1 / 25

Venture Capital and Private Equity Session 4

Venture Capital and Private Equity Session 4. Professor Sandeep Dahiya Georgetown University. Course Road Map. What is Venture Capital - Introduction VC Cycle Fund raising Investing VC Valuation Methods Term Sheets Design of Private Equity securities Exiting

felice
Download Presentation

Venture Capital and Private Equity Session 4

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Venture Capital and Private Equity Session 4 Professor SandeepDahiya Georgetown University

  2. Course Road Map • What is Venture Capital - Introduction • VC Cycle • Fund raising • Investing • VC Valuation Methods • Term Sheets • Design of Private Equity securities • Exiting • Time permitting – Corporate Venture Capital (CVC)

  3. Quick Review of VC Valuation Method • Remember - In venture capital all valuation is “implied valuation”. Simply put the value arises because VC(s) is(are) willing to finance the company! • The terms (amount invested, fraction of ownership received) fix the post-money and pre-money value of the business • This process is made transparent by reporting of “Capitalization Table” or simply “Cap Tables” – Let us see how these are created…

  4. Capitalization Tables Page 10 (Bottom) of ONSET ventures case describes the financing history of TallyUp. Onset offered to invest $750,000 at a price $1 per share in return for 31.6% of the company. Later, ONSET invested another $250,000 at the same price ($ 1 per share) when Reed Tausig as the CEO. Please draw up the capitalization tables, pre-money and post money valuations for tally before and after each round of financing.

  5. After Next Investment of $250,000

  6. After Option Pool Creation of 750,000 Shares

  7. What if Mann is able to do a $3.5 million round at 2.5 times step up (ONSET invests $1 million in this round)

  8. TallyUp – What Happened • Was able to raise 4 million in the next round at post-money value of $ 13 million (>2.5x step-up) • Raised 4 more rounds – changed name to Callidus Software • Did IPO in 2003 at $13.5 share • ONSET owned 17% of the company at the time of IPO

  9. Term Sheets…Let us look at Trendsetter

  10. Term Sheet • Getting first Term Sheet is MAJOR break through! • Validates entrepreneur/idea • Establishes a price • Can be shopped around (especially in later rounds)

  11. Term Sheets in Venture Financing • Responses by investors • Active Screening • Stage financing • Syndication • Use of Stock options/grants with strict vesting requirements • Contingent control mechanisms – Covenants and restrictions • Strategic composition of Board of Directors • Critical Issues • Uncertainty • Asymmetric Information • Nature of Firm’s assets • Conditions of relevant financial and product markets Got a Term Sheet Check the Term Sheet! Multiple Rounds, Multiple Tranches

  12. Trendsetter is Lucky! • If you were advising Trendsetter which offer would recommend? • Valuation • Liquidation Preference (and Antidilution) • Vesting • Corporate Governance

  13. Valuation (Cap Tables)

  14. Liquidation • Deemed liquidation event • Liquidation preference (2X, 3X, etc.) • Non Participating • Fully Participating • Qualified public offering (QPO) Will See in Details Later

  15. TYPE OF LIQUIDATION EVENT IS CRITICAL! What Type of Security? • Alpha • Convertible Preferred (CP) Stock • Mega • Participating Convertible Preferred (PCP) Stock

  16. Exit Values

  17. Anti-Dilution Protections Read the Note on Anti-dilution provisions: Typology and Numerical Example • Down round • Full-ratchet vs. weighted average • Adjusted conversion price, adjusted conversion rate

  18. Broad-base weighted average anti-dilution NCP = OCP * (OB+NM/OCP) / (OB+SI) NCP= New Conversion Price OCP= Old Conversion Price in effect immediately prior to new issue OB = Number of shares of shares outstanding immediately prior to this round NM = New Money received by the Corporation SI = Number of shares of stock issued in this round Another way of writing it

  19. Why do we see these features? • Convertible preferred • Participating Convertible Preferred • Full Ratchet/ Weighted Average Ratchet • Registration rights

  20. Challenges for VCs • Private Equity Partnerships (PEP) have become the dominant organization form as it addresses challenges faced by LPs (Investors) and GPs(VC, Buyout Firm). • Are there issues between GPs and the portfolio companies?

  21. Challenges of Venture Financing • Critical issues involved in financing young firms • Uncertainty • Asymmetric Information • Nature of Firm’s assets • Conditions of relevant financial and product markets • Responses by VCs • Active Screening • Stage financing • Syndication • Use of Stock options/grants with strict vesting requirements • Contingent control mechanisms – Covenants and restrictions • Strategic composition of Board of Directors

  22. Securities used by VCs • Common Stock • Debt • Preferred Stock • Never – why not? • Never – why not? • Interesting- why?

  23. VCs response #1– Security Design • Redeemable Preferred (RP) • Convertible Preferred (CP) - Forced Conversion Clause • Participating Convertible Preferred (PCP) DO NOT WORRY! WILL DEVOTE TIME TO THESE LATER!!

  24. VCs response #2 Vesting • Vesting – creates “Golden Handcuffs” for key employees • Idea being that you have to “Earn” your share of the company! • Also keeps the option pool from being depleted if employees leave

  25. VCs response #3 Covenants • Covenants • Positive Covenants • Example Provide regular information • Negative Covenants • Example Sale of assets • Others • Mandatory redemption • Board Seats

More Related