Question 1. Assume as a VC that you want to establish a pre- and post-money valuation in support of the issuance of a term sheet.
In order to establish a discount rate, you've decided to use CAPM with the following inputs:
- Risk free rate of 4%
- Market return expectation of 10%
- Beta coefficient of 2.5
You are planning to invest $5mm in a lump sum based solely on the company's success-based forecast as the basis for your operating cash flow (OCF) projections as follows:
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Year 1
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Year 2
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Year 3
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Year 4
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Year 5
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OCF
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-$3mm
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-$1mm
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+$1mm
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+3mm
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+$5mm
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Assume 5% annual growth after year 5.
At this point you perceive the most likely harvest to involve a M&A transaction. Recent transactions have occurred at the following operating cash flow multiples:
Transaction A: 8x Transaction B: 10x Transaction C: 11x Transaction D: 12x
The company currently has 1mm shares outstanding.
Propose an implied share price, a pre-money and post-valuation valuation for this venture.
Question 2. A growth stage venture that has received $6mm in venture financing and $1mm in angel financing is currently beginning the process of contemplating its harvest options. The CEO has requested that you, as CFO, perform a qualitative cost/benefit analysis of the following options:
- Acquisition
- Initial Public Offering (IPO)
- Leveraged Buyout / Management Buyout (MBO/LBO)
- Reverse Takeover of Public Company
It is imperative that you provide sufficient detail to support a number of key strategic decisions that will be made over the coming months. The existing venture investors expect harvest within 30 months.
Question 3. You have been hired by Serge Brink and Larry Park to assist them in the evaluation of a recently issued term sheet from Global VC Partners.
The new venture is an Internet startup based on the pair's doctoral research and each of the entrepreneurs are newly minted PhD graduates with minimal business experience. At this point, the valuation is not subject to debate but Serge & Larry are concerned about a number of the clauses referred to within the term sheet, specifically:
- Investor demand registration rights
- Reserved ESOP shares (30% of post-money shares)
- Investor liquidation preference of 250%
- Convertible preferred shares with full ratchet provision
- Fixed maturity date with investor put provision
Prepare a comprehensive professional style memo addressed to Serge & Larry that sufficiently explains each of the aforementioned items from both an investor's and an entrepreneur's perspective. You should also recommend any additional clauses that the entrepreneurs may wish to consider within their deal structure negotiations.