as Vice President, Commerce Products Group of Open Market, a provider of Internet commerce application software, from 1996 until 1998, as Vice President, Marketing of Progress Software Corporation, a developer and provider of application development tools and database software, from 1994 until 1996, as Director of Product Management of Dun & Bradstreet Software, a provider of enterprise resource planning software, from 1991 until 1994 and as Manager of Bain & Company, a business consulting firm, from 1987 until 1991. She holds a B.A. from the University of Pennsylvania and an M.B.A. from the Amos Tuck School of Dartmouth College.
 
Ellen Brezniak. Ms. Brezniak has served as Vice President, Product Strategy since September 2006. From September 2004 until September 2006, she served as Senior Vice President of Marketing and Product Management of GetConnected, Inc., a provider of transaction processing platforms for enabling the sale of digital services. From January 2001 until August 2004, Ms. Brezniak served as Vice President of Marketing of OutStart, Inc., an e-learning software company. Ms. Brezniak has also held leadership positions at Be Free, Inc., Open Market, and Progress Software, Inc. Ms. Brezniak holds a B.S. from Rensselaer Polytechnic Institute.
 
Nancie Freitas. Ms. Freitas joined us in November 2005 and has served as Vice President and Chief Marketing Officer since December 2006. In February 2005, Ms. Freitas founded The Freitas Group, a direct marketing and media firm, which she operated until joining us. From April 2000 until January 2005, she led the direct marketing services of Carat Business & Technology, a worldwide media agency. Ms. Freitas has also held leadership roles at CFO Magazine, Earthwatch Institute and Games Magazine. Ms. Freitas holds a B.A. from the University of Massachusetts.
 
Eric S. Groves. Mr. Groves has served as Senior Vice President, Sales and Business Development since January 2001. From October 1999 until December 2000, Mr. Groves served as Executive Director of Worldwide Sales & Business Development of Alta Vista Corporation, a provider of search services and technology. Mr. Groves has also held leadership positions at iAtlas Corp., InfoUSA Inc., MFS Communications Company, Inc., SBC Communications Inc. and Citigroup Inc. Mr. Groves holds a B.A. from Grinnell College and an M.B.A. from the University of Iowa.


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Thomas C. Howd. Mr. Howd has served as Vice President, Services since 2001. From 1999 until 2000, he served as Director, Production Engineering, of Direct Hit Technologies Inc., a provider of search technologies that was later acquired by Ask Jeeves, Inc. From 1998 until 1999, Mr. Howd served as Director of Support and Quality Assurance of Workgroup Technology Corporation, a product data management software provider. Mr. Howd also held leadership positions in engineering and professional services during his 11 year tenure at Marcam Corporation, a provider of software applications for manufacturing. Mr. Howd holds a B.S. from Williams College.
 
Robert P. Nault. Mr. Nault has served as Vice President and General Counsel since March 2007. Prior to joining us, Mr. Nault served as Senior Vice President, General Counsel and Secretary of RSA Security Inc., a provider of e-security technology solutions, from November 2005 until November 2006 after it was acquired by EMC Corporation in September 2006. Mr. Nault was Vice President and General Counsel of Med-i-Bank, Inc., a provider of software and services for electronic benefit payments from October 2004 to July 2005; Legal Consultant and Vice President and General Counsel of ON Technology Corporation, an enterprise software company, from March 2001 to May 2004; and Senior Vice President and General Counsel of The Pioneer Group, Inc., a financial services and alternative investments company, from 1995 to 2000. Before joining Pioneer, Mr. Nault was a member of the corporate department of Hale and Dorr LLP (now Wilmer Cutler Pickering Hale and Dorr LLP). Mr. Nault is a director of Vanderbilt Financial, LLC, an institutional investment fund. Mr. Nault holds a B.A. from the University of Rhode Island and a J.D. from Boston University School of Law.
 
Daniel A. Richards. Mr. Richards joined us in 1999 and has served as Vice President, Engineering since 2000. Prior to joining us, from 1995 to 1999, he served as a principal developer and as Vice President Engineering of Segue Software Inc., a software company specializing in automated testing applications. Mr. Richards has held a variety of developer and leadership positions at Mercury Computer Systems, Hewlett-Packard and Apollo Computer, Inc. Mr. Richards holds a B.S. from the State University of New York at Binghamton.
 
Steven R. Wasserman. Mr. Wasserman has served as Vice President and Chief Financial Officer since December 2005. Prior to joining us, he served as Vice President and Chief Financial Officer of Med-i-Bank, Inc., a provider of software and services for electronic benefit payments, from March 2004 until it was acquired by Metavante Corp. in July 2005. From January 2001 until March 2004, Mr. Wasserman served as Vice President and Chief Financial Officer of ON Technology Corporation, an enterprise software company that was acquired by Symantec Corporation. Mr. Wasserman has held leadership positions at The Pioneer Group, GTECH Holdings Corporation and EG&G, Inc. Mr. Wasserman holds a B.B.A. from the University of Michigan and an M.B.A. from Babson College.
 
Thomas Anderson. Mr. Anderson has served as one of our directors since January 2007. Mr. Anderson is the Senior Vice President, Direct to Consumer Channel of SLM Corporation. From January 2005 until January 2007, Mr Anderson was the President, Chief Executive Officer and a member of the board of directors of Upromise, Inc., which was acquired by SLM Corporation. From January 2003 until January 2005, he served as Chief Executive Officer of AmeriFee, LLC, a medical finance company owned by Capital One Financial Corporation. From 2001 until 2003, he served as a Senior Vice President of Capital One. Mr. Anderson holds a B.A. from Dartmouth College and a M.S. from the MIT Sloan School of Management.
 
Robert P. Badavas. Mr. Badavas has served as one of our directors since May 2007. He is the President and Chief Executive Officer of TAC Worldwide, a technical staffing and workforce solutions company owned by Goodwill Group of Japan. From November 2003 until becoming President and Chief Executive Officer in December 2005, he was the Executive Vice President and Chief Financial Officer of TAC Worldwide. From September 2001 to September 2003, Mr. Badavas served as Senior Principal and Chief Operating Officer of Atlas Venture, a venture capital firm. Mr. Badavas is a member of the board of directors of Hercules Technology Growth Capital, Inc., a publicly-traded specialty finance company, and Airvana, Inc, a provider of network infrastructure products. Mr. Badavas holds a B.S. in Accounting and Finance from Bentley College.
 
John Campbell. Mr. Campbell has served as one of our directors since March 1999 and is a private investor. From December 2005 until June 2006, he served as interim Chief Operating Officer of DFA Capital Management Inc., a risk management software company. He is a director of WAM Systems and DFA Capital


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Management, both privately held software companies. Mr. Campbell co-founded Marcam Corporation, a leading developer of ERP software, in 1980.
 
Michael T. Fitzgerald. Mr. Fitzgerald has served as one of our directors since July 2000. He is Managing General Partner and Founder of Commonwealth Capital Ventures, the manager of four early stage venture funds. Prior to founding Commonwealth in 1995, he was a General Partner at Palmer Partners, the manager of three early stage venture funds, where he served since 1981. Mr. Fitzgerald holds a B.A. from Amherst College and an M.B.A. from the Harvard Business School. Mr. Fitzgerald is a member of the board of directors of several private companies.
 
Patrick Gallagher. Mr. Gallagher has served as one of our directors since June 2003. He is a Principal at American Capital Strategies, Ltd., an alternative asset manager. Prior to American Capital, he was Vice President of Morgan Stanley Venture Partners (MSVP) and Morgan Stanley and joined the firm in 1995. While at Morgan Stanley he also spent time in the Debt Capital Markets Group and Technology Corporate Finance Department. Prior to joining Morgan Stanley, Mr. Gallagher spent two years working in Toyota’s Corporate Treasury Department. In 2003, Mr. Gallagher rejoined MSVP after working in various business development roles at RealNames, an Internet services company. He holds a B.A. in Economics and Literature from Claremont McKenna College.
 
William S. Kaiser. Mr. Kaiser has served as one of our directors since May 2006. Mr. Kaiser has been employed by Greylock Management Corporation, a venture capital firm, since May 1986 and has been one of the general partners of the Greylock Limited Partnerships since January 1988. Mr. Kaiser is a member of the board of directors of Red Hat, Inc., an open source solutions provider, and several private companies. Mr. Kaiser holds a B.S. from MIT and an M.B.A. from the Harvard Business School.
 
Board Composition
 
Our board of directors currently consists of seven members, all of whom were elected as directors pursuant to the terms of an investor rights agreement. The board composition provisions of our investor rights agreements will terminate upon the closing of this offering and there will be no further contractual obligations regarding the election of our directors. There are no family relationships among any of our directors or executive officers.
 
In accordance with the terms of our restated certificate of incorporation and second amended and restated bylaws that will become effective upon the closing of this offering, our board of directors will be divided into three classes, each of which shall consist, as nearly as possible, of one-third of the total number of directors constituting our entire board of directors and each of whose members will serve for staggered three year terms. As a result, only one class of our board of directors will be elected each year from and after the closing of this offering. Upon the closing of this offering, the members of the classes will be divided as follows:
 
  •   the class I directors will be Messrs. Anderson and Fitzgerald, and their term will expire at the annual meeting of stockholders to be held in 2008;
 
  •   the class II directors will be Messrs. Campbell and Gallagher, and their term will expire at the annual meeting of stockholders to be held in 2009; and
 
  •   the class III directors will be Ms. Goodman and Messrs. Badavas and Kaiser, and their term will expire at the annual meeting of stockholders to be held in 2010.
 
Our restated certificate of incorporation and second amended and restated bylaws that will become effective upon the closing of this offering provide that our directors may be removed only for cause by the affirmative vote of the holders of at least two-thirds of the votes that all of our stockholders would be entitled to cast in an annual election of directors. Upon the expiration of the term of a class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires. This classification of our board of directors may have the effect of delaying or preventing changes in control or management of our company.


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Director Independence
 
Under Rule 4350 of the Nasdaq Marketplace Rules, a majority of a listed company’s board of directors must be comprised of independent directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Rule 4200(a)(15) of the Nasdaq Marketplace Rules, a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
 
In May 2007, our board of directors undertook a review of the composition of our board of directors and its committees and the independence of each director. Based upon information requested from and provided by each director concerning their background, employment and affiliations, including family relationships, our board of directors has determined that none of Messrs. Anderson, Badavas, Campbell, Fitzgerald, Gallagher and Kaiser, representing six of our seven directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under Rule 4200(a)(15) of the Nasdaq Marketplace Rules.
 
Our board of directors also determined that Messrs. Badavas, Fitzgerald and Kaiser, who comprise our audit committee, Messrs. Campbell, Fitzgerald and Gallagher, who comprise our compensation committee, and Messrs. Anderson, Gallagher and Kaiser, who comprise our nominating and governance committee, satisfy the independence standards for those committees established by applicable SEC rules and the Nasdaq Marketplace Rules. In making this determination, our board of directors considered the relationships that each non-employee director has with our company and all other facts and circumstances our board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. In particular, our board of directors has determined that, although Mr. Fitzgerald falls outside the safe harbor provisions of Rule 10A-3(e)(1)(ii) under the Securities Exchange Act of 1934, as amended, Mr. Fitzgerald nevertheless meets the independence requirements contemplated by Rule 10A-3 under the Exchange Act. The safe harbor provisions of Rule 10A-3(e)(1)(ii) exempt holders of 10% or less of any class of voting securities of an issuer from being deemed to be in control of, or an affiliate of, that issuer. After this offering, Mr. Fitzgerald will beneficially own approximately 12%, or 13% assuming entities affiliated with Commonwealth Capital Ventures purchase an aggregate of $4 million of shares of our common stock in this offering, of our outstanding common stock as result of his affiliation with entities affiliated with Commonwealth Capital Ventures. The existence of the safe harbor set forth in Rule 10A-3(e)(1)(ii), however, does not create a presumption in any way that a person exceeding the 10% threshold controls or is otherwise an affiliate of an issuer, and our board of directors, after considering Mr. Fitzgerald’s individual ownership in our outstanding common stock and his service to us solely in the capacity as a director, has determined that Mr. Fitzgerald satisfies the audit committee membership requirements established by the SEC and under the Nasdaq Marketplace Rules.
 
Board Committees
 
Our board of directors has an audit committee, a compensation committee and a nominating and corporate governance committee. Each of these committees will operate under a charter that has been approved by our board of directors to be effective upon completion of this offering. The composition and functioning of all of our committees comply with all applicable requirements of the Sarbanes-Oxley Act of 2002, the Nasdaq Marketplace Rules and SEC rules and regulations.


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Audit Committee
 
The members of our audit committee are Messrs. Badavas, Fitzgerald and Kaiser. Our board of directors has determined that each of the members of our audit committee satisfies the requirements for financial literacy under the current requirements of the Nasdaq Marketplace Rules. Mr. Badavas is the chairman of the audit committee and is also an “audit committee financial expert,” as defined by SEC rules and satisfies the financial sophistication requirements of the Nasdaq Global Market. Our audit committee assists our board of directors in its oversight of our accounting and financial reporting process and the audits of our financial statements.
 
The audit committee’s responsibilities include:
 
  •   appointing, retaining, approving the compensation of, and assessing the independence of our independent registered public accounting firm;
 
  •   overseeing the work of our independent registered public accounting firm, including the receipt and consideration of reports from the firm;
 
  •   overseeing our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;
 
  •   establishing procedures for the receipt and retention of accounting related complaints and concerns;
 
  •   reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures;
 
  •   reviewing our policies and procedures for approving and ratifying related person transactions, including our related person transaction policy;
 
  •   meeting independently with our independent registered public accounting firm and management; and
 
  •   preparing the audit committee report required by SEC rules.
 
All audit services to be provided to us and all non-audit services, other than de minimus non-audit services, to be provided to us by our independent registered public accounting firm must be approved in advance by our audit committee.
 
Compensation Committee
 
The members of our compensation committee are Messrs. Campbell, Fitzgerald and Gallagher. Mr. Campbell is the chairman of the committee. Our compensation committee assists our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers. The compensation committee’s responsibilities include:
 
  •   reviewing and approving, or making recommendations to our board of directors with respect to, our chief executive officer’s compensation;
 
  •   evaluating the performance of our executive officers and reviewing and approving, or making recommendations to the board of directors with respect to, the compensation of our other executive officers;
 
  •   overseeing and administering, and making recommendations to our board of directors with respect to, our cash and equity incentive plans;
 
  •   granting equity awards pursuant to authority delegated by our board of directors;
 
  •   reviewing, and making recommendations to our board of directors with respect to, director compensation; and
 
  •   preparing the compensation committee reports required by SEC rules.


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Nominating and Corporate Governance Committee
 
The members of our nominating and corporate governance committee are Messrs. Anderson, Gallagher and Kaiser. Mr. Anderson is the chairman of the committee. The nominating and corporate governance committee’s responsibilities include:
 
  •   recommending to our board of directors the persons to be nominated for election as directors or to fill vacancies on our board of directors, and to be appointed to each of the board’s committees;
 
  •   overseeing an annual review by our board of directors with respect to management succession planning;
 
  •   developing and recommending to our board of directors corporate governance principles and guidelines; and
 
  •   overseeing periodic evaluations of our board of directors.
 
Compensation Committee Interlocks and Insider Participation
 
None of our executive officers serves, or served during the year ended December 31, 2006, as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or our compensation committee. None of the members of our compensation committee is an officer or employee of our company, nor have they ever been an officer or employee of our company.
 
Code of Business Conduct and Ethics
 
We will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our website at www.constantcontact.com. Any amendments to the code, or any waivers of its requirements, will be disclosed on our website.
 
Director Compensation
 
During the year ended December 31, 2006, none of our directors received any compensation for service as a member of our board of directors or board committees. Non-employee directors are reimbursed reasonable travel and other expenses incurred in connection with attending our board and committee meetings.
 
The following table sets forth information regarding compensation earned by each non-employee director during the year ended December 31, 2006.
 
                 
    Option Awards
    Total
 
Name
  ($)     ($)  
 
John Campbell
           
Michael T. Fitzgerald
           
Patrick Gallagher
           
William S. Kaiser
           
Nataly Kogan(1)
           
James Savage(1)
           
Paul L. Schaut(2)
  $ 311 (3)   $ 311  
 
 
(1) Ms. Kogan and Mr. Savage each resigned from our board of directors on May 12, 2006.
 
(2) Mr. Schaut resigned from our board of directors on May 6, 2007. As of December 31, 2006, Mr. Schaut held options to purchase an aggregate of 49,757 shares of our common stock. In January 2007, he exercised options to purchase 49,172 shares of our common stock.


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(3) Valuation of these option awards is based on the dollar amount of share based compensation that would have been recognized for financial statement reporting purposes in 2006 computed in accordance with SFAS 123R, excluding the impact of estimated forfeitures related to service-based vesting conditions (which in our case were none), had we used the modified prospective transition method pursuant to SFAS 123R. Under the modified prospective transition method, a portion of the grant date fair value determined under SFAS 123 of equity awards that are outstanding on January 1, 2006, the date we adopted SFAS 123R, is recognized over the awards’ remaining vesting periods. This amount would have been $311 for Mr. Schaut. The assumptions used by us with respect to the valuation of option awards are the same as those set forth in Note 6 to our financial statements included elsewhere in this prospectus.
 
In January 2007, in connection with his initial appointment to our board of directors, we granted Mr. Anderson an option to purchase 39,000 shares of our common stock, at an exercise price of $3.05 per share, which was the fair market value of our common stock on the date of grant as determined by our board of directors. These options will vest over a two-year period, with 12.5% of the shares underlying the option vesting on the three-month anniversary of the date of grant and an additional 12.5% of the shares underlying the option vesting each three months thereafter, subject to Mr. Anderson’s continued service as a director and, in the event of a change of control of us, the vesting schedule of these options will accelerate in full.
 
In June 2007, in connection with his initial appointment to our board of directors, we granted Mr. Badavas an option to purchase 39,000 shares of our common stock, at an exercise price of $6.89 per share, which was the fair market value of our common stock on the date of grant as determined by our board of directors. These options will vest over a two-year period, with 12.5% of the shares underlying the option vesting on the three-month anniversary of the date of grant and an additional 12.5% of the shares underlying the option vesting each three months thereafter, subject to Mr. Badavas’s continued service as a director and, in the event of a change of control of us, the vesting schedule of these options will accelerate in full.
 
In August 2007, our board of directors approved a compensation program, which will become effective upon the closing of this offering, pursuant to which we will pay each non-employee director an annual retainer of $20,000 for service as a director. Each non-employee director other than committee chairpersons will receive an additional annual fee of $5,000 for service on the audit committee, $3,750 for service on the compensation committee and $2,500 for service on the nominating and corporate governance committee. The chairman of the audit committee will receive an additional annual retainer of $10,000, the chairman of the compensation committee will receive an additional annual retainer of $7,500 and the chairman of the nominating and corporate governance committee will receive an additional annual retainer of $5,000. We will reimburse each non-employee member of our board of directors for out-of-pocket expenses incurred in connection with attending our board and committee meetings.
 
In addition, pursuant to our 2007 stock incentive plan each non-employee director will receive an option to purchase 25,000 shares of our common stock upon his or her initial appointment to our board of directors. Each non-employee director will also receive an annual option grant to purchase 10,000 shares of our common stock at each annual meeting after which he or she continues to serve as a director, provided each such non-employee director has served on our board of directors for at least six months. All of these options will vest over a three-year period, with 33.33% of the shares underlying the option vesting on the first anniversary of the date of grant, or in the case of annual option grants one business day prior to the next annual meeting, if earlier, and an additional 8.33% of the shares underlying the option vesting each three months thereafter, subject to the non-employee director’s continued service as a director. The exercise price of these options will equal the fair market value of our common stock on the date of grant. In the event of a change of control of us, the vesting schedule of these options will accelerate in full.


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Executive Compensation
 
Compensation Discussion and Analysis
 
Overview
 
Our historical executive compensation programs were developed and implemented by our board of directors and compensation committee while we were a private company. Prior to 2005, our compensation programs, and the process by which they were developed, were less formal than that typically employed by a public company. During this time, our board of directors generally benchmarked our executive compensation on an informal basis by comparing the compensation of our executives to the compensation of executives employed in the portfolio companies of certain of our board members’ venture capital firms. Over the last two years, however, the board of directors and the compensation committee began to formalize their approach to the development of our executive compensation programs. The process became more formalized for three primary reasons. First, our size and the growth and sophistication of our executive team required that the board of directors become more rigorous in its review of executive compensation. Second, as we grew, the compensation of the executives employed in the portfolio companies of some of our board members’ venture capital firms became less meaningful for benchmarking purposes because many of the companies were smaller than us and were in earlier stages of their development. Finally, while in late 2005 we were not yet contemplating a public offering, the board of directors recognized that if we wished to conduct a public offering in the future our executive compensation programs would need to meet the standards typically associated with the compensation programs of public companies.
 
In establishing executive compensation levels for 2006, the compensation committee reviewed published market surveys to provide current information regarding the competitiveness of our total cash compensation, which included base salaries and target bonuses. The compensation committee used these market surveys to compare the total cash compensation of the survey group in the 50th percentile to total cash compensation of our positions that matched positions in the survey group. Based on these surveys, three of our named executive officers (Mr. Groves (-4%), Mr. Howd (-14%) and Mr. Turcott (-3%)) were below the median, one of our named executive officers (Mr. Richards) was at the median, and two of our named executive officers (Ms. Goodman (3%) and Mr. Wasserman (5%)) were above the median. The compensation committee reviewed this information and determined that the target total cash compensation for the following executive officers be set as follows: Ms. Goodman, $325,000, Mr. Howd, $200,000, Mr. Richards, $200,000, and Mr. Turcott $225,000. These increases represented an increase in target total cash compensation to these officers of 12%. Due to Mr. Wasserman’s recent commencement of employment with us in December of 2005 and Mr. Groves’ high target incentive, the compensation committee decided that no cash compensation increases were warranted for these executive officers.
 
For 2007 executive compensation determinations, the compensation committee engaged an independent compensation consultant, DolmatConnell & Partners, to review and evaluate the elements of our executive compensation program, including base salaries, target bonus percentages and equity ownership. As part of this evaluation, DolmatConnell developed a specific peer group of private and public software and technology companies with annual revenue less than $60 million to provide a comparative basis for our compensation practices and established base salary, bonus and long-term equity guidelines for our executives. DolmatConnell then compared the total cash compensation of the peer group in the 50th percentile to total cash compensation of our positions that matched positions in the survey group. Based on this analysis, four of our named executive officers (Ms. Goodman (-26%), Mr. Groves (-9%), Mr. Richards (-15%) and Mr. Wasserman (-26%)) were below the median, and one of our named executive officers (Mr. Howd (1%)) was above the median. The compensation committee reviewed this information and determined that the target total cash compensation for the following executive officers be set as follows: Ms. Goodman, $400,000, Mr. Groves, $280,000, Mr. Howd, $230,000, Mr. Richards, $218,750, and Mr. Wasserman $250,000. These increases represented an increase in target total cash compensation to these officers of 16%.
 
Other than our retention of DolmatConnell in late 2006, we have not retained any other compensation consultant to review our policies and procedures relating to executive compensation. In the future, we expect


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that our compensation committee will continue to engage a compensation consulting firm to provide advice and resources.
 
Objectives and Philosophy of Our Executive Compensation Programs
 
Our compensation committee’s primary objectives with respect to executive compensation are to:
 
  •   attract, retain and motivate the best possible executive talent;
 
  •   ensure executive compensation is aligned with our corporate strategies and business objectives;
 
  •   promote the achievement of key financial and strategic performance measures by linking short- and long-term cash and equity incentives to the achievement of measurable corporate and, in some cases, individual performance goals; and
 
  •   align the incentives of our executives with the creation of value for our stockholders.
 
Our compensation committee expects to continue to implement and maintain compensation plans to achieve these objectives. Our compensation plans and policies currently, and we expect will continue to, compensate executive officers with a combination of base salary, quarterly cash incentive bonuses, equity incentives and customary employee benefits. Historically, quarterly cash incentive bonuses have been tied to key financial metrics such as average monthly revenue growth, or AMRG, cash flow and earnings before interest, taxes, depreciation and amortization, or EBITDA, and, in the case of certain of our executive officers, the achievement of individual quarterly performance goals. We have provided, and expect to continue providing, a portion of our executive compensation in the form of equity incentive awards that vest over time, which we believe helps to retain our executives and aligns their interests with those of our stockholders by allowing them to participate in the longer term success of our company as reflected in stock price appreciation. We intend to implement compensation packages for our executive officers generally in line with the median competitive levels of comparable public companies, with potential upside for better than planned performance.
 
Components of Our Executive Compensation Program
 
The primary elements of our executive compensation program are:
 
  •   base salary;
 
  •   quarterly cash incentive bonuses;
 
  •   equity incentive awards; and
 
  •   benefits and other compensation.
 
We have not had any formal or informal policy or target for allocating compensation between long-term and short-term compensation, between cash and non-cash compensation or among the different forms of non-cash compensation. Instead, our compensation committee has established these allocations for each executive officer on an annual basis. Our compensation committee establishes cash compensation targets based primarily upon benchmarking data as well as the performance of the individual executive. Our compensation committee establishes non-cash compensation based upon benchmarking data, the performance of the individual executive, the executives’ equity ownership percentage and the amount of their equity ownership that is vested equity. In the future, we expect that our compensation committee will continue to use benchmarking data for cash compensation as well as provide the executives with annual equity grants. We believe that the long-term performance of our business is improved through the grant of stock-based awards so that the interests of our executives are aligned with the creation of value for our stockholders.
 
Base Salaries. Base salaries are used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our executive officers. Base salaries for our executives have sometimes been set in our offer letter to the executive at the outset of employment, which is the case with Ms. Goodman and Mr. Wasserman. None of our executives is currently party to an employment agreement that provides for automatic or scheduled increases in base salary. However, from time to time in the discretion


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of our compensation committee, and consistent with our incentive compensation program objectives, base salaries for our executives, together with other components of compensation, are evaluated for adjustment based on an assessment of an executive’s performance and general compensation trends in our industry.
 
In establishing base salaries for our named executive officers for 2006, our compensation committee took into account a number of factors, including each named executive’s position and functional role, seniority, job performance and overall level of responsibility and the benchmarking data. In 2006, the base salaries of Mr. Howd and Mr. Turcott were increased by 11% and 6%, respectively. Our compensation committee determined that Mr. Howd had performed well over several years, ran his organization efficiently and effectively, and that the performance of his organization was contributing to our high level of customer satisfaction. Our compensation committee also determined that the size of Mr. Howd’s organization added significant complexity to his role. Our compensation committee determined to increase Mr. Howd’s base salary to $150,000, which placed him 6% below the median of the benchmarked group. Our compensation committee determined that Mr. Turcott had performed well in his first year and had employed marketing programs that increased our revenue. Our compensation committee determined to increase Mr. Turcott’s base salary to $165,000, which placed him 3% below the median of the benchmarked group. Our compensation committee also reviewed the performance of Ms. Goodman and Mr. Groves. Although our compensation committee determined that Ms. Goodman and Mr. Groves had performed well, it did not increase their base salaries. This decision was made, in part, because each executive’s base salary was above the median of the benchmarked group. Mr. Wasserman’s performance was not reviewed because his employment commenced in December 2005.
 
In establishing base salaries for our named executive officers for 2007, our compensation committee reviewed a number of factors, including each named executive’s position and functional role, seniority, job performance and overall level of responsibility and the benchmarking data and information provided by DolmatConnell. In 2007, the base salaries of Ms. Goodman, Mr. Howd and Mr. Richards and Mr. Wasserman were increased by 10%, 18%, 17% and 17%, respectively. Our compensation committee determined that Ms. Goodman had performed well as she continued to drive the strategy that expanded the company’s market leadership position. Our compensation committee determined to increase Ms. Goodman’s base salary to $275,900, which placed her 2% below the median of the benchmarked group. Our compensation committee determined that Mr. Howd had performed well in 2006, effectively scaling his organization to serve our large growth in the number of customers and at the same time helping to maintain our high level of customer satisfaction. Our compensation committee determined to increase Mr. Howd’s base salary to $176,900, which placed him 11% above the median of the benchmarked group. Our compensation committee believed that the scope and breadth of Mr. Howd’s role was broader and more strategic than a typical executive in his role and, as a result, increased his base salary substantially close to the 75th percentile of the benchmarked group. Our compensation committee determined that Mr. Richards had performed well in 2006. His organization added significant functionality to our software and kept the availability of our software product at very high levels, while we continued to add a large number of customers. Our compensation committee determined to increase Mr. Richards’ base salary to $175,000, which placed him 6% below the median of the benchmarked group. Our compensation committee determined that Mr. Wasserman had performed well in his first year, building his organization, raising capital on favorable terms and helping to prepare the company, from a systems and processes perspective, for rapid growth and a possible future initial public offering. Our compensation committee increased Mr. Wasserman’s base salary to $192,300, which placed him 6% below the median of the benchmarked group. Our compensation committee also reviewed the performance of Mr. Groves. While our compensation committee determined that Mr. Groves had performed well, it did not increase his base salary, in part, because his base salary was already 1% above the median of the benchmarked group. Our compensation committee, however, increased Mr. Groves’ target incentive percentage from 30% to 40%. The increase in Mr. Groves’ target incentive provided Mr. Groves with cash compensation upside but only if we achieved our financial targets. Our compensation committee felt that this better aligned the interests of Mr. Groves with those of our stockholders.
 
Cash Incentive Bonuses. Each year, including the years 2006 and 2007, we have established a cash incentive bonus plan for our executives, which provides for quarterly cash incentive bonus payments. The cash incentive


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bonuses are intended to compensate for the achievement of both company strategic and financial targets and, in the case of some executive officers, individual performance goals. Amounts payable under the cash incentive bonus plan are calculated as a percentage of the applicable executive’s base salary. The corporate financial targets are weighted 70% and the individual performance goals are weighted 30% in the bonus analysis, except that the corporate financial targets were weighted 100% for Ms. Goodman and Messrs. Groves and Turcott in 2006, and are weighted 100% for Ms. Goodman in 2007. The corporate financial targets generally conform to the financial metrics contained in the internal business plan adopted by our board of directors. In 2006, the financial metrics were AMRG and cash flow. The actual AMRG targets for each quarter of 2006 were as follows: $84,487 for the first quarter, $124,595 for the second quarter, $103,500 for the third quarter and $172,200 for the fourth quarter. The actual quarterly cash flow targets for 2006 were as follows: $(1,191,604) for the first quarter, $(1,355,479) for the second quarter, $(739,200) for the third quarter and $(3,630,300) for the fourth quarter. In 2007, the financial metrics are AMRG and EBITDA. In both 2006 and 2007, 90% of the portion of the bonus payout related to corporate financial targets is based on the AMRG metric. In 2006, bonus payments based on AMRG were paid out based on achieving a minimum target of at least 80% or 90% depending on the quarter with accelerators for achievement beginning at 115% or 120% depending on the quarter. If actual AMRG as a percentage of target AMRG was between the minimum threshold (80% or 90%) but less than the point at which the accelerators were effective (115% or 120%), the payout was equal to the percentage achievement multiplied by the target AMRG incentive. If actual AMRG as a percentage of target AMRG was equal to or greater than the point at which the accelerators were effective (115% or 120%), the payout was equal to the percentage achievement multiplied by the accelerator (1.5x or 2.0x) multiplied by the target AMRG incentive. In addition, in the first quarter of 2006 only, bonus payments based on cash flow and individual performance goals were increased above the target amounts by the percentage that we exceeded our AMRG target. For first quarter 2006 payments based on our cash flow target, these increased payments were earned by all executives because we met our cash flow target. For first quarter 2006 payments based on individual performance goals, only executives who fully achieved their individual performance goals received these increased payments. In 2007, the minimum threshold for achievement is identical to 2006 levels with similar accelerators. Bonus payments based on cash flow and EBITDA targets are paid out at 100% only if the target metric is achieved. Individual objectives are necessarily tied to the particular area of expertise of the employee and his or her performance in attaining those objectives relative to external forces, internal resources utilized and overall individual effort. The compensation committee approves the corporate financial targets, the weighting of various goals for each executive and the formula for determining potential bonus amounts based on achievement of those goals. Ms. Goodman sets the individual performance goals for the executives. The compensation committee works with the chief executive officer to develop corporate financial targets and individual performance goals. The targets and goals are generally designed to be difficult to fully achieve and, as was the case in 2006, we do not expect that all of the goals will be achieved in all periods.
 
Mr. Howd’s individual performance goals in 2006 included defining the role and recruiting a senior call center leader and achieving defined call center metrics in the first quarter, recruiting a senior call center leader and achieving defined call center metrics in the second quarter, planning regarding a major product update, “visual editor,” and implementing compliance initiatives in the third quarter, and developing and implementing certain personnel policies and procedures and implementing compliance initiatives in the fourth quarter. Mr. Richards’ individual performance goals in 2006 included planning and scheduling four major product releases and finalizing the plan for completing the web analytics project in the first quarter, finalizing the schedule for “visual editor” deployment, completing second half engineering resource planning and assessing data protection requirements in the second quarter, evaluating “visual editor” impact, addressing engineering organizational and personnel matters and addressing data protection requirements in the third quarter, and reviewing the status of the four major product upgrades and addressing engineering organizational matters in the fourth quarter. Mr. Wasserman’s individual performance goals in 2006 included identifying long term office space needs and options, recruiting additional personnel, transitioning elements of our legal work and addressing our equipment financing needs in the first quarter, completing an equity financing and completing a revenue and deferred revenue reporting project in the second quarter, recruiting additional personnel and


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developing business performance analytics and related reporting in the third quarter, and developing a plan for a potential future initial public offering in the fourth quarter.
 
The target bonus awards, as a percentage of base salary, for 2006 were 30% for Ms. Goodman and Mr. Groves, 33% for Mr. Howd and Mr. Richards, 36% for Mr. Turcott, and 24% for Mr. Wasserman. The target cash incentive bonuses awarded with respect to 2006 and set forth in the 2006 Summary Compensation Table were split 15%, 25%, 25% and 35% for each of the four quarters respectively.
 
The performance based compensation elements for our executive officers for 2006 and a description of whether or not they achieved or underachieved with respect to each element were as follows:
 
                                 
    2006 – First Quarter   2006 – Second Quarter   2006 – Third Quarter   2006 – Fourth Quarter
    Company
      Company
      Company
      Company
   
    Strategic
      Strategic
      Strategic
      Strategic
   
    and Financial
  Result for
  and Financial
  Result for
  and Financial
  Result for
  and Financial
  Result for
    Goal   Quarter   Goal   Quarter   Goal   Quarter   Goal   Quarter
 
Ms. Goodman
                               
Mr. Groves
                               
Mr. Howd
                               
Mr. Turcott
                               
Mr. Richards
                               
Mr. Wasserman
  AMRG (1)   Exceeded   AMRG   Under-
Achieved
  AMRG   Under-
Achieved
  AMRG   Under-
Achieved
Ms. Goodman
                               
Mr. Groves
                               
Mr. Howd
                               
Mr. Turcott
                               
Mr. Richards
                               
Mr. Wasserman
  Cash Flow   Achieved (2)   Cash Flow   Under-
Achieved
  Cash Flow   Achieved   Cash Flow   Achieved
                                 
Mr. Howd
  Individual
Performance
Goals
  Achieved (2)   Individual
Performance
Goals
  Achieved   Individual
Performance
Goals
  Achieved   Individual
Performance
Goals
  Achieved
                                 
Mr. Richards
  Individual
Performance
Goals
  Under-
Achieved
  Individual
Performance
Goals
  Achieved   Individual
Performance
Goals
  Under-
Achieved
  Individual
Performance
Goals
  Under-
Achieved
                                 
Mr. Wasserman
  Individual
Performance
Goals
  Achieved (2)   Individual
Performance
Goals
  Achieved   Individual
Performance
Goals
  Achieved   Individual
Performance
Goals
  Achieved
 
(1) AMRG = average monthly revenue growth
(2)  Because AMRG exceeded the established target by 6%, the payments based on cash flow and individual performance objectives were increased by 6%.
 
The table below reflects for each named executive officer (i) the 2006 quarterly target incentive for each performance based compensation element, (ii) the 2006 total quarterly target incentives, (iii) the actual 2006 quarterly incentive payments for each performance based compensation element based on achievement levels, and (iv) the actual 2006 total quarterly incentive payments.
 
                                                                 
    Target
    Target
    Target
    Total
    Actual
    Actual
    Actual
    Total
 
    AMRG (1)
    Cash Flow
    MBO (2)
    Target
    AMRG (1)
    Cash Flow
    MBO (2)
    Actual
 
    Incentive     Incentive     Incentive     Incentive     Incentive     Incentive     Incentive     Incentive  
 
Ms. Goodman
                                                               
Q1 2006
  $ 10,125     $ 1,125     $     $ 11,250     $ 10,733     $ 1,193 (3)   $     $ 11,926  
Q2 2006
  $ 16,875     $ 1,875     $     $ 18,750     $ 14,850     $     $     $ 14,850  
Q3 2006
  $ 16,875     $ 1,875     $     $ 18,750     $ 16,538     $ 1,838     $     $ 18,376  
Q4 2006
  $ 23,625     $ 2,625     $     $ 26,250     $ 21,971     $ 2,625     $     $ 24,596  


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    Target
    Target
    Target
    Total
    Actual
    Actual
    Actual
    Total
 
    AMRG (1)
    Cash Flow
    MBO (2)
    Target
    AMRG (1)
    Cash Flow
    MBO (2)
    Actual
 
    Incentive     Incentive     Incentive     Incentive     Incentive     Incentive     Incentive     Incentive  
 
Mr. Groves
                                                               
Q1 2006
  $ 8,100     $ 900     $     $ 9,000     $ 8,586     $ 954 (3)   $     $ 9,540  
Q2 2006
  $ 13,500     $ 1,500     $     $ 15,000     $ 11,880     $     $     $ 11,880  
Q3 2006
  $ 13,500     $ 1,500     $     $ 15,000     $ 13,230     $ 1,470     $     $ 14,700  
Q4 2006
  $ 18,900     $ 2,100     $     $ 21,000     $ 17,577     $ 2,100     $     $ 19,677  
                                                                 
Mr. Howd
                                                               
Q1 2006
  $ 4,725     $ 525     $ 2,250     $ 7,500     $ 5,009     $ 557 (3)   $ 2,385 (3)   $ 7,951  
Q2 2006
  $ 7,875     $ 875     $ 3,750     $ 12,500     $ 6,930     $     $ 3,750     $ 10,680  
Q3 2006
  $ 7,875     $ 875     $ 3,750     $ 12,500     $ 7,718     $ 875     $ 3,750     $ 12,343  
Q4 2006
  $ 11,025     $ 1,225     $ 5,250     $ 17,500     $ 10,253     $ 1,225     $ 5,250     $ 16,728  
                                                                 
Mr. Richards
                                                               
Q1 2006
  $ 4,725     $ 525     $ 2,250     $ 7,500     $ 5,009     $ 557 (3)   $ 2,027     $ 7,593  
Q2 2006
  $ 7,875     $ 875     $ 3,750     $ 12,500     $ 6,930     $     $ 3,750     $ 10,680  
Q3 2006
  $ 7,875     $ 875     $ 3,750     $ 12,500     $ 7,718     $ 875     $ 2,625     $ 11,218  
Q4 2006
  $ 11,025     $ 1,225     $ 5,250     $ 17,500     $ 10,253     $ 1,225     $ 4,594     $ 16,072  
                                                                 
Mr. Turcott
                                                               
Q1 2006
  $ 8,100     $ 900     $     $ 9,000     $ 8,586     $ 954 (3)   $     $ 9,540  
Q2 2006
  $ 13,500     $ 1,500     $     $ 15,000     $ 11,880     $     $     $ 11,880  
Q3 2006
  $ 13,500     $ 1,500     $     $ 15,000     $ 13,230     $ 1,470     $     $ 14,700  
Q4 2006
  $ 18,900     $ 2,100     $     $ 21,000     $ 17,577     $ 2,100     $     $ 19,677  
                                                                 
Mr. Wasserman
                                                               
Q1 2006
  $ 3,780     $ 420     $ 1,800     $ 6,000     $ 4,007     $ 445 (3)   $ 1,908 (3)   $ 6,360  
Q2 2006
  $ 6,300     $ 700     $ 3,000     $ 10,000     $ 5,544             $ 3,000     $ 8,544  
Q3 2006
  $ 6,300     $ 700     $ 3,000     $ 10,000     $ 6,174     $ 700     $ 3,000     $ 9,874  
Q4 2006
  $ 8,820     $ 980     $ 4,200     $ 14,000     $ 8,203     $ 980     $ 4,200     $ 13,383  
 
 
(1) AMRG = average monthly revenue growth
 
(2) MBOs = individual performance goals
 
(3) Because AMRG exceeded the established target by 6%, the payments based on cash flow and individual performance objectives were increased by 6%.
 
In 2006, the total annual bonus payment as a percentage of the total annual target bonus and the total annual bonus payment as a percentage of annual salary for each named executive officer were as follows: Ms. Goodman (93% and 28%); Mr. Groves (93% and 28%); Mr. Howd (95% and 32%); Mr. Richards (91% and 30%); Mr. Turcott (93% and 34%); and Mr. Wasserman (95% and 23%).
 
In December 2006, our compensation committee approved the target bonus awards for 2007 for our named executive officers. The target bonus awards, as a percentage of base salary, for 2007 are 45% for Ms. Goodman, 40% for Mr. Groves, 30% for Mr. Howd, 25% for Mr. Richards and 30% for Mr. Wasserman. As described in the “Overview” section above, the compensation committee determined the target total cash compensation of each named executive officer after reviewing and considering the evaluation prepared by our independent compensation consultant, DolmatConnell. Once the compensation committee established 2007 base salaries for each named executive officer, the target bonus awards, as a percentage of base salary, were set to bring each named executive officer’s total target cash compensation to the approved level. Target bonus awards for 2007 are paid out quarterly at the rate of 15%, 25%, 25% and 35% for each of the four quarters respectively.

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Equity Incentive Awards. Our equity award program is the primary vehicle for offering long-term incentives to our executives. Prior to this offering, our employees, including our executives, were eligible to participate in our 1999 Stock Option/Stock Issuance Plan. Following the completion of this offering, we will continue to grant our employees, including our executives, stock-based awards pursuant to the 2007 Stock Incentive Plan, which will become effective upon the completion of this offering. Under the 2007 Stock Incentive Plan, our employees, including our executives, will be eligible to receive grants of stock options, restricted stock awards, and other stock-based equity awards at the discretion of our compensation committee.
 
Although we do not have any formal equity ownership guidelines for our executives, we believe that equity grants provide our executives with a strong link to our long-term performance, create an ownership culture and help to align the interests of our executives and our stockholders. In addition, we believe the vesting feature of our equity grants furthers our goal of executive retention because this feature provides an incentive to our executives to remain in our employment during the vesting period. In determining the size of equity grants to our executives, our compensation committee considers comparative share ownership of executives in our compensation peer group, our company-level performance, the applicable executive’s performance, the amount of equity previously awarded to the executive, the vesting of such awards and the recommendations of management.
 
We typically make an initial equity award of stock options or restricted stock to new executives in connection with the start of their employment. Grants of equity awards, including those to executives, are all approved by our board of directors or our compensation committee and are granted based on the fair market value of our common stock. Historically, the equity awards we have granted to our executives have vested as to 25% of such awards at the end of the first year and in equal quarterly installments over the succeeding three years. This vesting schedule is consistent with the vesting of stock options granted to other employees. In 2006, following the recommendation of our compensation committee, our board of directors approved new equity awards to reestablish or bolster incentives to retain employees, including executives who had been with us for a significant time. In determining the equity awards for each of the executives set forth on the 2006 Grants of Plan-Based Awards table below, our board of directors took into account company performance, the applicable executive’s performance and, for the December 2006 grant, the equity guidelines recommended by DolmatConnell. In February 2006, our board of directors determined that overall company performance had been strong in 2005 and that Ms. Goodman, Mr. Groves, Mr. Howd, Mr. Richards and Mr. Turcott had performed well. In making these grants, our board of directors also considered the portion of the prior equity grants that had not yet vested, and their value as a retention tool. In the case of Ms. Goodman, Mr. Groves, Mr. Howd and Mr. Richards, a large portion of their prior option grants had already vested. As a result, in February 2006, our board of directors granted options to Ms. Goodman, Mr. Groves, Mr. Howd and Mr. Richards to purchase 13,000, 13,000, 45,500 and 19,500 shares of common stock, respectively. The exercise price of these options is $1.09 per share, which was the fair market value of our common stock on the date of grant. In December 2006, our board of directors determined that the overall 2006 company performance had been strong. Our board of directors also determined that Mr. Groves, Mr. Howd, Mr. Richards and Mr. Wasserman had performed well and in particular, Ms. Goodman had performed particularly well. While reviewing the equity guidelines recommended by DolmatConnell, our board of directors noted that Mr. Wasserman’s equity ownership position was below the 50th percentile for financial executives at the peer companies. As a result, in December 2006, our board of directors granted options to Ms. Goodman, Mr. Groves, Mr. Howd, Mr. Richards and Mr. Wasserman to purchase 117,000, 19,500, 26,000, 19,500 and 39,000 shares of common stock, respectively. The exercise price of these options is $3.05 per share, which was the fair market value of our common stock on the date of grant. The increase in options granted to Ms. Goodman in December as compared to the grant in February was to reward her for her very strong performance throughout 2006. The 39,000 share grant to Mr. Wasserman was made to reward his performance and bring him closer to the 50th percentile for financial executives at the peer companies. At the discretion of our compensation committee, we expect to continue to approve annually new equity awards to certain of our employees and executives consistent with our overall incentive compensation program objectives.
 
We do not currently have a program, plan or practice of selecting grant dates for equity compensation to our executive officers in coordination with the release of material non-public information. Equity award grants are made from time to time in the discretion of our board of directors or compensation committee consistent with our incentive compensation program objectives. It is anticipated that following the completion of this offering, our board of directors will consider implementing a grant date policy for our executive officers.


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Benefits and Other Compensation. We maintain broad-based benefits that are provided to all employees, including health and dental insurance, life and disability insurance, a 401(k) plan, an employee assistance program, maternity and paternity leave plans and standard company holidays. Our executive officers are eligible to participate in all of our employee benefit plans, in each case on the same basis as other employees, except that we pay for parking for our executive officers.
 
Tax Considerations
 
Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our chief executive officer and our four other most highly paid executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We periodically review the potential consequences of Section 162(m) and we generally intend to structure the performance-based portion of our executive compensation, where feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, the compensation committee may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.


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2006 Summary Compensation Table
 
The following table sets forth information regarding compensation earned by our president and chief executive officer, our vice president and chief financial officer, each of our three other most highly compensated executive officers and a former executive officer during the year ended December 31, 2006. We refer to these executive officers as our “named executive officers” elsewhere in this prospectus.
 
                                         
            Non-Equity
       
        Option
  Incentive Plan
  All Other
   
    Salary
  Awards
  Compensation
  Compensation
  Total
Name and Principal Position
  ($)   ($)(1)   ($)(2)   ($)(3)   ($)
 
Gail F. Goodman 
  $ 250,000     $ 13,352     $ 69,748     $ 840     $ 333,940  
President and Chief Executive Officer
                                       
Steven R. Wasserman 
  $ 165,000     $ 1,295     $ 38,161     $ 840     $ 205,296  
Vice President and Chief Financial Officer
                                       
Eric S. Groves
  $ 200,000     $ 5,191     $ 55,797     $ 840     $ 261,828  
Senior Vice President, Sales and Business Development
                                       
Thomas C. Howd
  $ 150,000     $ 9,235     $ 47,702     $ 840     $ 207,777  
Vice President, Services
                                       
Daniel A. Richards 
  $ 150,000     $ 5,256     $ 45,563     $ 840     $ 201,659  
Vice President, Engineering
                                       
Richard H. Turcott(4)
  $ 165,000     $ 3,297     $ 55,797     $ 88,310 (5)   $ 312,404  
Former Chief Marketing Officer
                                       
 
 
(1) Valuation of these stock and option awards is based, in part, on the dollar amount of share based compensation recognized for financial statement reporting purposes in 2006 computed in accordance with SFAS 123R, excluding the impact of estimated forfeitures related to service-based vesting conditions (which in our case were none). We arrive at these amounts by taking the compensation cost for these awards calculated under SFAS 123R on the date of grant, and recognize this cost over the period in which the named executive officer must provide services in order to earn the award, typically four years. The reported amounts include additional amounts that were not recognized for financial statement reporting purposes in 2006, resulting from requirements of the SEC to report in this summary compensation table awards made prior to 2006 using the modified prospective transition method pursuant to SFAS 123R. Under the modified prospective transition method, a portion of the grant date fair value determined under SFAS 123R of equity awards that are outstanding on January 1, 2006, the date we adopted SFAS 123R, is recognized over those awards’ remaining vesting periods. This additional amount is $7,445 for Ms. Goodman, $2,522 for Mr. Groves, $1,304 for Mr. Howd, $1,577 for Mr. Richards and $1,275 for Mr. Turcott. The assumptions used by us with respect to the valuation of stock and option awards are the same as those set forth in Note 6 to our financial statements included elsewhere in this prospectus. The individual awards reflected in the summary compensation table are further described below in the table “2006 Grants of Plan-Based Awards.”
 
(2) The amounts shown were paid during 2006 and in January 2007 to each of the named executive officers for the achievement in 2006 of specified performance objectives under our 2006 Executive Incentive Plan.
 
(3) The amounts shown reflect life insurance premiums and parking costs paid by us in 2006 on behalf of each of the named executive officers.
 
(4) Mr. Turcott resigned as our Chief Marketing Officer in December 2006.
 
(5) This amount includes a severance payment of $82,500 paid to Mr. Turcott in January 2007 and $4,970 for the costs of providing medical and dental benefits for six months in connection with his resignation.


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2006 Grants of Plan-Based Awards
 
The following table sets forth information regarding grants of awards made to our named executive officers during the year ended December 31, 2006.
 
                                                         
                    All Other
       
                    Option
       
                    Awards:
      Grant Date
        Estimated Future Payouts Under
  Number of
  Exercise or
  Fair Value
        Non-Equity Incentive Plan Awards   Securities
  Base Price of
  of Option
    Grant
  Threshold
  Target
  Maximum
  Underlying
  Option Awards
  Awards
Name
  Date   ($)   ($)(1)   ($)   Options (#)   ($/share)(2)   ($)(3)
 
Gail F. Goodman
              $ 75,000                          
      2/9/06                         13,000     $ 1.09     $ 9,100  
      12/7/06                         117,000     $ 3.05     $ 226,880  
Steven R. Wasserman
              $ 40,000                          
      12/7/06                         39,000     $ 3.05     $ 75,600  
Eric S. Groves
              $ 60,000                          
      2/9/06                         13,000     $ 1.09     $ 9,100  
      12/7/06                         19,500     $ 3.05     $ 37,800  
Thomas C. Howd
              $ 50,000                          
      2/9/06                         45,500     $ 1.09     $ 31,850  
      12/7/06                         26,000     $ 3.05     $ 50,400  
Daniel A. Richards
              $ 50,000                          
      2/9/06                         19,500     $ 1.09     $ 13,650  
      12/7/06                         19,500     $ 3.05     $ 37,800  
Richard H. Turcott
              $ 60,000                          
      2/9/06                         13,000     $ 1.09     $ 9,100  
 
 
(1) Our 2006 Executive Incentive Plan was approved by the compensation committee of the board of directors on February 9, 2006 (with respect to the first two quarters of 2006) and August 28, 2006 (with respect to the final two quarters of 2006). For 2006, payouts under the 2006 Executive Incentive Plan were contingent upon the achievement of certain quarterly financial performance goals, including average monthly revenue growth targets and cash flow targets, and, with the exception of Ms. Goodman and Messrs. Grove and Turcott, individual objectives. Thirty percent of the potential payouts to Messrs. Howd, Richards and Wasserman were contingent upon their ability to achieve individual quarterly objectives determined in advance by Ms. Goodman. There was no maximum payout under the 2006 Executive Incentive Plan.
 
(2) In determining the exercise price for the options granted to each of the named executive officers, for option grants in the first quarter of 2006 our board of directors utilized the guideline public company method and considered a number of factors including peer group trading multiples, the amount of preferred stock liquidation preferences, the illiquid nature of our common stock, our small size, our lack of historical profitability, our short-term cash requirements and the redemption rights of our preferred stockholders. For grants during the remainder of 2006, our board of directors utilized the guideline public company method and the discounted future cash flow method, which involves applying appropriate discount rates to estimated cash flows that are based on our forecasts of revenue, costs and capital. These methodologies are then used to calculate four different valuation outcomes, which were then probability weighted. The possible outcomes considered were a sale of the company, an initial public offering, dissolution and continuing operations as a private company. For additional discussion of our methodology for determining the fair value of our common stock, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”
 
(3) Valuation of these options is based on the aggregate dollar amount of share based compensation recognized for financial statement reporting purposes computed in accordance with SFAS 123R over the term of these options, excluding the impact of estimated forfeitures related to service-based vesting conditions (which in our case were none). The assumptions used by us with respect to the valuation of stock and option awards are set forth in Note 6 to our financial statements included elsewhere in this prospectus.


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2006 Outstanding Equity Awards at Fiscal Year End
 
The following table sets forth information regarding outstanding option awards held by our named executive officers at December 31, 2006.
 
                                                 
    Option Awards   Stock Awards
    Number of
  Number of
               
    Securities
  Securities
          Number of
  Market Value
    Underlying
  Underlying
          Shares or Units
  of Shares or
    Unexercised
  Unexercised
  Option
      of Stock That
  Units of Stock
    Options
  Options
  Exercise
  Option
  Have Not
  That Have Not
    Exercisable
  Unexercisable
  Price
  Expiration
  Vested
  Vested
Name
  (#)   (#)   ($)   Date   (#)   ($)
 
Gail F. Goodman
    5,200 (1)         $ 36.15       6/7/2010              
      11,247       22,491 (2)   $ 0.04       10/23/2013              
      19,243       86,591 (3)   $ 0.06       2/10/2015              
            13,000 (4)   $ 1.09       2/9/2016              
            117,000 (5)   $ 3.05       12/7/2016              
Steven R. Wasserman
          39,000 (6)   $ 3.05       12/7/2016              
                              144,008 (7)   $ 438,669 (8)
Eric S. Groves
    2,925 (9)         $ 41.54       2/7/2011              
      11,247       22,491 (10)   $ 0.04       10/23/2013              
      6,483       29,170 (11)   $ 0.06       2/10/2015              
            13,000 (12)   $ 1.09       2/9/2016              
            19,500 (13)   $ 3.05       12/7/2016              
Thomas C. Howd
    1,300 (14)         $ 41.54       6/12/2011              
      4,459 (15)         $ 1.54       9/7/2011              
      5,623       22,492 (16)   $ 0.04       10/23/2013              
      1,688       15,182 (17)   $ 0.06       2/10/2015              
            45,500 (18)   $ 1.09       2/9/2016              
            26,000 (19)   $ 3.05       12/7/2016              
Daniel A. Richards
    650 (20)         $ 20.77       9/16/2009              
      650 (21)         $ 20.77       1/12/2010              
      975 (22)         $ 36.15       6/7/2010              
      9,924 (23)         $ 1.54       9/7/2011              
      11,246       11,246 (24)   $ 0.04       10/23/2013              
      14,759       18,978 (25)   $ 0.06       2/10/2015              
            19,500 (26)   $ 1.09       2/9/2016              
            19,500 (27)   $ 3.05       12/7/2016              
Richard H. Turcott
    56,875       73,125 (28)   $ 0.06       2/10/2015              
            13,000 (29)   $ 1.09       2/9/2016