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E140A: ABCs of Financing. A. Amount of cash needed and purpose. C. Deal Structure and Terms. B. Sources of Capital. A. Amount of Cash … Two Key Questions. #1 How much money is needed for this “round” of financing?. Typical Financing Stages (or Rounds):

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E140A: ABCs of Financing


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    1. E140A: ABCs of Financing A. Amount of cash needed and purpose C. Deal Structure and Terms B. Sources of Capital

    2. A. Amount of Cash …Two Key Questions #1 How much money is needed for this “round” of financing? Typical Financing Stages (or Rounds): Seed  Early  Mezzanine  Late (e.g., IPO)

    3. #2 Which risks are to be reduced with this money in this round? Team Risk Technology Risk Capital Risk Market Risk

    4. Angel Investors Corporate VC Traditional VC Boot-strapping Other B. Raise Money From Where?Sources of Capital for High-Technology Entrepreneurs

    5. U.S. Venture Capital Investment Number of US VC Investments In 2003, VC’s invested $18 billion in U.S. and angels invested about $16 billion. (Sources: Venture Economics, NVCA and Center for Venture Research)

    6. C. Key Questions Regarding the “Deal” • What percentage of the company do the investors receive for their cash? • What special terms and conditions are necessary to compensate them for the risk?

    7. A Simple Venture Finance Example • Roma’s hot startup requires $10 million in order to form its business. She expects to earn $10 million in its fifth year. • Randy’s VC firm has reviewed the company's business plan and believes that he is entitled to a 50% return on his investment. (Hint: how many “times” must his money grow in 5 years?) • Publicly traded companies in this category and industry trade at approximately 15 times earnings (PE ratio). There is no material difference between these companies and the startup. • What portion of the company should Randy’s VC firm receive today? (Hint: what is future value of that investment?) 1. Value of VC Investment in Year 5 = $10 m*(1+50%)^5 = $76m 2. StartUp’s Value in Year 5 = $10 m*(P/E of 15) = $150m 3. VC Firm’s Share Today =   Step 1/Step 2                    =  $76 m/$150m = ~ 50% 4. “Post-Money” Value Today = $10 m / .50 =$ 20 mm

    8. 1mm shares for each founder =3mm shares @ $0.001 ea. Value=$3k +1mm shares each for CEO & employees = 5mm shares @ $0.01 each Value=$50k +5mm shares for first VC firm =10mm shares @ $1.00 each Value=$10mm Use of $: R&D A Multi-Stage Venture Finance Example Time I II III IV V Note: not to scale

    9. +5mm shares for second round VCs =15mm shares @ $5 each Value=$75mm Use of $: Mktg. +5mm shares for sale to public in IPO  = 20mm shares @ $15.00 each Value=$300mm Use of $: Operations A Multi-Stage Venture Finance Example Time I II III IV V V 1mm shares each for CEO & employees = 5mm shares @ $0.01 each Value=$50k 5mm shares for first VC firm =10mm shares @ $1.00 each Value=$10mm Use of $: R&D 1mm shares for each founder =3mm shares @ $0.001 ea. Value=$3k Note: not to scale