S-1 1 b68284ccsv1.htm CONSTANT CONTACT, INC. sv1
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As filed with the Securities and Exchange Commission on March 27, 2008.
Registration No. 333-      
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
CONSTANT CONTACT, INC.
(Exact Name of Registrant as Specified in Its Charter)
         
Delaware   7372   04-3285398
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code No.)
  (I.R.S. Employer
Identification No.)
 
 
 
 
Reservoir Place
1601 Trapelo Road, Suite 329
Waltham, Massachusetts 02451
(781) 472-8100
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
 
 
 
Gail F. Goodman
Constant Contact, Inc.
Reservoir Place
1601 Trapelo Road, Suite 329
Waltham, Massachusetts 02451
(781) 472-8100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
 
 
 
 
Copies to:
 
         
Mark G. Borden, Esq.
Philip P. Rossetti, Esq.
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
  Robert P. Nault, Esq.
Constant Contact, Inc.
Reservoir Place
1601 Trapelo Road, Suite 329
Waltham, Massachusetts 02451
(781) 472-8100
  John R. Utzschneider, Esq.
Bingham McCutchen LLP
150 Federal Street
Boston, Massachusetts 02110
(617) 951-8000
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.
 
 
 
If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  o
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
                         
            Proposed Maximum
          Amount of
      Amount to be
    Aggregate Offering
    Proposed Maximum
    Registration
Title of Each Class of Securities to be Registered     Registered(1)     Price Per Share(2)     Aggregate Offering Price(2)     Fee(3)
Common stock, par value $0.01 per share
    5,049,420     $17.32     $87,455,955     $3,438
                         
 
(1)  Includes 658,620 shares of common stock that may be purchased by the underwriters to cover over-allotments, if any.
(2)  Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(c) under the Securities Act. Includes the offering price attributable to shares available for purchase by the underwriters to cover over-allotments, if any.
(3)  Calculated pursuant to Rule 457(c) based on the average of the high and low sales prices reported in the consolidated reporting system of the Nasdaq Global Market on March 25, 2008.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.
 


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The information contained in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
Subject to Completion, Dated March 26, 2008
4,390,800 Shares
 
(CONSTANT CONTACT LOGO)
 
Common Stock
$ per share
 
Constant Contact is offering 106,461 shares of common stock and the selling stockholders identified in this prospectus are offering 4,284,339 shares of common stock to be sold in this offering. Constant Contact will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.
 
Our common stock is listed on the Nasdaq Global Market under the symbol “CTCT.” The last reported sale price of our common stock on March 26, 2008 was $17.19.
 
Investing in our common stock involves risks. See “Risk Factors” beginning on page 7.
 
                 
   
Per Share
    Total  
 
Price to the public
  $           $        
Underwriting discount
  $           $        
Proceeds, before expenses, to Constant Contact
  $           $        
Proceeds, before expenses, to the selling stockholders
  $           $        
 
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 658,620 additional shares (208,676 from us and 449,944 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.
 
 
 
 
The underwriters expect to deliver the shares against payment in New York, New York on          , 2008.
 
 
 
 
 
 
Oppenheimer & Co. Thomas Weisel Partners LLC
 
William Blair & Company Cowen and Company Needham & Company, LLC
 
The date of this prospectus is        , 2008


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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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 Ex-10.11 Letter Agreement, dated March 7, 2007 (Robert P. Nault)
 Ex-23.1 Consent of PricewaterhouseCoopers LLP
 Ex-23.2 Consent of Vitale, Caturano & Company, Ltd.


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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. and our wholly-owned subsidiary.
 
Constant Contact
 
Overview
 
Constant Contact is a leading provider of on-demand email marketing and online survey solutions for small organizations, including small businesses, associations and non-profits. As of December 31, 2007, we had over 164,000 email marketing 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. As of December 31, 2007, we had over 8,000 survey customers, substantially all of which were also email marketing customers. 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 164,000 as of December 31, 2007. We estimate that approximately two-thirds of our customers have fewer than ten employees and in 2007 our top 80 email marketing customers accounted for approximately 1% of our total 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 year ended December 31, 2007, the average monthly amount that we charged a customer for our email marketing solution alone was approximately $33. In addition, in 2007, the average monthly total revenue per email marketing customer, including all sources of revenue, was $33.63. We believe that the simplicity of on-demand deployment combined with our affordable subscription fees and functionality facilitate adoption of our solutions by our target customers while generating significant recurring revenue. From January 2005 through December 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 24 consecutive quarters of growth in customers and revenue.
 
We acquire our customers through a variety of sources including online advertising, channel partnerships, regional initiatives, referrals and general brand awareness. Our online advertising includes search engine marketing and advertising on networks and other sites. Our channel partnerships are contractual relationships with over 2,300 active partners, which include national small business service providers such as Network Solutions, LLC, American Express Company and Career Builder, LLC as well as local small business service providers, such as web developers and marketing agencies, who refer customers to us through links on their websites and outbound promotions to their customers. Our regional initiatives include local seminars and local advertising including print, online and radio. Referral customers come from word-of-mouth from those among our satisfied, growing customer base and the inclusion of a link to our website in the footer of the more than 700 million emails currently sent by our customers each month. Finally, we believe our general brand awareness, press and thought leadership initiatives and visibility drive prospects to us. During 2007, approximately 33% of our new email marketing customers were generated through our online marketing efforts and approximately 14% of our new email marketing customers were generated through our channel partners. We believe the remaining 53% came from the combination of regional initiatives, referrals and general brand awareness.
 
We were founded in 1995 and our on-demand email marketing product was first offered commercially in 2000. In 2007, our revenue was $50.5 million and our net loss was $8.3 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, one of the selling stockholders in this offering, and others, we believe that our email marketing product could potentially address the needs of more than 28 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 December 2007, we had customers in at least 871 of the 1,005 4-digit 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 Microsoft Hotmail®, are generally 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.
 
  •   Email Archive. This service allows customers to create a hosted version of current and past email communications on our system and make them readily available to their constituents via a link on a customer’s website.
 
  •   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 offer our customers an online survey product to enable them 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 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 December 31, 2007, we had an email marketing customer base in excess of 164,000 and a survey customer base of over 8,000, substantially all of which were also email marketing customers. We seek to increase revenue by cross selling products and selling add-on services that are designed to enhance our products, such as image hosting and email archive.
 
  •   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.
 
  •   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 or that may be accessed through links 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
106,461 shares
 
Common stock offered by the selling stockholders
4,284,389 shares
 
Common stock to be outstanding after the offering
27,724,634 shares
 
Use of proceeds
We intend to use our net proceeds from this offering to pay the expenses we incur in connection with this offering and, the remaining proceeds, if any, will be used for general corporate purposes. 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 (i) 27,617,014 shares of common stock outstanding as of December 31, 2007 and (ii) an additional 1,159 shares of common stock to be issued to certain selling stockholders in connection with this offering upon the exercise of stock options, and excludes:
 
  •   2,199,983 shares of common stock issuable upon the exercise of stock options and a warrant outstanding as of December 31, 2007 at a weighted average exercise price of $6.33 per share, of which options and a warrant to purchase an aggregate of 572,539 shares of our common stock were exercisable as of December 31, 2007 with a weighted average exercise price of $2.00 per share (both after giving effect to the option exercises described in (ii) above); and
 
  •   2,157,450 shares of common stock available for future issuance under our equity compensation plans as of December 31, 2007.
 
Except as otherwise noted, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.


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Summary Financial Information
 
The following tables present our summary statements of operations data for the three years ended December 31, 2007, and our summary historical and as adjusted balance sheet data as of December 31, 2007. The summary statements of operations data for the three years ended December 31, 2007 and the summary balance sheet data as of December 31, 2007 are derived from our audited consolidated financial statements for the three years ended December 31, 2007 included elsewhere in this prospectus. Our historical results for prior periods are not necessarily indicative of results to be expected 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.”
 
                         
    Year Ended December 31,  
    2005     2006     2007  
    (in thousands, except per share and
 
    customer data)  
Statements of Operations Data:
                       
Revenue
  $  14,658     $ 27,552     $ 50,495  
Cost of revenue(1)
    3,747       7,801       13,031  
                         
Gross profit
    10,911       19,751       37,464  
                         
Operating expenses:(1)
                       
Research and development
    3,355       6,172       10,341  
Sales and marketing
    7,460       18,592       27,376  
General and administrative
    1,326       2,623       5,445  
                         
Total operating expenses
    12,141       27,387       43,162  
                         
Loss from operations
    (1,230 )     (7,636 )     (5,698 )
Interest and other income (expense), net
    (24 )     (203 )     (2,556 )
                         
Net loss
    (1,254 )     (7,839 )     (8,254 )
Accretion of redeemable convertible preferred stock
    (5,743 )     (3,788 )     (816 )
                         
Net loss attributable to common stockholders
  $ (6,997 )   $ (11,627 )   $ (9,070 )
                         
Net loss attributable to common stockholders per share:
                       
Basic and diluted
  $ (2.49 )   $ (3.38 )   $ (0.97 )
Weighted average shares outstanding used in computing per share amounts:
                       
Basic and diluted
    2,813       3,438       9,366  
                         
Other Operating Data:
                       
End of period number of customers(2)
    47,730       89,323       164,669  
 
(1) Amounts include stock-based compensation expense, as follows:
 
                   
Cost of revenue
  $          –   $        25   $        81
Research and development
        27     170
Sales and marketing
        19     133
General and administrative
    17     12     261
                   
    $ 17   $ 83   $ 645
                   
 
(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 December 31, 2007:
 
  •   on an actual basis; and
 
  •   on an as adjusted basis to reflect (i) the receipt by us of estimated net proceeds of $1.1 million from the sale of 106,461 shares of common stock offered by us, at an assumed public offering price of $17.19 per share, which is the last reported sale price of our common stock on March 26, 2008, after deducting the estimated underwriting discount and offering expenses payable by us and (ii) the issuance of 1,159 shares of common stock upon the exercise of options to be sold by certain selling stockholders in this offering.
                 
    As of December 31, 2007  
    Actual     As Adjusted  
    (in thousands)   
 
Balance Sheet Data:
               
Cash, cash equivalents and short-term marketable securities
  $ 101,535     $ 102,636  
Total assets
    111,845       112,946  
Deferred revenue
    10,354       10,354  
Total stockholders’ equity
    94,354       95,455  


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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, we are committed to providing our customers with a high level of support. As a result, we believe 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 costs 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 larger 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 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


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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 reputation and 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.
 
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. In addition, we have limited experience operating our business during an economic downturn. Accordingly, we do not know if our current business model will respond effectively to the challenges we may confront during an economic downturn.
 
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.


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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.
 
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 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., Broadwick Corporation (iContact®, formerly Intellicontact), CoolerEmail, Inc., 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 survey product competes with similar offerings by Zoomerang (a division of Market Tools, Inc.) and Surveymonkey.com Corporation.


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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.
 
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.
 
The internet protocol addresses associated with our email marketing product are owned and controlled by Internap Network Services Corporation, which operates one of our third-party hosting facilities. In connection with the establishment of a second third-party hosting facility, we are currently migrating to internet protocol addresses owned and controlled by us. If we experience difficulties with this migration, our deliverability rates could suffer and it could undermine the effectiveness of our customers’ email marketing campaigns. This, in turn, could harm our business and financial performance.
 
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 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 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


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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.
 
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 ourselves from those lists. Blacklisting of this type could interfere with our ability to market our products and


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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 largely 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. During 2007, we introduced our survey product, which enables customers to create and send online surveys and analyze responses, and our add-on email archive service that enables 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 products, 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. Nor is there any guarantee that any new product offerings will gain widespread acceptance among our email marketing customers or by the broader market. For example, our existing email marketing customers may not view any new product as complementary to our email product offerings and therefore decide not to purchase such product. 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 active channel partners, which include national small business service providers such as Network Solutions, LLC, American Express Company and Career Builder, LLC as well as local small business service providers such as web developers and marketing agencies, who refer customers to us through links on their websites and outbound promotion to their customers. If we are unable to maintain our contractual relationships with existing channel partners or establish new contractual relationships with potential channel partners, we may lose potential new customers and 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 over which we have little or no control, 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 anticipated growth could strain our personnel resources and infrastructure, and if we are unable to implement appropriate controls and procedures to manage that 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 anticipated 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 anticipated 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 will include installing a new billing system. The expected addition of new employees and the capital investments that we believe will be necessary to manage our anticipated 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 anticipated 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 co-located in two third-party hosting facilities. The first, located in Somerville, Massachusetts, is owned and operated by Internap Network Services Corporation. The second, which is expected to become operational during the first quarter of 2008, is located in Bedford, Massachusetts, and is owned and operated by Sentinel Properties-Bedford, LLC. Neither Internap nor Sentinel guarantees that our customers’ access to our products will be uninterrupted, error-free or secure.


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Our operations depend on Internap’s and Sentinel’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 either Internap or Sentinel is terminated, or there is a lapse of service or damage to the Internap or Sentinel facilities, 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 currently located only 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, Sentinel 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 both our headquarters in Waltham, Massachusetts and the Sentinel facility 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 or Sentinel facilities. In the event of a disaster in which either facility is irreparably damaged or destroyed, we would experience interruptions in access to our products. Moreover, our headquarters, the Internap facility and the Sentinel facility are located several miles from each other and may be equally or more affected by any regional disaster. 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, including Massachusetts, 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.
 
If we fail to maintain compliance with the data protection policy documentation standards adopted by the major credit card issuers, we could lose our ability to offer our customers a credit card payment option. 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.
 
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 International Business Machines Corporation, Dell Computer Corporation, Sun Microsystems, Inc. and EMC Corporation. This hardware and software may not


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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 offer only limited protection and 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 software 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 or in the event there is a significant change in the terms of open source licenses in general, 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;
 
  •  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


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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 December 31, 2007, our accumulated deficit was $42.8 million. Our net losses were $7.8 million for the year ended December 31, 2006 and $8.3 million for the year ended December 31, 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 will never become profitable. Our recent revenue growth may not be indicative of our future performance. In future periods, we may not have any revenue growth, or our revenue could decline.
 
We are incurring significant increased costs as a result of operating as a public company, and our management has been, and will continue to be, required to devote substantial time to new compliance initiatives.
 
As a public company, we are incurring significantly more legal, accounting and other expenses than we incurred as a private company. The Sarbanes-Oxley Act of 2002, and rules subsequently implemented by the SEC and the Nasdaq Stock Market, require public companies to meet certain corporate governance standards. Our management and other personnel are devoting a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly.
 
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


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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.
 
Our ability to use net operating loss carryforwards in the United States may be limited.
 
As of December 31, 2007, we had net operating loss carryforwards of $38 million for U.S. federal tax purposes and $25 million for state tax purposes. These loss carryforwards expire between 2008 and 2027. If we were to generate income that would be subject to taxation, 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. While we do not believe that our initial public offering and prior financings have resulted in ownership changes that limit our ability to utilize net operating loss carryforwards, any subsequent ownership changes, including as a result of this offering, could result in such a limitation. 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.
 
Our quarterly results may fluctuate and if we fail to meet the expectations of analysts or investors, our stock price 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 net new quarterly customer additions;
 
  •  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.


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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 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. 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.
 
We have, from time to time, evaluated acquisition opportunities and may pursue acquisition opportunities in the future. We have not made any 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;
 
  •  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 acquired 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 public offering price per share in this offering 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 $13.82 per share. This dilution is due in large part to the fact that our earlier investors paid substantially less than the public offering price


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when they purchased their shares of common stock. In addition, we have issued options to acquire common stock at prices significantly below the 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 26.84% of our outstanding common stock. 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 payment of expenses incurred by us in connection with this offering, we expect to use any remaining net proceeds, if any, for general corporate purposes, including capital expenditures. 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 continue to 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 may not be able to retain research coverage by securities and industry analysts. If securities or industry analysts do not continue to cover our company, the trading price for our stock would be negatively impacted. In the event the analysts who cover us downgrade our stock or publish 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.


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The market price of our common stock has been and may continue to be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.
 
Prior to the completion of our initial public offering in October 2007, there was no public market for shares of our common stock. The trading price of our common stock has been and may continue 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 debt;
 
  •   announcements by us or our competitors of significant product releases, 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 our stockholders could cause our stock price to decline.
 
If our stockholders sell substantial amounts of our common stock in the public market, the trading price of our common stock could decline below the public offering price. Based on shares outstanding as of January 31, 2008, upon completion of this offering, we will have outstanding 27,727,462 shares of common stock. Of these shares, 12,526,220 shares of common stock will be subject to a 90-day contractual lock-up with the underwriters. Oppenheimer & Co. Inc. 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 90-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 90-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.
 
After each of the lock-up agreements pertaining to this offering expire 90 days from the date of this prospectus, or such longer period described above, up to           shares will become eligible for sale in the public market,           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


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agreements. 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.
 
In addition, as of December 31, 2007, we had options to purchase a total of 2,200,622 shares of our common stock outstanding under our equity incentive plans, of which 573,178 were vested. We have filed registration statements on Forms S-8 to register all of the shares issuable under our equity incentive plans. The sale of shares registered on the Forms S-8 which are not yet outstanding, but are issuable upon exercise of outstanding options, may cause our stock price to decline.
 
Some of our existing stockholders have demand and incidental registration rights to require us to register with the SEC up to approximately           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. Among other things, our restated certificate of incorporation and second amended and restated bylaws:
 
  •   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 Restated 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,” “objective,” “plan,” “predict,” “project,” “seek,” “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 or incorporated by reference 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 assumed public offering price of $17.19 per share, which is the last reported sale price of our common stock on March 26, 2008, will be approximately $1.1 million, or approximately $4.5 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. In addition, we will receive $636 in connection with the payment of the exercise price upon the exercise of outstanding options to purchase 1,159 shares of common stock, which shares are to be sold in the offering.
 
A $1.00 increase (decrease) in the assumed public offering price of $17.19 per share would increase (decrease) the net proceeds to us from this offering by $100,000 and increase (decrease) the net proceeds to the selling stockholders from this offering by $4.0 million, assuming the number of shares offered by us and the selling stockholders as set forth on the cover of this prospectus remains the same.
 
We intend to use our net proceeds from this offering to pay the expenses we incur in connection with this offering and, the remaining proceeds, if any, will be used for general corporate purposes, including financing our growth, developing new products, acquiring new customers and funding capital expenditures.
 
In addition, the other principal purposes for this offering are to:
 
  •   increase our visibility in our markets;
 
  •   provide liquidity for our existing stockholders;
 
  •   increase our public float;
 
  •   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.
 
Other than paying the expenses we incur in connection with this offering, we have not yet determined with any certainty the manner in which we will allocate the remaining net proceeds we receive in this offering, if any. Management will retain broad discretion in the allocation and use of our net proceeds from this offering. To the extent there are net proceeds available to us after paying the expenses we incur in connection with this offering, a number of factors may impact the allocation of such proceeds, including the nature, size and type of expansion of our operations we may undertake.
 
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.


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Price Range of Common Stock
 
Our common stock commenced trading on the Nasdaq Global Market under the symbol “CTCT” on October 3, 2007. The following table sets forth, for the periods indicated, the high and low reported sales prices of our common stock as reported on the Nasdaq Global Market:
 
                 
    High     Low  
2007
               
Fourth quarter (from October 3, 2007)
  $ 30.76     $ 15.45  
2008
               
First quarter (through March 26, 2008)
    25.24       14.67  
 
As of March 26, 2008, there were approximately 129 holders of record of our common stock. The last reported sale price of our common stock on March 26, 2008 was $17.19 per share.
 
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 December 31, 2007:
 
  •   on an actual basis; and
 
  •   on an as adjusted basis to (i) give effect to the issuance and sale by us of 106,461 shares of common stock at an assumed offering price of $17.19 per share, which was the last reported sale price of our common stock on March 26, 2008, after deducting the estimated underwriting discount and offering expenses payable by us and (ii) reflect the issuance of 1,159 shares of common stock upon the exercise of options to be sold by certain selling stockholders in connection with this offering.
 
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 December 31, 2007  
          As
 
    Actual     Adjusted  
    (in thousands, except share data)  
 
Stockholders’ equity:
               
Common stock; $0.01 par value; 100,000,000 shares authorized and 27,617,014 shares issued and outstanding, actual; 100,000,000 shares authorized and 27,724,634 shares issued and outstanding, as adjusted
  $ 276     $ 277  
Preferred stock; $0.01 par value; 5,000,000 shares authorized and no shares issued or outstanding, actual or as adjusted
           
Additional paid-in capital
    136,832       137,932  
Accumulated other comprehensive income
    2       2  
Accumulated deficit
    (42,756 )     (42,756 )
                 
Total stockholders’ equity
    94,354       95,455  
                 
Total capitalization
  $ 94,354     $ 95,455  
                 
 
The table above does not include:
 
  •   520 shares of common stock issuable upon the exercise of a warrant outstanding as of December 31, 2007 with an exercise price of $0.38 per share;
 
  •   2,199,463 shares of common stock issuable upon the exercise of stock options outstanding as of December 31, 2007 at a weighted average exercise price of $6.33 per share, of which options to purchase 572,019 shares were exercisable as of December 31, 2007 at a weighted average exercise price of $2.00 per share (both after giving effect to the contemplated issuance by us of 1,159 shares of common stock upon the exercise of options by certain selling stockholders); and
 
  •   2,157,450 shares of common stock available for future issuance under our equity compensation plans as of December 31, 2007.
 
A $1.00 increase (decrease) in the assumed public offering price of $17.19 per share would increase (decrease) each of additional paid-in capital and total stockholders’ equity in the as adjusted column by $100,000, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.


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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 public offering price per share you will pay in this offering and the as adjusted net tangible book value per share of our common stock after this offering.
 
Our net tangible book value as of December 31, 2007 was approximately $92.3 million, or approximately $3.34 per share of common stock. Net tangible book value per share is calculated by subtracting our total liabilities from our total tangible assets, which is total assets less intangible assets, and dividing this amount by the number of shares of common stock outstanding. After giving effect to the sale by us of the 106,461 shares of common stock offered in this offering at an assumed public offering price of $17.19 per share, the last reported sale price of our common stock on the NASDAQ Global Market on March 26, 2008, and after deducting estimated underwriting discounts and offering expenses payable by us, our as adjusted net tangible book value as of December 31, 2007 would have been approximately $93.4 million, or approximately $3.37 per share of common stock. This represents an immediate increase in the as adjusted net tangible book value of $0.03 per share to our existing stockholders and an immediate and substantial dilution in net tangible book value of $13.82 per share to new investors. The following table illustrates this per share dilution:
 
                 
Assumed public offering price per share
          $ 17.19  
Net tangible book value per share as of December 31, 2007
  $ 3.34          
Increase in net tangible book value per share attributable to this offering
  $ 0.03          
                 
As adjusted net tangible book value per share after this offering
          $ 3.37  
                 
Dilution per share to new investors
          $ 13.82  
                 
 
A $1.00 increase (decrease) in the assumed public offering price per share of our common stock would not affect our as adjusted net tangible book value per share after giving effect to this offering and would increase (decrease) the dilution in as adjusted net tangible book value per share to the new investors after giving effect to this offering by $1.00, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
 
In the discussion and table above, we assume no exercise of outstanding options or warrants, except for the exercise of options to purchase 1,159 shares of common stock being sold by certain selling stockholders in this offering. As of December 31, 2007, there were 2,199,983 shares of common stock reserved for issuance upon exercise of outstanding options with a weighted average exercise price of $6.33 per share (after giving effect to the issuance by us of 1,159 shares of common stock upon the exercise of options by certain selling stockholders) and 520 shares of common stock reserved for issuance upon the exercise of an outstanding warrant with an exercise price of $0.38 per share. To the extent that any of these outstanding options or the warrant are exercised, there will be further dilution to new investors. If the underwriters exercise their over-allotment option, there will be further dilution to new investors.


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Selected Financial Data
 
The selected statement of operations data for each of the years ended December 31, 2006 and 2007 and the balance sheet data as of December 31, 2006 and 2007 have been derived from our audited consolidated financial statements, which have been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, and are included elsewhere in this prospectus. The selected statement of operations data for the year ended December 31, 2005 has 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, 2003 and 2004 and the balance sheet data as of December 31, 2003, 2004 and 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 not included in this prospectus. The selected financial data set forth below summarizes our consolidated financial data and 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.
 
                                         
    Year Ended December 31,  
    2003     2004     2005     2006     2007  
    (in thousands, except per share and customer data)  
Statements of Operations Data:
                                       
Revenue
  $ 4,465     $ 8,071     $ 14,658     $ 27,552     $ 50,495  
Cost of revenue(1)
    1,899       2,211       3,747       7,801       13,031  
                                         
Gross profit
    2,566       5,860       10,911       19,751       37,464  
                                         
Operating expenses:(1)
                                       
Research and development
    1,653       2,140       3,355       6,172       10,341  
Sales and marketing
    2,549       3,385       7,460       18,592       27,376  
General and administrative
    640       856       1,326       2,623       5,445  
                                         
Total operating expenses
    4,842       6,381       12,141       27,387       43,162  
                                         
Loss from operations
    (2,276 )     (521 )     (1,230 )     (7,636 )     (5,698 )
Interest and other income (expense), net
    (39 )     (34 )     (24 )     (203 )     (2,556 )
                                         
Net loss
    (2,315 )     (555 )     (1,254 )     (7,839 )     (8,254 )
Accretion of redeemable convertible preferred stock
    (2,471 )     (3,701 )     (5,743 )     (3,788 )     (816 )
                                         
Net loss attributable to common stockholders
  $ (4,786 )   $ (4,256 )   $ (6,997 )   $ (11,627 )   $ (9,070 )
                                         
Net loss attributable to common stockholders per share:
                                       
Basic and diluted
  $ (5.75 )   $ (4.37 )   $ (2.49 )   $ (3.38 )   $ (0.97 )
Weighted average shares outstanding used in computing per share amounts:
                                       
Basic and diluted
    832       974       2,813       3,438       9,366  
Other Operating Data:
                                       
End of period number of customers(2)
    14,431       25,229       47,730       89,323       164,669  
 
 
(1) Amounts include stock-based compensation expense, as follows:
 
                                         
    Year Ended December 31,  
    2003     2004     2005     2006     2007  
    (in thousands)  
Cost of revenue
  $     –     $     –     $     –     $     25     $     81  
Research and development
                      27       170  
Sales and marketing
    6       6             19       133  
General and administrative
    17       17       17       12       261  
                                         
    $ 23     $    23     $    17     $    83     $ 645  
                                         


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(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 December 31,        
    2003     2004     2005     2006     2007        
    (in thousands)  
Balance Sheet Data:
                                               
Cash, cash equivalents and short-term marketable securities
  $ 2,114     $ 2,115     $ 2,784     $ 12,790     $ 101,535          
Total assets
    3,236       3,222       5,545       18,481       111,845          
Deferred revenue
    615       1,270       2,827       5,476       10,354          
Redeemable convertible preferred stock warrant
                      628                
Notes payable and capital lease obligation
    612       844       1,326       702                
Redeemable convertible preferred stock
    7,213       10,914       16,657       35,322                
Total stockholders’ (deficit) equity
    (6,129 )     (10,287 )     (17,237 )     (28,629 )     94,354          


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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 a leading provider of on-demand email marketing and online survey solutions for small organizations, including small businesses, associations and non-profits. 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. As of December 31, 2007, we had 164,669 email marketing customers. 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. As of December 31, 2007, we had 8,270 survey customers, substantially all of which are also email marketing customers. 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 year ended December 31, 2007, the average monthly amount that we charged a customer for our email marketing solution alone was approximately $33. In addition, in 2007, our average monthly total revenue per email marketing customer, including all sources of revenue, was $33.63. 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 December 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 164,000 as of December 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 sources including online advertising, channel partnerships, regional initiatives, referrals and general brand awareness. Our online advertising includes search engine marketing and advertising on networks and other sites. Our channel partnerships are contractual relationships with over 2,300 active partners who refer customers to us through links on their websites and outbound promotions to their customers. Our regional initiatives include local seminars and local advertising including print, online and radio. Referral customers come from word-of-mouth from those among our satisfied, growing customer base and the inclusion of a link to our website in the footer of the more than 700 million emails currently sent by our customers each month. Finally, we believe our general brand awareness, press and thought leadership initiatives and visibility drive prospects to us. In 2007, our cost of customer acquisition, which we define as our total sales and marketing expense divided by the


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gross number of email marketing customers added during the year, was approximately $255 per email marketing customer, implying payback on a revenue basis in less than a year. This implied payback is calculated by dividing the acquisition cost per email marketing customer by the average monthly total revenue per email marketing customer, which implies an eight month payback period.
 
Our on-demand product was first offered commercially in 2000. In 2007, our revenue was $50.5 million and our net loss was $8.3 million.
 
On October 9, 2007, we completed our initial public offering, in which we sold and issued 6,199,845 shares of common stock at a price of $16.00 per share. We raised approximately $90.4 million in net proceeds after deducting underwriting discounts and commissions and other offering costs.
 
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 2007, our top 80 email marketing customers accounted for approximately 1% of our total 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 means of a credit card or check. 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 2% of gross revenue for each of the years ended December 31, 2005, 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 cost of revenue to increase moderately as a percentage of revenue in 2008 as we expand our operations to include a second sales and support office and a second third-party hosting facility. Over the longer term, we anticipate that these expenses will increase in absolute dollars as we expect to 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 on an annual basis 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


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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 substantial resources to our sales and marketing efforts. As a result, we expect that on an annual basis 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 anticipated growth of our business and incur costs related to operating as a public company. Therefore, we expect that our general and administrative expenses, in total, will increase in absolute dollars as we continue to grow and operate as a public company.
 
Critical Accounting Policies
 
Our consolidated 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, assumptions and judgments on an ongoing basis. Our actual results may differ from these estimates under different assumptions and conditions. See Note 2 to our consolidated 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 products. 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 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


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or Obtained for Internal Use and EITF Issue No. 00-02, Accounting for Web Site Development Costs, 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 years ended December 31, 2006 and 2007 were $516,000 and $382,000, respectively. Development costs eligible for capitalization for the year ended December 31, 2005 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 was related to our redeemable convertible preferred stock was classified as a liability on the balance sheet. The warrant was subject to re-measurement at each balance sheet date prior to its exercise in October 2007. The change in fair value (as determined using the Black-Scholes option-pricing model) was recognized as a component of other income (expense), net.
 
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. Commencing in the fourth quarter of 2007, we used the quoted market price of our common stock to establish fair value of the common stock underlying the options. Because there was no public market for our common stock prior to our initial public offering, our board of directors determined the fair value of our common stock taking into account our most recently available valuation of our common stock. For the year ended December 31, 2005, the fair value of our common stock was estimated on an annual basis 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, our small size and lack of historical profitability. Commencing in 2006, we began the process of quarterly contemporaneous common stock valuations. In the first quarter of 2006, the fair value of our common stock was estimated 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, lack of historical profitability, short-term cash requirements and the redemption rights of preferred stockholders. Beginning in the second quarter of 2006, our quarterly common stock valuations were prepared using the probability-weighted expected return method. Under this methodology, the fair market value of our common stock was estimated based upon an analysis of our future values assuming various outcomes. The share value was 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.
 
During 2006 and 2007, 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%


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and no expected dividends. The assumptions used in calculating the fair value in 2007 were a weighted average risk free interest rate of 4.23%, expected term of 6.1 years, weighted average expected volatility of 62.1% and no expected dividends. 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. 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. We have unrecognized compensation expense associated with outstanding stock options at December 31, 2007 of $7.2 million, which is expected to be recognized over a weighted-average period of 3.57 years.
 
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.
 
                         
    Years Ended
 
    December 31,  
    2005     2006     2007  
 
Revenue
    100 %     100 %     100 %
Cost of revenue
    26       28       26  
                         
Gross profit
    74       72       74  
                         
Operating expenses:
                       
Research and development
    23       22       20  
Sales and marketing
    51       67       54  
General and administrative
    9       10       11  
                         
Total operating expenses
    83       99       85  
                         
Loss from operations
    (9 )     (27 )     (11 )
Interest and other income (expense), net
    (0 )     (1 )     (5 )
                         
Net loss
    (9 )%     (28 )%     (16 )%
                         
 
Comparison of Years Ended December 31, 2007 and 2006
 
Revenue.  Revenue for 2007 was $50.5 million, an increase of $22.9 million, or 83%, over revenue of $27.6 million for 2006. The increase in revenue resulted primarily from an 86% 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 125,130 in 2007 from 67,336 in 2006, while average revenue per customer in 2007 decreased to $33.63 from $34.10 in 2006. We expect our average revenue per customer to increase in 2008 as we generate additional revenue from our email marketing customers for add-ons to the email marketing product and from our survey product.
 
Cost of Revenue.  Cost of revenue for 2007 was $13.0 million, an increase of $5.2 million, or 67%, over cost of revenue of $7.8 million for 2006. As a percentage of revenue, cost of revenue decreased to 26% in 2007 from 28% in 2006. The increase in absolute dollars primarily resulted from an 86% increase in the number of


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average monthly email marketing customers, which resulted in increased hosting and operations expense and customer support costs. Of the increase in cost of revenue, $3.1 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, $1.2 million resulted from increased depreciation, hosting and maintenance costs due to scaling and adding capacity to our hosting infrastructure, and $700,000 related to increased credit card fees due to a higher volume of billing transactions. We expect cost of revenue to increase modestly as a percentage of revenue in 2008 as we expand our operations to include a second sales and support office and a second third-party hosting facility.
 
Research and Development Expenses.  Research and development expenses for 2007 were $10.3 million, an increase of $4.1 million, or 68%, over research and development expenses of $6.2 million for 2006. The increase was primarily due to additional personnel related costs of $3.5 million as we increased the number of research and development employees to further enhance our products. Additional consulting and contractor fees of $100,000 also contributed to the increase due to the use of these resources to supplement our own personnel. We expect research and development expenses to increase in absolute dollars but decrease as a percentage of revenue.
 
Sales and Marketing Expenses.  Sales and marketing expenses for 2007 were $27.4 million, an increase of $8.8 million, or 47%, over sales and marketing expenses of $18.6 million for 2006. The increase was primarily due to increased advertising and promotional expenditures of $4.3 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 $2.7 million also contributed to the increase as we added employees to accommodate the growth in sales leads and to staff our expanded marketing efforts. We also paid $600,000 in increased partner fees as our partners generated increased referral customers. We expect sales and marketing expenses to increase in absolute dollars but decrease as a percentage of revenue.
 
General and Administrative Expenses.  General and administrative expenses for 2007 were $5.4 million, an increase of $2.8 million, or 108%, over general and administrative expenses of $2.6 million for 2006. The increase was due primarily to additional personnel related costs of $1.2 million because we increased the number of general and administrative employees to support our overall growth, as well as a one-time payment of $225,000 to close out an obligation related to a 1999 stock placement agreement. We also incurred increased insurance and professional fees to support the reporting and regulatory requirements of a public company.
 
Interest and Other Income (Expense), Net.  Interest and other income (expense), net for 2007 was $(2.6) million, an increase of $2.4 million from interest and other income (expense), net of $(203,000) for 2006. The increase was due to a $3.3 million increase in the expense related to the change in the fair value of the redeemable convertible preferred stock warrant primarily offset by a $1.0 million increase in interest income from investments in marketable securities and cash equivalents. We accounted for an outstanding redeemable convertible preferred stock warrant as a liability held at fair market with changes in value recorded as a component of other expense. In October 2007, the preferred stock warrant was exercised and converted into common stock at which time we recorded the final charge relating to the change in fair value of the warrant. The increase in interest income was primarily due to an increase in the balance of investments and cash equivalents as a result of our initial public offering, which was completed in the fourth quarter of 2007.
 
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%


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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, audit, 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. 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.


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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 December 31, 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  
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
 
    2005     2005     2006     2006     2006     2006     2007     2007     2007     2007  
    (in thousands, except per share and customer data)  
 
Statements of Operations Data:
                                                                               
Revenue
  $ 3,900     $ 4,628     $ 5,429     $ 6,400     $ 7,239     $ 8,484     $ 9,713     $ 11,398     $ 13,517     $ 15,867  
Cost of revenue(1)
    931       1,187       1,543       1,811       2,038       2,409       2,731       3,106       3,423       3,771  
                                                                                 
Gross Profit
    2,969       3,441       3,886       4,589       5,201       6,075       6,982       8,292       10,094       12,096  
                                                                                 
Operating Expenses:(1)
                                                                               
Research and development
    741       1,133       1,363       1,411       1,530       1,868       2,169       2,802       2,536       2,834  
Sales and marketing
    2,079       2,745       2,837       4,247       4,664       6,844       6,121       6,674       6,742       7,839  
General and administrative
    385       417       493       586       633       911       1,082       1,289       1,597       1,477  
                                                                                 
Total operating expenses
    3,205       4,295       4,693       6,244       6,827       9,623       9,372       10,765       10,875       12,150  
                                                                                 
Loss from operations
    (236 )     (854 )     (807 )     (1,655 )     (1,626 )     (3,548 )     (2,390 )     (2,473 )     (781 )     (54 )
Interest and other income (expense), net
    (5 )     (7 )     (150 )     (156 )     105       (2 )     (291 )     (340 )     (910 )     (1,015 )
                                                                                 
Net loss
    (241 )     (861 )     (957 )     (1,811 )     (1,521 )     (3,550 )     (2,681 )     (2,813 )     (1,691 )     (1,069 )
Accretion of redeemable convertible preferred stock
    (1,372 )     (1,672 )     (2,136 )     (1,134 )     (259 )     (259 )     (253 )     (265 )     (271 )     (27 )
                                                                                 
Net loss attributable to common stockholders
  $ (1,613 )   $ (2,533 )   $ (3,093 )   $ (2,945 )   $ (1,780 )   $ (3,809 )   $ (2,934 )   $ (3,078 )   $ (1,962 )   $ (1,096 )
                                                                                 
Net loss attributable to common stockholders per share:
                                                                               
Basic and diluted(2)
  $ (0.57 )   $ (0.89 )   $ (0.94 )   $ (0.88 )   $ (0.51 )   $ (1.06 )   $ (0.79 )   $ (0.81 )   $ (0.51 )   $ (0.04 )
                                                                                 
Other Operating Data:
                                                                               
End of period number of customers(3)
    39,878       47,730       57,195       67,061       76,861       89,323       104,265       123,865       145,067       164,669(4 )
 
 
(1) Amounts include stock-based compensation expense, as follows:
 
                                                                                 
Cost of revenue
  $     $     $ 2     $ 3     $ 9     $ 11     $ 15     $ 17     $ 20     $ 29  
Research and development
                1       3       6       17       21       29       49       71  
Sales and marketing
                1       3       6       9       11       18       36       68  
General and administrative
    5             1       1       2       8       36       56       65       104  
                                                                                 
    $ 5     $     $ 5     $ 10     $ 23     $ 45     $ 83     $ 120     $ 170     $ 272  
                                                                                 
(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.
 
(4) In the quarter ended December 31, 2007, we adjusted our customer count downward to remove 2,189 customers that were not generating any revenue.


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As a percentage of revenue:
 
                                                                                 
    Three Months Ended  
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
 
    2005     2005     2006     2006     2006     2006     2007     2007     2007     2007  
 
                                                                                 
Statements of Operations Data:
                                                                               
Revenue
    100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %     100 %
Cost of revenue
    24       26       28       28       28       28       28       27       25       24  
                                                                                 
Gross Profit
    76       74       72       72       72       72       72       73       75       76  
                                                                                 
Operating Expenses:
                                                                               
Research and development
    19       25       25       22       21       22       23       25       19       19  
Sales and marketing
    53       59       53       67       64       81       63       59       50       49  
General and administrative
    10       9       9       9       9       11       11       11       12       9  
                                                                                 
Total operating expenses
    82       93       87       98       94       114       97       95       81       77  
                                                                                 
Loss from operations
    (6 )     (19 )     (15 )     (26 )     (22 )     (42 )     (25 )     (22 )     (6 )     (1 )
Interest and other income (expense), net
    (0 )     (0 )     (3 )     (2 )     1       (0 )     (3 )     (3 )     (7 )     (6 )
                                                                                 
Net loss
    (6 )%     (19 )%     (18 )%     (28 )%     (21 )%     (42 )%     (28 )%     (25 )%     (13 )%     (7 )%
                                                                                 
 
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
 
At December 31, 2007, our principal sources of liquidity were cash and cash equivalents and marketable securities of $102 million.
 
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. On October 9, 2007, we completed our initial public offering, in which we issued and sold 6,199,845 shares of common stock at a price to the public of $16.00 per share. We raised approximately $90.4 million in net proceeds after deducting underwriting discounts and commissions and other offering costs. Additionally, we used $2.6 million of proceeds to repay our outstanding principal and interest under our term loan facility. In the future, we anticipate that our primary sources of liquidity will be cash generated from our operating activities.
 
Our operating activities provided cash of $4.3 million in 2007, used cash of $748,000 in 2006 and provided cash of $2.4 million in 2005. Net cash inflows for the year ended December 31, 2007 resulted primarily from our operating losses offset by non-cash charges for depreciation and amortization, changes in fair value of the preferred stock warrant and stock-based compensation charges as well as changes in our working capital accounts. Net cash outflows in 2006 resulted primarily from operating losses partially offset by changes in our working capital 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 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 for each of the three years in the period ended December 31, 2007.


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Changes in current assets consisted primarily of the increase in prepaid expenses and other current assets. Prepaid expenses and other current assets increased $1.3 million in 2007 primarily due to an increase in prepaid software and maintenance contracts as well as increased volume of business. Prepaid expenses and other current assets increased $255,000 in 2006 primarily due to increased volume of business. Other assets increased in 2007 due to the prepayment of a multi-year software agreement.
 
The increases in current liability accounts consisted primarily of the following:
 
Changes in deferred revenue were as follows:
 
  •  during 2007, deferred revenue increased $4.9 million from $5.5 million to $10.4 million;
 
  •  during 2006, deferred revenue increased $2.7 million from $2.8 million to $5.5 million; and
 
  •  during 2005, deferred revenue increased $1.5 million from $1.3 million to $2.8 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 2007, accrued expenses increased $900,000 from $2.4 million to $3.3 million primarily due to increased employee related costs as a result of personnel additions;
 
  •  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 as a result of personnel additions and increased costs directly attributable to revenue growth partially offset by the receipt of invoices and timing of payments; and
 
  •  during 2005, accrued expenses increased $188,000 from $306,000 to $494,000.
 
Changes in accounts payable were as follows:
 
  •  during 2007, accounts payable increased $1.3 from $2.6 million to $3.9 million;
 
  •  during 2006, accounts payable increased $1.1 million from $1.5 million to $2.6 million; and
 
  •  during 2005, accounts payable increased $1.3 million from $176,000 to $1.5 million.
 
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 provided by or used in operating activities:
 
  •  change in fair value of a warrant of $3.9 million and $588,000 for the years ended December 31, 2007 and 2006, respectively;
 
  •  depreciation and amortization expense of $2.6 million, $1.5 million and $591,000 for the years ended December 31, 2007, 2006 and 2005, respectively; and
 
  •  stock-based compensation expense of $645,000, $83,000 and $17,000 for the years ended December 31, 2007, 2006 and 2005, 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 was ultimately convertible. The warrant was subject to re-measurement at each balance sheet date and changes in fair value recognized as a component of other expense until the warrant was exercised in October 2007.
 
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 expense was due to the adoption of SFAS 123R in January 2006 and an increase in the value of the common stock into which these options were exercisable.


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As of December 31, 2007, we had federal and state net operating loss carry-forwards of $38 million and $25 million, respectively, which may be available to offset potential payments of future federal and state income tax liabilities which expire at various dates through 2027 for federal income tax purposes and through 2012 for state income tax purposes.
 
Net cash used in investing activities was $6.0 million, $7.7 million and $2.2 million for the years ended December 31, 2007, 2006 and 2005, respectively. Net cash used in investing activities during the years ended December 31, 2007 and 2006 consisted primarily of net cash paid to purchase marketable securities and property and equipment, partially offset by proceeds from maturities of marketable securities in 2007. Net cash used in investing activities during the year ended December 31, 2005 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 primarily related to additional office space.
 
Net cash provided by financing activities was $90.0 million for 2007. Net cash provided by financing activities was $14.4 million and $512,000 for the years ended December 31, 2006 and 2005, respectively. Net cash provided by financing activities for 2007 consisted primarily of cash proceeds from our initial public offering in which we raised approximately $90.4 million after deducting underwriting discounts and commissions and other offering costs. We also received proceeds of $2.8 million from additional borrowings under the term loan facility and repaid $900,000 of borrowings during the first nine months of 2007. After our initial public offering, we used proceeds of $2.6 million to repay the remaining outstanding borrowings. Additional cash was provided by exercises of outstanding options and warrants in 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 year ended December 31, 2005 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 anticipated 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 plan to open a second third-party hosting facility that is expected to become operational in the first quarter of 2008 to provide redundancy and increased scaleability for our product infrastructure. We have made capital expenditures in 2007 and plan to make additional capital expenditures in 2008 for capital equipment to be used in this facility. We also plan to open a second sales and support office in the second half of 2008. We anticipate making capital commitments in 2008 and 2009 associated with the build-out and outfitting of this office. Additionally we anticipate continuing investments in property and equipment to support the anticipated growth in our business. We believe that our current cash, cash equivalents and marketable securities and operating cash flows 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 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 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.


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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.
 
New Accounting Pronouncements
 
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations. SFAS 141(R) expands the definition of a business combination and requires acquisitions to be accounted for at fair value. These fair value provisions will be applied to contingent consideration, in-process research and development and acquisition contingencies. Purchase accounting adjustments will be reflected during the period in which an acquisition was originally recorded. Additionally, the new standard requires transaction costs and restructuring charges to be expensed. The guidance of SFAS 141(R) shall be applied to the first reporting period beginning after December 15, 2008. The adoption of SFAS 141(R) is not expected to have a material impact on our financial position, results of operations, or cash flows.
 
On February 15, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (“SFAS 159”), which permits companies to choose to measure many financial instruments and certain other items at fair value. The objective of SFAS 159 is to improve financial reporting by providing companies with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. SFAS 159 is effective for fiscal years beginning after November 15, 2007. Management is currently evaluating the effect that SFAS 159 may have on our financial statements taken as a whole.
 
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS 157 are effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In February 2008, the FASB issued FSP No. 157-2, Effective Date of FASB Statement No. 157 which permits delayed application of SFAS 157 for nonfinancial assets and nonfinancial liabilities to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. Management is currently evaluating the effect that SFAS 157 may have on our financial statements taken as a whole.
 
Contractual Obligations
 
The following table summarizes our contractual obligations at December 31, 2007 and the effect such obligations are expected to have on our liquidity and cash flow in future periods.
 
                                         
          Less than
                More than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (In thousands)  
 
Operating lease obligations
  $ 6,024     $ 2,041     $ 3,983              
Contractual commitments
    9,302       1,756       3,490     $ 3,282     $ 774  
                                         
Total
  $ 15,326     $ 3,797     $ 7,473     $ 3,282     $ 774  
                                         
 
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


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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, was previously filed as an exhibit to our registration statement in connection with our initial public offering.
 
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 a leading provider of on-demand email marketing and online survey solutions for small organizations, including small businesses, associations and non-profits. As of December 31, 2007, we had over 164,000 e-mail marketing customers and over 8,000 survey customers, substantially all of which were also e-mail marketing 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 year ended December 31, 2007, the average monthly amount that we charged a customer for our email marketing solution alone was approximately $33. In addition, in 2007, our average monthly total revenue per email marketing customer, including all sources of revenue, was $33.63. 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 24 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 164,000 as of December 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 2007, our top 80 email marketing customers accounted for approximately 1% of our total email marketing revenue. Our customers have displayed a high degree of loyalty. From January 2005 through December 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 sources including online advertising, channel partnerships, regional initiatives, referrals and general brand awareness. Our online advertising includes search engine marketing and advertising on networks and other sites. Our channel partnerships are contractual relationships with over 2,300 active partners, which include national small business service providers such as Network Solutions, LLC, American Express Company and Career Builder, LLC as well as local small business service providers, such as web developers and marketing agencies, who refer customers to us through links on their websites and outbound promotions to their customers. Our regional initiatives include local seminars and local advertising including print, online and radio. Referral customers come from word-of-mouth from those among our satisfied, growing customer base and the inclusion of a link to our website in the footer of the more than 700 million emails currently sent by our customers each month. Finally, we believe our general brand awareness, press and thought leadership initiatives and visibility drive prospects to us. During 2007, approximately 33% of our new email marketing customers were generated through our online marketing efforts and approximately 14% of our new email marketing customers were generated through our channel partners. We believe the remaining 53% came from the combination of regional initiatives, referrals and general brand awareness.


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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. 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, a selling stockholder in this offering, estimated that there were 26.8 million small businesses in the United States in 2006, 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 28 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 December 31, 2007, we had customers in at least 871 of the 1,005 4-digit 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 Hyper Text Markup Language, 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 Microsoft Hotmail® are generally 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. Enterprise 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. These providers offer sophisticated, Internet-based marketing services and tools with professional and customized execution and reporting 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 300 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 computer 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 2007, the average monthly amount that we charged a customer for our email marketing solution alone was approximately $33. In addition, in 2007, our average monthly total revenue per email marketing customer, including all sources of revenue, was $33.63.
 
  •   Effective. Our product provides our customers with an effective way to reach their customers, clients and members. According to data measured by ReturnPath, Inc. approximately, 98% of our customers’ emails were delivered past any spam filters or controls to their target email inboxes in the United States during 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


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customers’ emails are delivered, we have developed relationships with leading Internet Service Providers, or ISPs.
 
  •   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 have continually invested 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, online and in-person seminars and brand awareness. A Constant Contact “Try It Free” link is included in the footer of more than 700 million emails currently sent by our customers each month. In 2007, 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 during the year, was approximately $255 per email marketing customer. For 2007, our average monthly total revenue per email marketing customer, including all sources of revenue, was approximately $33.63, implying payback on a revenue basis in less than one year. This implied payback is calculated by dividing the $255 acquisition cost per email marketing customer by the $33.63 average monthly revenue per email marketing customer, which implies an eight month payback period.
 
  •   High Degree of Recurring Revenue. We benefit from a high level of customer loyalty. From January 2005 through December 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 customer 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 trial customers to help them launch an initial campaign and address any questions or concerns. During the fourth quarter ended December 31, 2007, our customer surveys indicated that more than 90% of our customers who responded to our survey rated their overall experience with Constant Contact as good, very good or excellent. As a result, we believe we have a highly satisfied customer base.
 
  •   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


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  enables us to serve additional customers with little incremental expense and to deploy new applications and upgrades quickly and efficiently to our existing customers.
 
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 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 December 31, 2007, we had an email marketing customer base in excess of 164,000 and a survey customer base of over 8,000, substantially all of which were also email marketing customers. We seek to increase revenue from each email marketing customer through cross selling our survey product and through add-on services that enhance our products such as the hosting of our customers’ images and logos on our system. In 2007, we launched an add-on email archive service that enables 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. We believe that we have a significant opportunity to sell our 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.
 
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.


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  •   Professionally Developed Templates. These pre-designed email message forms help customers quickly create attractive and professional campaigns. Over 300 templates provide ideas about the kinds of 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 software plug-ins to import contact lists maintained in Microsoft’s Outlook® and Outlook Express® and Intuit’s QuickBooks®. 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 email marketing 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 are designed to 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.
 
  •   Email Archive. We offer our customers the ability to create a hosted version of current and past email communications on our system and make them readily available to their constituents through a link on a customer’s website. The service, which is available for an additional $5.00 per month, extends the life of an email communication and provides our customers with an ability to showcase to online visitors the extent and breadth of their communication efforts.
 
  •   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 online survey product enables our 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.


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By incorporating a real-time and comprehensive reporting function our survey product enables our customers to analyze overall survey results and specific answers submitted by individual respondents. Our survey product includes powerful analytic features that enable our customers to segment results based on survey responses, easily edit filters for “slice and dice” analysis and view the results in intuitive, easy-to-understand graphical and detailed data formats. Results can be exported to a Microsoft 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. In addition, we recently launched a new online polling feature that enables our customers to create online polls for use on their websites. Responses to these polls can be viewed immediately.
 
Customer Support
 
We provide extensive free customer support to all customers. Our 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 campaigns. Additional assistance is available via phone, chat or email. Our customer support employees answer approximately 1,500 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 a portion of our email support to a third party based in Bangalore, India. In the second half of 2008, we plan to open a second sales and support call center office in the western U.S. 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 and surveys.
 
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 December 2007, involuntary terminations have averaged less than 0.5% of our customer base each month.
 
As of December 31, 2007, we had 110 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
 
Every customer experience starts with a free 60-day trial. The only requirement for the free trial is that the trial 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. 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 products.


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Once a customer’s free trial experience has ended and the customer becomes a paying customer, 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 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 per month. However, if a customer receives survey responses in a given month that exceed the maximum number of email addresses permitted in their current pricing tier, 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 50,000 unique email addresses and our email archive service for $5.00 per month. We offer discounted rates to non-profits and for six- and twelve-month prepayment options.
 
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 300 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


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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.
 
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 and email archive. Customers may pay by check if they prepay for 6 or 12 months. If


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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 December 31, 2007, we had in excess of 14,500 members of the community with numerous forums that include “members networking with members” and “dos and don’ts for email marketing.”
 
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 December 31, 2007, we served a large and diverse group of over 164,000 email marketing customers and over 8,000 survey customers, substantially all of which were also 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, charities, trade associations, 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 year ended December 31, 2007, the average monthly amount that we charged a customer for our email marketing solution alone was approximately $33. In addition, in 2007, our average monthly total revenue per email marketing customer, including email marketing revenue, image hosting revenue, email archive revenue, survey revenue and professional services revenue, was $33.63. We have low customer concentration as our top 80 customers in email marketing revenue in 2007 accounted for approximately 1% of our total 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 December 2007, at least 97.4% of our customers in a given month have continued to utilize our email marketing product in the following month.


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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 variety of sources including online advertising, channel partnerships, regional initiatives, referrals and general brand awareness. We also invest in public relations and thought leadership in an effort to build our overall brand and visibility. We are constantly seeking new methods to reach and convert more customers.
 
Customer Acquisition 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 33% of our new email marketing customers in 2007 were generated from online advertising.
 
Channel Partners. We have contractual relationships with over 2,300 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 Career Builder, LLC, smaller companies with narrow reach but high influence such as web designers and marketing agencies, and large and small franchise organizations. Most of our channel partners either share a percentage of the cash received by us or receive a one-time referral fee. A website design and hosting company, Website Pros, Inc., bundles our services and provides them directly to its customers. This channel partner pays us monthly royalties, which contributed less than one percent of our total revenue during 2007. Approximately 14% of our new email marketing customers in 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 advertisements in national publications such as Entrepreneur as well as local business publications in our geographically targeted metro regions. Our geographically targeted offline advertising supports our local evangelism efforts.
 
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 2007, at least 44% 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 700 million emails currently sent by our customers each month. In 2007, approximately 8% of our new email marketing customers came from a footer click-through.
 
Sales Efforts
 
Communications Consultants. We employed a team of 37 phone-based sales professionals as of December 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 December 31, 2007, we employed a team of nine regional development directors who are focused on educating small organizations as to the benefits of email marketing in their local markets.


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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, survey 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 and survey, 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, Valentine’s Day and the December holiday season. 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. We specifically develop marketing programs and target public relations efforts at vertical markets for certain markets that have demonstrated an affinity for our products. These programs focus on a number of different vertical markets and have targeted restaurants, food service firms, franchises, real estate, religious organizations, retail and travel and tourism firms. We continue to adjust our target vertical markets based on our existing customer base, market opportunity and overall value to our business.
 
Community. We maintain an online user community for both trial and paying customers with discussion boards, a resource center, member spotlights and other features. As of December 31, 2007, we had in excess of 14,500 members of the community.
 
In the years ended December 31, 2005, 2006 and 2007 we spent $7.5 million, $18.6 million and $27.4 million, respectively, on sales and marketing. Our cost of customer acquisition during the years ended December 31, 2006 and 2007 was approximately $305 and $255, respectively, per email marketing customer, defined as our total annual sales and marketing expense divided by the gross number of email marketing customers added during the year.
 
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 two hosting facilities. The first, located in Somerville, Massachusetts, is owned and operated by Internap Network Services Corporation under an agreement that expires in October 2009. The second, which is expected to become operational during the first quarter of 2008, is located in Bedford, Massachusetts, and is owned and operated by Sentinel Properties-Bedford, LLC. This agreement expires in December 2013. Both facilities provide around-the-clock security personnel, video surveillance and biometric access screening, and are serviced by onsite electrical generators, fire detection and suppression systems. Both facilities also have multiple Tier 1 interconnects to the Internet.
 
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-


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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 December 31, 2007, we had 107 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 $3.4 million for 2005, $6.2 million for 2006 and $10.3 million for 2007.
 
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;
 
  •   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 a 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. (more than 36,000 customers), Broadwick Corporation (iContact, formerly Intellicontact) (more than 21,000 customers), CoolerEmail, Inc. (10,000 customers), Got Corporation (Campaigner) (more than 10,000 customers), Emma, Inc. (10,000 customers), Lyris Technologies, Inc. (more than 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 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.


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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.
 
Our survey product competes with similar offerings by Zoomerang (a division of Market Tools, Inc.) and Surveymonkey.com Corporation.
 
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 ISPs 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;
 
  •   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.


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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. Initial 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. These confidentiality and other written agreements, however, offer only limited protection, and we may not be able to enforce our rights under such agreements. Despite our efforts to protect


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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.
 
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 or in the event there is a significant change in the terms of open source licenses in general, 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.
 
“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 December 31, 2007, we employed a total of 318 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 80,000 square feet under an agreement that expires in September, 2010. As of December 31, 2007, all of our employees were based in this location with the exception of 10 employees who worked 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. In addition, we plan to open a second sales and support office in the Western United States in the second half of 2008.
 
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 December 31, 2007 are set forth below:
 
             
Name
  Age  
Position(s)
 
Gail F. Goodman
    47     Chairman, President and Chief Executive Officer
Ellen Brezniak
    49     Vice President, Product Strategy
Nancie Freitas
    46     Vice President and Chief Marketing Officer
Eric S. Groves
    44     Senior Vice President, Worldwide Strategy and Market Development
Thomas C. Howd
    48     Senior Vice President, Customer Operations
Robert P. Nault
    43     Vice President and General Counsel
Daniel A. Richards
    48     Vice President, Engineering
Steven R. Wasserman
    51     Vice President and Chief Financial Officer
Thomas Anderson(3)
    45     Director
Robert P. Badavas(1)
    54     Director
John Campbell(2)
    60     Director
Michael T. Fitzgerald(1)(2)
    55     Director
Patrick Gallagher(2)(3)
    36     Director
William S. Kaiser(1)(3)
    52     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 President and 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, Worldwide Strategy and Market Development since February 2008 and before that 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,


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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.
 
Thomas C. Howd. Mr. Howd has served as Senior Vice President, Customer Operations since February 2008 and before that 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. Preceding that, 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 following its acquisition 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. Preceding that, Mr. Richards 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. Preceding that, 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. From January 2007 until December 2007, Mr. Anderson was the Senior Vice President, Direct to Consumer Channel, of SLM Corporation, a provider of student loans. 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., a provider of financial resources for college-bound individuals, 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, a financial services company. 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


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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 publicly-traded 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 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 is a member of the board of directors of several private companies. Mr. Fitzgerald holds a B.A. from Amherst College and an M.B.A. from the Harvard Business School.
 
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 that terminated upon the closing of our initial public offering. There are no further contractual obligations regarding the election of our directors and 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, our board of directors are divided into three classes, each of which consists, as nearly as possible, of one-third of the total number of directors constituting our entire board of directors and each of whose members serve for staggered three year terms. As a result, only one class of our board of directors is elected each year. The members of the classes are divided as follows:
 
  •   the class I directors are Messrs. Anderson and Fitzgerald, and their term expires at the annual meeting of stockholders to be held in 2008;
 
  •   the class II directors are Messrs. Campbell and Gallagher, and their term expires at the annual meeting of stockholders to be held in 2009; and
 
  •   the class III directors are Ms. Goodman and Messrs. Badavas and Kaiser, and their term expires at the annual meeting of stockholders to be held in 2010.
 
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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 are 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.
 
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, or the Exchange Act. 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 February 2008, 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, or 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 Exchange Act, 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 11.4% 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 operates under a charter that has been approved by our board of directors. The composition and functioning of all of our committees comply with all applicable


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requirements of the Sarbanes-Oxley Act of 2002, the Nasdaq Marketplace Rules and SEC rules and regulations.
 
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 Marketplace Rules. 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 report 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, 2007, 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 have adopted 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 is 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
 
Prior to our initial public offering, none of our directors received any compensation for service as a member of our board of directors or board committees, other than the option grants in connection with the initial appointments of Mr. Anderson and Mr. Badavas to our board of directors described below. In anticipation of our initial public offering, our board of directors approved a compensation program effective upon the closing of the offering, pursuant to which we pay each non-employee director an annual retainer of $20,000 for service as a director. Each non-employee director other than committee chairpersons receives 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 receives an additional annual retainer of $10,000, the chairman of the compensation committee receives an additional annual retainer of $7,500 and the chairman of the nominating and corporate governance committee receives an additional annual retainer of $5,000. We reimburse each non-employee director for out-of-pocket expenses incurred in connection with attending our board and committee meetings.
 
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 of these options will accelerate in full.


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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 of these options will accelerate in full.
 
 
The following table sets forth information regarding compensation earned by each non-employee director during the year ended December 31, 2007:
 
                         
    Fees Earned or
    Option Awards
       
Name
  Paid in Cash ($)(l)     ($)(2)     Total ($)  
 
Thomas Anderson(3)
  $ 6,250     $ 35,917 (4)   $ 42,167  
Robert P. Badavas(5)
  $ 7,500     $ 24,563 (6)   $ 32,063  
John Campbell
  $ 6,875     $     $ 6,875  
Michael T. Fitzgerald
  $ 7,188     $     $ 7,188  
Patrick Gallagher
  $ 6,563     $     $ 6,563  
William S. Kaiser
  $ 6,875     $     $ 6,875  
Paul Schaut(7)
  $     $ 1,234     $ 1,234  
 
 
(1) The non-employee director compensation program became effective following our initial public offering in October 2007. These fees were earned by each director in 2007 and paid in January 2008.
 
(2) Valuation of these option awards is based on the dollar amount of share based compensation recognized for financial statement reporting purposes in 2007 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 director must provide services in order to earn the award, which in the case of these awards was two years. These amounts do not represent the actual amounts paid to or realized by the director during 2007. 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.
 
(3) Mr. Anderson joined our board of directors in January 2007.
 
(4) The compensation committee granted Mr. Anderson an option to purchase 39,000 shares on January 18, 2007, in connection with his initial appointment to the board of directors. The option has an exercise price of $3.05 and vests over a two year period. As of December 31, 2007, Mr. Anderson had not exercised this option. The grant date fair value of this option, computed in accordance with SFAS 123R, was $75,660.
 
(5) Mr. Badavas joined our board of directors in May 2007.
 
(6) The compensation committee granted Mr. Badavas an option to purchase 39,000 shares on June 5, 2007, in connection with his initial appointment to the board of directors. The option has an exercise price of $6.89 and vests over a two year period. As of December 31, 2007, Mr. Badavas had not exercised this option. The grant date fair value of this option, computed in accordance with SFAS 123R, was $168,480.
 
(7) Mr. Schaut resigned from our board of directors in May 2007.
 
As of December 31, 2007, other than Ms. Goodman, the only members of our board of directors that held outstanding stock options were Mr. Anderson and Mr. Badavas, each of whom held an option to purchase 39,000 shares of common stock.


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In addition, pursuant to our 2007 stock incentive plan each non-employee director receives 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 prior to such annual meeting. 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
 
This Compensation Discussion and Analysis is designed to provide an understanding of how our compensation program is developed with respect to our named executive officers. Our named executive officers consist of Gail F. Goodman, our president and chief executive officer, Steven R. Wasserman, our vice president and chief financial officer, and the other executive officers included in the Summary Compensation Table on page 77 of this prospectus.
 
We have divided this Compensation Discussion and Analysis into sections in order to help explain:
 
  •   the role of the compensation committee;
 
  •   the role of the independent compensation consultant;
 
  •   the use of competitive benchmarking data provided by our independent compensation consultant;
 
  •   the objectives and philosophy of our executive compensation program; and
 
  •   the specific components of our executive compensation program.
 
The Compensation Discussion and Analysis provides detailed information on the administration and results of our executive compensation program in 2007. In addition, there is detailed information regarding the compensation committee’s determination of 2008 executive compensation, which was approved by the compensation committee in December 2007 following a series of compensation committee meetings held during the fall of 2007.
 
Role of the Compensation Committee
 
The compensation committee is specifically responsible for establishing compensation and benefits programs for the Company’s executive officers, including Ms. Goodman and her executive management team. The compensation committee is comprised solely of independent directors, and its membership currently consists of John Campbell, who serves as chairman, Michael T. Fitzgerald and Patrick Gallagher. The members of the compensation committee are recommended by the nominating and corporate governance committee and elected by the board of directors annually. For more information regarding the compensation committee, see page 62 of this prospectus.
 
The compensation committee establishes the overall objectives and philosophy of our executive compensation program, determines the specific components of executive compensation, sets and reviews financial performance goals, and approves incentive payouts. With regard to Ms. Goodman’s compensation, the compensation committee performs these functions with input from an independent compensation consultant (discussed below), and with regard to the other named executive officers, the compensation committee relies on Ms. Goodman’s recommendations as well as input from the independent compensation consultant. In all cases, the compensation committee has responsibility for final executive compensation decisions.
 
The compensation committee strives to maintain an effective balance between short-term and long-term business objectives, employing its understanding of our business, the industry and the current and likely future business environment. Accordingly, the compensation committee endeavors to structure short-term and long-term incentive plans that reward performance based on achievement of different, but complementary, strategic and financial objectives. The compensation committee believes this balanced approach motivates management’s efforts to drive strong outcomes in both the current and future business environment.
 
In establishing individual executive compensation, the compensation committee considers analysis and recommendations from its independent compensation consultant, competitive practices, the president and chief executive officer’s recommendations (for her subordinates), established plans, compensation trends and internal practices. Ultimately, however, the compensation committee applies its judgment in establishing executive compensation.


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In 2007, the compensation committee held nine meetings and acted by written consent on five occasions.
 
Independent Compensation Consultant
 
Beginning with 2007 executive compensation determinations, the compensation committee engaged an independent compensation consultant, DolmatConnell & Partners, to review and evaluate our executive compensation program and its specific components, including total cash compensation targets, base salaries, target bonus percentages and equity ownership. DolmatConnell is directly accountable to the compensation committee for the performance of its services. In its role as an advisor to the compensation committee, a senior representative of DolmatConnell attends meetings of the compensation committee when requested. DolmatConnell also provides assistance to the compensation committee on financial performance goals and advice on rules, regulations and general compensation trends regarding executive compensation.
 
In the future, we expect that our compensation committee will continue to engage an independent compensation consulting firm to provide advice and data regarding executive compensation.
 
Competitive Compensation Benchmarking
 
We operate in a competitive environment. As such, the compensation committee believes that it is important to review the executive compensation practices of companies that are similar in business and size to us to ensure that our executive compensation program is competitive and assist us in meeting our overall executive compensation objectives.
 
In establishing executive compensation levels for 2007, which were established in December 2006 and prior to the time we became a public company, the compensation committee requested that DolmatConnell review and evaluate the elements of our executive compensation program, including total cash compensation targets, base salaries, target bonus percentages and equity ownership. As part of this review and 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.
 
In establishing executive compensation levels for 2008, the compensation committee again engaged DolmatConnell to provide analysis similar to that which it provided for 2007 executive compensation determinations. As part of this engagement, DolmatConnell developed two comparative data sources for analytical purposes and to ensure that comparative market data was available for all executives. First, given that we are now a publicly traded company, they developed a peer group comprised solely of U.S. based publicly traded companies from the software and services industries of similar size to our company based on revenue and market capitalization. This peer group, which is referred to in this Compensation Discussion and Analysis as the Original Peer Group, included: Art Technology Group, Inc., Chordiant Software, Inc., LivePerson, Inc., Marchex, Inc., Pegasystems Inc., PeopleSupport, Inc., RightNow Technologies, Inc., S1 Corp., Synchronoss Technologies, Inc., Unica Corporation, Visual Sciences, Inc. and Vocus, Inc. Second, they reviewed compensation data from a composite of credible, published executive compensation surveys scoped appropriately based on the size and nature of our business. At the request of the compensation committee, DolmatConnell developed a second peer group for comparison purposes. This second peer group, which consisted of U.S. based publicly traded companies primarily in the software as a service business similar in revenue and market capitalization to our company, included: BlackBoard, Inc., DemandTec, Inc., LivePerson, Inc., Kenexa Corporation, Omniture, Inc., RightNow Technologies, Inc., Salesforce.com, Taleo Corp., VistaPrint Limited and Vocus, Inc. The compensation committee requested that DolmatConnell create this second peer group, which is referred to in this Compensation Discussion and Analysis as the Second Peer Group, because investment analysts typically compare our company’s financial performance to the performance of companies in this group. The compensation committee determined that the data in the Second Peer Group was substantially similar to the data in the Original Peer Group. In addition, the compensation committee noted that the compensation ranges in the Original Peer Group and Second Peer Group were higher than the compensation ranges reflected in the 2007 benchmarking data, which resulted from the change to a peer group consisting of only public companies.


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Objectives and Philosophy of Our Executive Compensation Program
 
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 incentive awards and customary employee benefits. Quarterly cash incentive bonuses are tied to key financial metrics such as average gross monthly revenue growth, or AMRG, adjusted earnings before interest, taxes, depreciation and amortization, or Adjusted EBITDA, and Adjusted EBITDA as a percentage of revenue, or Adjusted EBITDA Margin, 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 plan to continue 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 do not have 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 establishes these allocations for each executive officer on an annual basis. Our compensation committee establishes total cash compensation targets based primarily upon benchmarking data as well as the performance and importance to the company of the individual executive and internal equity considerations among all executive officers. 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 when determining cash compensation as well as annual equity grants to executives. 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.
 
In establishing base salaries and cash incentive bonuses for our executives, the compensation committee first establishes a total cash compensation target for each executive. This is accomplished by comparing the total cash compensation of the applicable peer group in the 50th percentile to total cash compensation of our positions that matched positions in the peer group.
 
Based on this analysis for 2007 executive compensation determinations, three of our named executive officers (Ms. Goodman (−26%), Eric S. Groves, our Senior Vice President, Worldwide Strategy & Market


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Development, (−9%), and Mr. Wasserman (−26%) were below the median for target total cash compensation of the peer group for 2007. 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, and Mr. Wasserman, $250,000. These increases represented an increase in target total cash compensation to these executive officers of approximately 16%. Ellen Brezniak’s target total cash compensation for 2007 was established by the compensation committee at the time of her hiring in September 2006 and was set slightly below the median based on the peer group analysis. Ms. Brezniak serves as our Vice President, Product Strategy. Robert P. Nault’s target total cash compensation for 2007 was established by the compensation committee at the time of his hiring in March 2007 and was set slightly below the median based on the peer group analysis. Mr. Nault serves as our Vice President and General Counsel.
 
Based on this analysis for 2008 executive compensation determinations, all of our named executives were positioned below the 25th percentile for total target cash compensation for both the Original Peer Group and the Second Peer Group. The compensation committee reviewed this information and determined that the total target cash compensation for the following executive officers for 2008 be set as follows: Ms. Goodman, $525,000, Ms. Brezniak, $270,000, Mr. Groves, $287,000, Mr. Nault, $294,000 and Mr. Wasserman, $308,000.
 
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, Ms. Brezniak and Messrs. Wasserman and Nault. 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 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.
 
  2007 Base Salaries
 
In establishing base salaries for our named executive officers for 2007, our compensation committee reviewed a number of factors, including each named executive officer’s position and functional role, seniority, job performance and overall level of responsibility and the benchmarking data and other information provided by DolmatConnell. In 2007, the base salaries of Ms. Goodman and Mr. Wasserman were increased by 10% and 17%, respectively, as compared to 2006. Our compensation committee determined that Ms. Goodman had performed well in 2006 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 base salary 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 base salary 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 in 2006, it did not increase his base salary, in part, because his base salary was already 1% above the median base salary of the benchmarked group. Our compensation committee, however, increased Mr. Groves’ target incentive percentage (as a percentage of base salary) 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. Ms. Brezniak’s and Mr. Nault’s base salaries were established by the compensation committee at the time of their hiring in September 2006 and March 2007, respectively. These base salaries were generally set slightly below the median base salary of the relevant peer group.


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  2008 Base Salaries
 
In establishing base salaries for our named executive officers for 2008, our compensation committee reviewed a number of factors, including each named executive officer’s position and functional role, seniority, job performance and overall level of responsibility and the benchmarking data, including the Original Peer Group and Second Peer Group, and other information provided by DolmatConnell. In 2008, the base salaries of Ms. Goodman, Ms. Brezniak, Mr. Groves, Mr. Nault and Mr. Wasserman were increased by approximately 27%, 8%, 3%, 5% and 14%, respectively. Our compensation committee determined that Ms. Goodman had an exceptional year in 2007. They noted that she continued to successfully drive the strategy and growth of our company during 2007 while leading the team that completed our initial public offering. As a result of this analysis, our compensation committee determined to increase Ms. Goodman’s base salary to $350,000, which placed her base salary 17% above the median of the Original Peer Group and slightly above the median of the Second Peer Group. Our compensation committee determined that Ms. Brezniak had performed well in 2007. They noted that she had developed a detailed product roadmap, extended the planning horizon for product strategy and successfully helped to implement the Agile software development methodology. As a result of this analysis, our compensation committee determined to increase Ms. Brezniak’s base salary to $200,000, which placed her base salary at approximately the median for both the Original Peer Group and the Second Peer Group. Our compensation committee determined that Mr. Groves had performed well in 2007. They noted that he successfully expanded the regional development director program, reorganized the partner program to drive growth and continued to be a “thought leader” for the company’s strategy and focus on small organizations. As a result of this analysis, our compensation committee determined to increase Mr. Groves’ base salary to $205,000, which placed his base salary slightly above the median for the Original Peer Group. Our compensation committee determined that Mr. Wasserman had a very strong year. His primary accomplishment was the completion of our initial public offering. In addition, he continued to build the finance organization, enhance our systems, processes and controls and refine the financial metrics for the company, particularly as we prepared to become a public company. As a result of this analysis, our compensation committee increased Mr. Wasserman’s base salary to $220,000, which placed him slightly below the median base salary for the Original Peer Group and 12% below the median base salary for the Second Peer Group. Our compensation committee determined that Mr. Nault had performed well in his first year, learning our business and the legal issues relevant to our business and playing an integral role in our initial public offering. Our compensation committee increased Mr. Nault’s base salary to $210,000, which placed him below the median of both the Original Peer Group (−7%) and the Second Peer Group (−15%).
 
Cash Incentive Bonuses. Each year, including 2007 and 2008, we have established a cash incentive bonus plan for our executives, which provides for quarterly cash incentive bonus payments. The cash incentive bonuses are intended to compensate for the achievement of both corporate financial targets and, in the case of all executive officers except Ms. Goodman, individual performance goals. The corporate financial targets generally conform to the financial metrics contained in the internal business plan developed by our management and reviewed by our board of directors. Amounts payable under the cash incentive bonus plan are calculated as a percentage of the applicable executive’s base salary.
 
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. The compensation committee works with the chief executive officer and the chief financial officer to develop corporate financial targets. Individual performance objectives are necessarily tied to the particular area of expertise of the executive and his or her performance in attaining those objectives relative to external forces, internal resources utilized and overall individual effort. Ms. Goodman sets the individual quarterly performance objectives. In establishing these objectives, Ms. Goodman typically identifies areas that she believes require focus on the part of the executive and are strategic or important to our company as a whole. The financial targets and performance objectives are generally designed to be difficult to fully achieve and, as was the case in 2007, we do not expect that all of the targets and objectives will be fully achieved in all periods.


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  2007 Cash Incentive Bonuses
 
In 2007, the corporate financial targets were weighted 70% and the individual performance goals were weighted 30% in the bonus analysis, except that the corporate financial targets were weighted 100% for Ms. Goodman. The corporate financial targets were AMRG and Adjusted EBITDA. In 2007, 90% of the portion of the bonus payout related to corporate financial targets was based on the AMRG metric. Bonus payments based on AMRG were paid based on achieving at least 80% or 90% of the AMRG target, depending on the quarter, with accelerators for over 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 accelerators (1.5x for achievement between 115% or 120% and 130% and 2.0x for achievement above 130%) multiplied by the target AMRG incentive. Bonus payments based on Adjusted EBITDA targets, which accounted for 10% of the portion of the bonus payout related to corporate financial targets, were paid out at 100% only if the target metric was achieved. The actual AMRG targets for each quarter of 2007 were as follows: $126,000 for the first quarter of 2007, $214,800 for the second quarter of 2007, $195,200 for the third quarter of 2007 and $255,400 for the fourth quarter of 2007. The actual Adjusted EBITDA quarterly targets for 2007 were as follows: ($3,379,000) for the first quarter of 2007, ($2,075,300) for the second quarter of 2007, ($963,400) for the third quarter of 2007 and $242,600 for the fourth quarter of 2007.
 
Ms. Brezniak’s individual performance goals in 2007 included continuing to make progress on customer research initiatives and planning and scheduling from a product strategy perspective two major product releases in the first quarter, further developing and refining the product roadmap and addressing matters related to website architecture in the second quarter, continuing work on the product roadmap and future release planning in the third quarter, planning the 2008 product release schedule, hiring a web properties director and analyzing the benefits of agile programming in the fourth quarter. Mr. Groves’ individual performance goals in 2007 included establishing an enhanced methodology for measuring the impact of our regional development directors and reviewing and developing objectives around our strategic and partner initiatives in the first quarter, reviewing and refining the sales and channel partner initiatives relating to the launch of our survey product and creating an 18-month plan for sales and marketing in the second quarter, planning and launching market expansion testing and implementing initiatives to ensure the company met or beat customer quarterly acquisition targets in the third quarter, and implementing initiatives to ensure the company met or beat customer quarterly acquisition targets and continuing to refine the analysis to measure the organizational impact of our regional development directors in the fourth quarter. Mr. Nault’s primary individual performance goals in 2007 related to our initial public offering and our operations as a public company after the offering. Mr. Nault’s additional individual performance goals in 2007 included continuing to learn about the business by developing relationships with his executive peers in the second and third quarters, ensuring that our corporate governance standards were in place prior to our initial public offering in the third quarter and implementing public company controls and processes and rolling out to our employees our employee stock purchase plan in the fourth quarter. Mr. Wasserman’s primary individual performance goals in 2007 related to our initial public offering and our operations as a public company after the offering. Mr. Wasserman’s additional individual performance goals in 2007 included developing a lifetime profit per customer analysis in the first quarter, refining our expense forecasting methodology in the third quarter and implementing public company controls and processes and rolling out to our employees our new employee stock purchase plan in the fourth quarter.
 
The target bonus awards, as a percentage of base salary, for 2007 were 45% for Ms. Goodman, 27% for Ms. Brezniak, 40% for Mr. Groves, 30% for Mr. Nault and 30% for Mr. Wasserman. The actual target cash incentive bonuses awarded with respect to 2007 and set forth in the Summary Compensation Table that follows this Compensation Discussion and Analysis were split 15%, 25%, 25% and 35% for each of the four quarters respectively.


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The performance based compensation elements for our named executive officers for 2007 and a description of whether or not they achieved or underachieved with respect to each element were as follows:
 
                                 
    2007 – First Quarter   2007 – Second Quarter   2007 – Third Quarter   2007 – 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
                               
Ms. Brezniak
                               
Mr. Groves
                               
Mr. Nault(1)
                               
Mr. Wasserman
  AMRG(2)   Exceeded   AMRG   Under-Achieved   AMRG   Exceeded   AMRG   Exceeded
 
 
Ms. Goodman
                               
Ms. Brezniak
                               
Mr. Groves
                               
Mr. Nault(1)
                               
Mr. Wasserman
  Adjusted EBITDA   Achieved   Adjusted EBITDA   Achieved   Adjusted EBITDA   Achieved   Adjusted EBITDA   Achieved
 
 
Ms. Brezniak
  Individual       Individual       Individual       Individual    
    Performance Goals  
Achieved
  Performance Goals   Under-
Achieved
  Performance Goals  
Achieved
  Performance Goals  
Achieved
Mr. Groves
  Individual       Individual       Individual       Individual    
    Performance Goals  
Achieved
  Performance Goals   Achieved   Performance Goals   Under-
Achieved
  Performance Goals  
Achieved
Mr. Nault
  Individual       Individual       Individual       Individual    
    Performance Goals  
N/A(1)
  Performance Goals   Under-
Achieved
  Performance Goals   Under-
Achieved
  Performance Goals   Under-
Achieved
Mr. Wasserman
  Individual       Individual       Individual       Individual    
    Performance Goals  
Achieved
  Performance Goals   Achieved   Performance Goals  
Achieved
  Performance Goals   Under-
Achieved
 
 
(1) Mr. Nault was not eligible for a quarterly incentive payment in the first quarter of 2007 as he joined our company in March 2007.
 
(2) AMRG = average gross monthly revenue growth


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The table below reflects for each named executive officer (i) the 2007 quarterly target incentive for each performance based compensation element, (ii) the 2007 total quarterly target incentives, (iii) the actual 2007 quarterly incentive payments for each performance based compensation element based on achievement levels, and (iv) the actual 2007 total quarterly incentive payments.
 
                                                                 
                                  Actual
             
    Target
    Target
    Target
    Total
    Actual
    Adjusted
    Actual
    Total
 
    AMRG(1)
    Adjusted EBITDA
    MBO(2)
    Target
    AMRG(1)
    EBITDA
    MBO(2)
    Actual
 
    Incentive     Incentive     Incentive     Incentive     Incentive     Incentive     Incentive     Incentive  
 
Ms. Goodman
                                                               
Q1 2007
  $ 16,754     $ 1,861     $     $ 18,615     $ 18,094     $ 1,861     $     $ 19,955  
Q2 2007
  $ 27,923     $ 3,102     $     $ 31,025     $ 27,644     $ 3,102     $     $ 30,746  
Q3 2007
  $ 27,923     $ 3,102     $     $ 31,025     $ 31,832     $ 3,102     $     $ 34,934  
Q4 2007
  $ 39,092     $ 4,343     $     $ 43,435     $ 42,219     $ 4,343     $     $ 46,562  
Ms. Brezniak
                                                               
Q1 2007
  $ 4,725     $ 525     $ 2,250     $ 7,500     $ 5,103     $ 525     $ 2,250     $ 7,878  
Q2 2007
  $ 7,875     $ 875     $ 3,750     $ 12,500     $ 7,796     $ 875     $ 3,413     $ 12,084  
Q3 2007
  $ 7,875     $ 875     $ 3,750     $ 12,500     $ 8,978     $ 875     $ 3,750     $ 13,603  
Q4 2007
  $ 11,025     $ 1,225     $ 5,250     $ 17,500     $ 11,907     $ 1,225     $ 5,250     $ 18,382  
Mr. Groves
                                                               
Q1 2007
  $ 7,560     $ 840     $ 3,600     $ 12,000     $ 8,165     $ 840     $ 3,600     $ 12,605  
Q2 2007
  $ 12,600     $ 1,400     $ 6,000     $ 20,000     $ 12,474     $ 1,400     $ 6,000     $ 19,874  
Q3 2007
  $ 12,600     $ 1,400     $ 6,000     $ 20,000     $ 14,364     $ 1,400     $ 5,940     $ 21,704  
Q4 2007
  $ 17,640     $ 1,960     $ 8,400     $ 28,000     $ 19,051     $ 1,960     $ 8,400     $ 29,411  
Mr. Nault
                                                               
Q1 2007(3)
  $     $     $     $     $     $     $     $  
Q2 2007
  $ 9,450     $ 1,050     $ 4,500     $ 15,000     $ 9,356     $ 1,050     $ 4,118     $ 14,524  
Q3 2007
  $ 9,450     $ 1,050     $ 4,500     $ 15,000     $ 10,773     $ 1,050     $ 4,444     $ 16,267  
Q4 2007
  $ 13,230     $ 1,470     $ 6,300     $ 21,000     $ 14,288     $ 1,470     $ 6,111     $ 21,869  
Mr. Wasserman
                                                               
Q1 2007
  $ 5,453     $ 605     $ 2,597     $ 8,655     $ 5,889     $ 605     $ 2,597     $ 9,091  
Q2 2007
  $ 9,088     $ 1,009     $ 4,328     $ 14,425     $ 8,997     $ 1,009     $ 4,328     $ 14,334  
Q3 2007
  $ 9,088     $ 1,009     $ 4,328     $ 14,425     $ 10,360     $ 1,009     $ 4,328     $ 15,697  
Q4 2007
  $ 12,723     $ 1,413     $ 6,059     $ 20,195     $ 13,741     $ 1,413     $ 5,877     $ 21,031  
 
 
(1) AMRG = average gross monthly revenue growth
 
(2) MBOs = individual performance goals
 
(3) Because Mr. Nault joined the company in March 2007, he was not eligible for a quarterly incentive payment in the first quarter of 2007.
 
In 2007, 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 (107% and 48%); Ms. Brezniak (104% and 28%); Mr. Groves (104% and 42%); Mr. Nault (103% and 26%); and Mr. Wasserman (104% and 31%). In reviewing these results, the compensation committee believed that these results were justified by the strong company performance and individual performance in 2007 and the goal of using performance targets to reward over achievement.
 
  2008 Cash Incentive Bonuses
 
In December 2007, our compensation committee approved the target bonus awards for 2008 for our named executive officers. The target bonus awards, as a percentage of base salary, for 2008 are 50% for Ms. Goodman, 35% for Ms. Brezniak, 40% for Mr. Groves, 40% for Mr. Nault and 40% for Mr. Wasserman. As described 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 2008 base salaries for


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each named executive officer, the target bonus awards, as a percentage of base salary, were generally set to bring each named executive officer’s total target cash compensation to the approved level. Target bonus awards for 2008 will be paid out quarterly at the rate of 25% for each of the four quarters respectively.
 
In 2008, corporate financial targets will be weighted 70% and individual performance goals weighted 30% in the bonus analysis, except that, in the case of Ms. Goodman, the corporate financial targets are weighted 100%. The corporate financial targets are based on AMRG and Adjusted EBITDA Margin. For all named executive officers other than Ms. Goodman, of the total corporate financial target bonus amount payable, approximately 71% will be paid out based on the AMRG metric and approximately 29% based on the Adjusted EBITDA Margin metric. For Ms. Goodman, 70% of the entire bonus amount she is eligible to receive is based on the quarterly AMRG metric and the remaining 30% on the quarterly Adjusted EBITDA Margin metric. No bonus payment will be made to any executive based on the quarterly AMRG metric unless the quarterly AMRG we achieve exceeds at least 85% of the target amount, in which event the executive will be eligible to receive 50% of the bonus allocable to the AMRG metric. In the event that this minimum quarterly AMRG target amount is exceeded, the executive will be eligible to receive an increase of 3.333% in the bonus allocable to the AMRG metric for every 1% in excess of 85% of the target amount, up to a maximum of 135% of the AMRG target amount. No bonus payment will be made based on the quarterly Adjusted EBITDA Margin metric unless the Adjusted EBITDA Margin we achieve exceeds at least 95% of the target amount, in which event the executive will be eligible to receive 95% of the bonus allocable to Adjusted EBITDA Margin metric. In the event that this minimum quarterly Adjusted EBITDA Margin target amount is exceeded, the executive will be eligible to receive an increase of 1% in the bonus allocable to Adjusted EBITDA Margin metric for every 1% by which we exceed 95% of the target amount, up to a maximum of 105% of the Adjusted EBITDA Margin target. The compensation committee believes that these financial targets are designed to drive revenue growth and to ensure that we meet our Adjusted EBITDA Margin projections while incenting executives to work collaboratively to reinvest excess operating profit into the business.
 
Equity Incentive Awards. Our equity award program is the primary vehicle for offering long-term incentives to our executives. Prior to our initial public offering in October 2007, our employees, including our executives, were eligible to participate in our 1999 Stock Option/Stock Issuance Plan. Following the completion of our initial public offering, we grant to our employees, including our executives, stock-based awards pursuant to the 2007 Stock Incentive Plan. Under the 2007 Stock Incentive Plan, our employees, including our executives, are eligible to receive grants of stock options, restricted stock awards, and other stock-based equity awards at the discretion of our compensation committee. We believe that our option program is critical to our efforts to hire and retain the best people and to maintain a competitive advantage over our current and future competitors.
 
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 Ms. Goodman with respect to her executive team members. 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 approved by our compensation committee and are granted based on the fair market value of our common stock on the date of grant. 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 connection with the commencement of Mr. Nault’s employment and based on the equity guidelines recommended by DolmatConnell, the compensation committee granted to him an option to purchase 110,500 shares of common stock. The exercise price of this option was $4.12 per share, which was the fair


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market value of our common stock on the date of grant as determined by our board of directors. In December 2007, the compensation committee approved new equity awards for each of our executives. In determining these equity awards for each of the named executive officers set forth on the 2007 Grants of Plan-Based Awards table below, our compensation committee took into account company performance, which was very strong, the fact that we completed our initial public offering, the applicable executive’s performance and the equity guidelines recommended by DolmatConnell. As a result, in December 2007, our board of directors granted to Ms. Goodman, Ms. Brezniak, Mr. Groves, Mr. Nault and Mr. Wasserman options to purchase 65,000, 45,000, 30,000, 45,000 and 45,000 shares of common stock, respectively. The exercise price of these options was $22.27 per share, which was the closing, or last sale, price of our shares of common stock on the Nasdaq Global Market on December 6, 2007, the date of grant. Under a policy adopted by the compensation committee, this price is equal to the fair market value of our common stock on the date of grant. 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. The compensation committee has adopted a stock option grant policy that applies to all stock option grants, including grants to executives, but excluding automatic annual grants to independent directors. The option grant policy adopted by the compensation committee is as follows:
 
  •   That we shall not, and shall not have any program, plan or practice to, time or select the grant dates of any stock options or stock-based awards in coordination with the release by us of material non-public information.
 
  •   That only the compensation committee, in its sole discretion, shall be permitted to grant stock options and stock-based awards under the 2007 Stock Incentive Plan.
 
  •   That all grants of stock options and stock-based awards under the 2007 Stock Incentive Plan, including grants to new hires, shall be made during the first business week of the third month of the calendar quarter.
 
  •   That the exercise price of all stock options and stock-based awards shall equal the closing, or last sale, price of our common stock on the Nasdaq Global Market on the grant date.
 
  •   That the compensation committee will meet telephonically or in person during the first business week of the third month of the calendar quarter to approve grants of stock options and stock-based awards.
 
  •   That, to the extent practical, each quarterly meeting date will be tentatively set at the prior quarter’s meeting.
 
  •   That the compensation committee will not take action by written consent with respect to the grant of stock options and stock-based awards
 
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.
 
Severance and Change in Control Benefits
 
We have severance arrangements with Ms. Goodman and Messrs. Nault and Wasserman. These agreements provide, in general, that in the event the executive is terminated without cause (as defined in each agreement) or, in the case of Messrs. Wasserman and Nault, there is a significant change in his responsibilities or location, the executive will be entitled to a severance benefit equal to six months salary plus health insurance benefits. These arrangements were approved at the time of hire by either the compensation committee or the board of directors. See “Employment and Other Agreements” below for additional information relating to


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these agreements. In addition, each of the option agreements entered into with our executive officers has a change in control provision that provides that 50% of the unvested shares under the option shall vest immediately prior to the change in control and the balance will vest in the event the executive is terminated within one year from the date of the change in control.
 
We have provided more detailed information about these benefits, along with estimates of their value under various circumstances, under the caption “—Potential Payments Upon Termination or Change of Control” below. Our compensation committee believes that our severance and change of control benefits are reasonable and generally consistent with severance packages offered to executives at similarly situated companies.
 
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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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 and each of our three other most highly compensated executive officers during the years ended December 31, 2007 and 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
  Year   ($)   ($)(3)   ($)(4)   ($)(5)   ($)
 
Gail F. Goodman
    2007     $ 275,900     $ 78,221     $ 132,197     $ 840     $ 487,158  
President and Chief Executive Officer
    2006     $ 250,000     $ 13,352     $ 69,748     $ 840     $ 333,940  
Steven R. Wasserman
    2007     $ 192,300     $ 30,184     $ 60,153     $ 840     $ 283,477  
Vice President and Chief Financial Officer
    2006     $ 165,000     $ 1,295     $ 38,161     $ 840     $ 205,296  
Eric S. Groves
    2007     $ 200,000     $ 21,316     $ 83,594     $ 840     $ 305,750  
Senior Vice President, Worldwide Strategy and Market Development
    2006     $ 200,000     $ 5,191     $ 55,797     $ 840     $ 261,828  
Ellen Brezniak(1)
    2007     $ 185,000     $ 62,141     $ 51,947     $ 840     $ 299,928  
Vice President, Product Strategy
                                               
Robert P. Nault(2)
    2007     $ 153,269     $ 70,950     $ 52,660     $ 630     $ 277,509  
Vice President and General Counsel
                                               
 
 
(1) Ms. Brezniak joined our company in September 2006.
 
(2) Mr. Nault joined our company in March 2007.
 
(3) 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 each of 2006 and 2007 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 each of 2006 and 2007, 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. In 2006, this additional amount was $7,445 for Ms. Goodman and $2,522 for Mr. Groves. In 2007, this additional amount was $1,970 for Ms. Goodman and $969 for Mr. Groves. These amounts do not represent the actual amounts paid to or realized by the named executive officer during 2006 and 2007. 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 for 2007 are further described below in the table “2007 Grants of Plan-Based Awards.”
 
(4) For 2007, the amounts shown were paid during 2007 and in February 2008 to each of the named executive officers for the achievement in 2007 of specified performance objectives under our 2007 Executive Team Bonus Plan. For 2006, 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.
 
(5) The amounts shown reflect life insurance premiums and parking costs paid by us in each of 2006 and 2007 on behalf of each of the named executive officers.


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2007 Grants of Plan-Based Awards
 
The following table sets forth information regarding grants of awards made to our named executive officers during or for the year ended December 31, 2007.
 
                                                         
                    All Other
       
                    Option
       
                    Awards:
  Exercise or
  Grant Date
        Estimated Future Payouts Under
  Number of
  Base Price of
  Fair Value
        Non-Equity Incentive Plan Awards   Securities
  Option
  of Option
    Grant
  Threshold
  Target
  Maximum
  Underlying
  Awards
  Awards
Name
  Date   ($)   ($)(1)   ($)   Options (#)   ($/share)(2)   ($)(3)
 
Gail F. Goodman
              $ 124,100                          
      12/6/07                         65,000     $ 22.27     $ 865,800  
Steven R. Wasserman
              $ 57,700                          
      12/6/07                         45,000     $ 22.27     $ 599,400  
Eric S. Groves
              $ 80,000                          
      12/6/07                         30,000     $ 22.27     $ 399,600  
Ellen Brezniak
              $ 50,000                          
      12/6/07                         45,000     $ 22.27     $ 599,400  
Robert P. Nault
              $ 51,000 (4)                        
      3/2/07                         110,500     $ 4.12     $ 289,510  
      12/6/07                         45,000     $ 22.27     $ 599,400  
 
 
(1) Our 2007 Executive Team Bonus Plan was approved by the compensation committee of the board of directors on December 7, 2006. Payouts under the 2007 Executive Team Bonus Plan were contingent upon the achievement of certain quarterly financial performance goals, including AMRG targets and adjusted EBITDA targets, and, with the exception of Ms. Goodman, individual performance objectives. Thirty percent of the potential payouts to Ms. Brezniak and Messrs. Groves, Wasserman and Nault were contingent upon their ability to achieve individual quarterly objectives determined in advance by Ms. Goodman. There was no maximum payout under the 2007 Executive Team Bonus Plan. The amounts shown in the target column reflects the target amount payable under the 2007 Executive Team Bonus Plan. The actual amounts paid are reflected in the Summary Compensation Table above.
 
(2) In determining the exercise price for the option granted to Mr. Nault on March 2, 2007, our compensation committee and board of directors utilized the guideline public company method and the discounted future cash flow method, which involved 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 option grants to the named executive officers in December 2007, the compensation committee determined that the fair value of our common stock was equal to the last sale, or closing price, of our common stock on the Nasdaq Global Market on December 6, 2007, the date of grant. 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.
 
(4) Mr. Nault joined our company in March 2007 and, as a result, was not eligible to receive a bonus in the first quarter of 2007.


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2007 Outstanding Equity Awards at Year End
 
The following table sets forth information regarding outstanding option and stock awards held by our named executive officers at December 31, 2007.
 
                                                 
    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
 
    (#)
    (#)
    Price
    Expiration
    Vested
    Vested
 
Name
  Exercisable     Unexercisable     ($)     Date     (#)     ($)  
 
Gail F. Goodman
    5,200 (1)         $ 36.15       6/7/2010              
      33,738 (2)         $ 0.04       10/23/2013              
      57,728 (3)     48,106     $ 0.06       2/10/2015              
      5,687 (4)     7,313     $ 1.09       2/9/2016              
      29,250 (5)     87,750     $ 3.05       12/7/2016              
            65,000 (6)   $ 22.27       12/6/2017              
Steven R. Wasserman
    9,750 (7)     29,250     $ 3.05       12/7/2016              
            45,000 (8)   $ 22.27       12/6/2017              
                              96,006 (9)   $ 2,064,129 (10)
Eric S. Groves
    2,925 (11)         $ 41.54       2/7/2011              
      29,058 (12)         $ 0.04       10/23/2013              
      19,448 (13)     16,205     $ 0.06       2/10/2015              
      5,687 (14)     7,313     $ 1.09       2/9/2016              
      4,875 (15)     14,625     $ 3.05       12/6/2016              
            30,000 (16)   $ 22.27       12/6/2017              
Ellen Brezniak
    37,559 (17)     82,632     $ 2.68       9/20/2016              
            45,000 (18)   $ 22.27       12/6/2017              
Robert P. Nault
          110,500 (19)   $ 4.12       3/2/2017              
            45,000 (20)   $ 22.27       12/6/2017              
 
 
(1) Our board of directors granted this option to Ms. Goodman on June 7, 2000 and the shares underlying such option were fully vested by June 7, 2004.
 
(2) Our board of directors granted this option to Ms. Goodman on October 23, 2003 and the shares underlying such option were fully vested by October 23, 2007. As of December 31, 2007, Ms. Goodman had exercised a portion of this option to purchase 56,228 shares of common stock.
 
(3) Our board of directors granted this option to Ms. Goodman on February 10, 2005. Twenty-five percent of the shares underlying this option vested on January 15, 2006 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments, which vesting began on April 15, 2006, subject to continued employment. As of December 31, 2007, Ms. Goodman had exercised a portion of this option to purchase 48,105 shares of common stock.
 
(4) Our board of directors granted this option to Ms. Goodman on February 9, 2006. Twenty-five percent of the shares underlying this option vested on February 9, 2007 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments, which vesting began on May 9, 2007, subject to continued employment.
 
(5) Our board of directors granted this option to Ms. Goodman on December 7, 2006. Twenty-five percent of the shares underlying this option vested on December 7, 2007 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments, which vesting began on March 7, 2008, subject to continued employment.
 
(6) Our compensation committee granted this option to Ms. Goodman on December 6, 2007. Twenty-five percent of the shares underlying this option vest on December 6, 2008 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments beginning on March 6, 2009, subject to continued employment.
 
(7) Our board of directors granted this option to Mr. Wasserman on December 7, 2006. Twenty-five percent of the shares underlying this option vested on December 7, 2007 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments, which vesting began on March 7, 2008, subject to continued employment.


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(8) Our compensation committee granted this option to Mr. Wasserman on December 6, 2007. Twenty-five percent of the shares underlying this option vest on December 6, 2008 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments beginning on March 6, 2009, subject to continued employment.
 
(9) On December 8, 2005, our board of directors granted to Mr. Wasserman the right to purchase 192,010 shares of restricted common stock for a purchase price of $0.06 per share, which shares Mr. Wasserman purchased. The restrictions on the shares lapsed as to 25% of the shares on December 8, 2006 and the restrictions on the remaining 75% of the shares lapse in 12 equal quarterly installments, which lapsing began on March 8, 2007, subject to continued employment.
 
(10) This value was determined by multiplying the number of restricted shares for which the restrictions had not lapsed by the closing, or last sale price, of our common stock on the Nasdaq Global Market on December 31, 2007, or $21.50 per share.
 
(11) Our board of directors granted this option to Mr. Groves on February 7, 2001 and the shares underlying such option were fully vested by January 8, 2005.
 
(12) Our board of directors granted this option to Mr. Groves on October 23, 2003 and the shares underlying such option were fully vested by October 23, 2007. As of December 31, 2007, Mr. Groves had exercised a portion of this option to purchase 60,908 shares of common stock.
 
(13) Our board of directors granted this option to Mr. Groves on February 10, 2005. Twenty-five percent of the shares underlying this option vested on January 15, 2006 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments, which vesting began on April 15, 2006, subject to continued employment. As of December 31, 2007, Mr. Groves had exercised a portion of this option to purchase 16,204 shares of common stock.
 
(14) Our board of directors granted this option to Mr. Groves on February 9, 2006. Twenty-five percent of the shares underlying this option vested on February 9, 2007 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments, which vesting began on May 9, 2007, subject to continued employment.
 
(15) Our board of directors granted this option to Mr. Groves on December 7, 2006. Twenty-five percent of the shares underlying this option vested on December 7, 2007 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments, which vesting began on March 7, 2008, subject to continued employment.
 
(16) Our compensation committee granted this option to Mr. Groves on December 6, 2007. Twenty-five percent of the shares underlying this option vest on December 6, 2008 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments beginning on March 6, 2009, subject to continued employment.
 
(17) Our board of directors granted this option to Ms. Brezniak on September 20, 2006. Twenty-five percent of the shares underlying this option vested on September 20, 2007 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments, which vesting began on December 20, 2007, subject to continued employment.
 
(18) Our compensation committee granted this option to Ms. Brezniak on December 6, 2007. Twenty-five percent of the shares underlying this option vest on December 6, 2008 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments beginning on March 6, 2009, subject to continued employment.
 
(19) Our compensation committee granted this option to Mr. Nault on March 2, 2007. Twenty-five percent of the shares underlying this option vested on March 19, 2008 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments beginning on June 19, 2008, subject to continued employment.
 
(20) Our compensation committee granted this option to Mr. Nault on December 6, 2007. Twenty-five percent of the shares underlying this option vest on December 6, 2008 and the remaining 75% of the shares underlying this option vest in 12 equal quarterly installments beginning on March 6, 2009, subject to continued employment.


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2007 Option Exercises and Stock Vested
 
The following table sets forth information regarding options exercised by our named executive officers and shares subject to stock awards held by our named executive officers that vested during the year ended December 31, 2007.
 
                                 
    Option Awards     Stock Awards  
    Number of
                   
    Shares
          Number of Shares
       
    Acquired on
    Value Realized on
    Acquired on Vesting
    Value Realized on
 
Name
  Exercise (#)     Exercise ($)     (#)     Vesting ($)  
 
Gail F. Goodman
                       
Steven R. Wasserman
                48,002 (1)   $ 494,067 (1)
Eric S. Groves
    4,680 (2)   $ 44,741 (2)            
Ellen Brezniak
                       
Robert P. Nault
                       
 
 
(1) These shares of restricted stock vested during 2007 as follows: 12,000 shares on March 12, 2007, 12,001 shares on June 12, 2007, 12,000 shares on September 12, 2007 and 12,001 shares on December 12, 2007. The value realized has been calculated by taking the fair market value of our common stock at each of the vesting dates and multiplying it by the number of vesting shares, and then totaling these amounts. Prior to our initial public offering in October 2007, there was no public market for our common stock. Our board of directors determined that the fair value of our common stock on March 12, 2007, June 12, 2007 and September 12, 2007 was $4.12 per share, $6.89 per share and $9.60 per share, respectively. The fair value of our common stock on December 12, 2007 was $20.56 per share, the last sale, or closing price, of our common stock on the Nasdaq Global Market on that day. For a description 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.”
 
(2) Mr. Groves exercised these options in September 2007. At that time, there was no public market for our common stock. The value realized has been calculated by taking the fair market value of our common stock in September 2007 as determined by our board of directors, or $9.60 per share, less the per share exercise price multiplied by the number of stock options exercised.
 
Employment and Other Agreements
 
We do not have formal employment agreements with any of our named executive officers. As a condition to their employment, each named executive officer entered into a non-competition, non-disclosure and non-solicitation agreement. Pursuant to these agreements, each named executive officer has agreed not to compete with us or to solicit our employees during their employment and for a period of one year after their employment ends, to protect our confidential and proprietary information and to assign to us all intellectual property conceived of or developed during the term of their employment.
 
We entered into an offer letter with Ms. Goodman on April 14, 1999 that sets forth the terms of her employment as our chief executive officer. Ms. Goodman’s initial annual base salary was $100,000 and she was eligible to earn an annual bonus of $30,000. Ms. Goodman’s base salary has been adjusted by our compensation committee of directors and is currently $350,000 and she is eligible to earn a target annual bonus for 2008 of $175,000. Pursuant to the offer letter, our board of directors granted Ms. Goodman the right to purchase 7,150 shares of restricted common stock at a purchase price of $20.77 per share. The restricted shares vested as to 12.5% on October 5, 1999 and as to 6.25% each quarter thereafter. In the event Ms. Goodman’s employment is terminated by us without cause, the offer letter provides that she will be entitled to receive six months’ base salary and health insurance benefits.
 
We entered into an offer letter with Mr. Wasserman on December 1, 2005 that sets forth the terms of his employment as our vice president and chief financial officer. Mr. Wasserman’s initial annual base salary under the offer letter was $165,000. Mr. Wasserman’s base salary has been adjusted by our compensation committee and is currently $220,000. Pursuant to the offer letter, our board of directors granted Mr. Wasserman the right to purchase 192,010 shares of restricted common stock at a purchase price of $0.06 per share. The grant was effective on December 8, 2005, with 25% of the restricted shares vesting at the end of Mr. Wasserman’s first year of employment, and 6.25% of the restricted shares vesting each quarter thereafter. In the event of a


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change of control of our company, 50% of the unvested restricted shares will become vested. In addition, if Mr. Wasserman is terminated within the first year after the change of control, the offer letter provides that the remaining unvested restricted shares will vest. If Mr. Wasserman’s employment is terminated by us without cause, or if there is a significant change in his responsibilities or location that is unacceptable to him, he will be entitled to receive six months’ salary and medical coverage for himself and his dependents for six months from the date of his termination.
 
We entered into an offer letter with Mr. Nault on March 7, 2007 that sets forth the terms of his employment as our vice president and general counsel. Mr. Nault’s initial annual base salary under the offer letter was $200,000. Mr. Nault’s base salary has been adjusted by our compensation committee and is currently $210,000. Pursuant to the offer letter, our compensation committee granted Mr. Nault an option to purchase 110,500 shares of common stock at an exercise price of $4.12 per share. The grant was effective on March 19, 2007, with 25% of the shares underlying the option vesting at the end of Mr. Nault’s first year of employment, and 6.25% of the shares underlying the option vesting each quarter thereafter. In the event of a change of control of our company, 50% of the unvested shares under the option will become vested. In addition, if Mr. Nault is terminated within the first year after the change of control, the offer letter provides that the remaining unvested shares under the option will vest. If Mr. Nault’s employment is terminated by us without cause, or if there is a significant change in his responsibilities or location that is unacceptable to him, he will be entitled to receive six months’ salary and medical coverage for himself and his dependents for six months from the date of his termination.
 
Potential Payments Upon Termination or Change of Control
 
In addition to the offer letters with Ms. Goodman and Messrs. Wasserman and Nault described above, the option agreements with each of our executive officers and the restricted stock agreement with Mr. Wasserman provide that in the event of a change of control, 50% of then unvested shares or options subject to such agreements shall become vested. In addition, under these agreements, if the named executive officer’s employment is terminated within 12 months after the change of control, any remaining unvested shares or options subject to these agreements shall become vested. For these purposes, “change of control” generally means the consummation of the following: (a) the sale, transfer or other disposition of substantially all of our assets to a third party entity, (b) a merger or consolidation of our company with a third party entity, or (c) a transfer of more than 50% of the outstanding voting equity of our company to a third party entity (other than in a financing transaction involving the additional issuance of our securities).
 
The table below shows the benefits potentially payable to each of our named executive officers if he or she was terminated without cause, if there was a change of control of our company, and if he or she was terminated within 12 months after a change of control. These amounts are calculated on the assumption that the employment termination and change of control both took place on December 31, 2007.
 
                                 
          Benefits Payable
    Additional Benefits Payable Upon
 
    Benefits Payable Upon Termination Without Cause     Upon a Change
    Termination Within 12 Months of
 
    Severance
    Medical/
    of Control     a Change of Control  
Name
  Payments     Dental(1)     Equity Benefits(2)     Equity Benefits(2)  
 
Gail F. Goodman
  $ 175,000     $ 7,338     $ 1,399,820     $ 1,399,820  
Steven R. Wasserman
  $ 110,000     $ 7,338     $ 1,301,886     $ 1,301,886  
Eric S. Groves
              $ 244,106     $ 244,106  
Ellen Brezniak
              $ 1,140,407     $ 1,140,407  
Robert P. Nault
  $ 105,000     $ 7,338     $ 960,245     $ 960,245  
 
(1) Calculated based on the estimated cost to us of providing these benefits.
 
(2) This amount is equal to (a) the number of option shares or restricted shares that would vest, assuming a December 31, 2007 change of control and employment termination, multiplied by (b) in the case of options, the excess of $21.50 over the exercise price of the option or, in the case of restricted stock, $21.50. $21.50 was the last sale, or closing, price of our common stock on the Nasdaq Global Market on December 31, 2007.


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Stock Option and Other Compensation Plans
 
1999 Stock Option/Stock Issuance Plan
 
Our 1999 Stock Option/Stock Issuance Plan, as amended, which we refer to as the 1999 stock plan, was adopted by our board of directors and approved by our stockholders in March 1999.
 
The 1999 stock plan provided for the grant of incentive stock options, nonstatutory stock options, restricted stock and other stock-based awards. Our employees, officers, directors, consultants and advisors were eligible to receive awards under the 1999 stock plan; however, incentive stock options were only granted to our employees. In accordance with the terms of the 1999 stock plan, our board of directors, or a committee appointed by our board of directors, administered the 1999 stock plan and, subject to any limitations in the 1999 stock plan, selected the recipients of awards and determined:
 
  •   the number of shares of common stock covered by options and the dates upon which those options become exercisable;
 
  •   the exercise price of options;
 
  •   the duration of options;
 
  •   the methods of payment of the exercise price of options; and
 
  •   the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of those awards, including the conditions for vesting or repurchase, issue price and repurchase price.
 
Unless otherwise provided in any individual option agreement, in the event of our merger or consolidation with or into another entity or the sale of all or substantially all of our assets as a result of which our common stock is converted into the right to receive securities, cash or other property, or in the event of our liquidation, our board of directors or the board of directors of any corporation assuming our obligations shall, in its discretion, provide that all outstanding options under the 1999 stock plan be assumed or substituted for by the successor corporation. Alternatively, our board of directors may provide written notice to option holders that all unexercised options will become exercisable in full prior to completion of the reorganization event, and will terminate if not exercised prior to that time. If under the terms of the reorganization event holders of our common stock receive cash for their surrendered shares, our board of directors may instead provide for a cash-out of the value of any outstanding options based on the surrender value less the applicable exercise price. Our board of directors may also provide that each outstanding option shall terminate in exchange for a cash payment equal to the fair market value of our common stock less the applicable exercise price.
 
Our board of directors may at any time modify or amend the 1999 stock plan in any respect, except that stockholder approval will be required for any revision that is required to comply with applicable law, and provided further that optionholder approval will be required for any modification that affects the optionholder’s rights under any outstanding options.
 
Since the effective date of the 2007 stock incentive plan described below, we no longer grant stock options or other stock-based awards under the 1999 stock plan.
 
2007 Stock Incentive Plan
 
Our 2007 stock incentive plan, which became effective on October 9, 2007, was adopted by our board of directors and approved by our stockholders in September 2007. The 2007 stock incentive plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock, restricted stock units, stock appreciation rights and other stock-based awards. A maximum of 2,900,000 shares of common stock are currently authorized for issuance under our 2007 stock incentive plan.


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In addition, our 2007 stock incentive plan contains an “evergreen provision” that allows for an annual increase in the number of shares available for issuance under our 2007 stock incentive plan on the first day of each year until the second day of 2017. The annual increase in the number of shares shall be equal to the lowest of:
 
  •   700,000 shares of common stock;
 
  •   5% of the aggregate number of shares of common stock outstanding on the first day of the applicable year; and
 
  •   an amount determined by our board of directors.
 
Our employees, officers, directors, consultants and advisors are eligible to receive awards under our 2007 stock incentive plan; however, incentive stock options may only be granted to our employees. The maximum number of shares of common stock with respect to which awards may be granted to any participant under the plan is 500,000 per fiscal year.
 
Our 2007 stock incentive plan provides for the automatic grant of options to members of our board of directors who are not our employees. 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 of stockholders 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 prior to such annual meeting. All of these options will vest over a 3-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 in control, the form of standard option agreement for non-employee directors provides that the vesting of these options will accelerate in full. Our board of directors can increase or decrease the number of shares subject to options granted to non-employee directors and can issue restricted stock or other stock-based awards in addition to some or all of the options otherwise issuable. In addition, our board of directors may provide for accelerated vesting of any such options upon death, disability, change in control, attainment of mandatory retirement age or retirement following at least 10 years of service and may include any such other terms and conditions as our board of directors determines.
 
Our 2007 stock incentive plan is administered by our board of directors. Pursuant to the terms of the 2007 stock incentive plan and to the extent permitted by law, our board of directors may delegate authority under the 2007 stock incentive plan to one or more committees or subcommittees of our board of directors or to our executive officers. Our board of directors or any committee to whom our board of directors delegates authority selects the recipients of awards and determines:
 
  •   the number of shares of common stock covered by options and the dates upon which the options become exercisable;
 
  •   the exercise price of options;
 
  •   the duration of the options;
 
  •   the methods of payment of the exercise price of options; and
 
  •   the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of such awards, including conditions for vesting or repurchase, issue price and repurchase price.
 
If our board of directors delegates authority to an executive officer to grant awards under the 2007 stock incentive plan, the