07 - Valuation of VC Claims

07 - Valuation of VC Claims - Venture Capital & Private...

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Venture Capital & Private Equity Valuation of VC Claims Valuation of Venture Capital Claims Professor David Wessels © 2008 The Wharton School of the University of Pennsylvania 3620 Locust Walk, Philadelphia PA 19104
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Venture Capital & Private Equity Valuation of VC Claims Venture Capital & Contingent Claims o value the enterprise, we use To value the enterprise, we use traditional valuation techniques such as discounted free cash flow sing scenarios and Exit Diagram for Redeemable Convertible Preferred (using scenarios and probabilities) or multiples. Because the payoff structures in 8 10 12 Stock Payo f VC-backed companies are not simply linear functions of enterprise value, we need to use 0 2 4 6 Preferred S options models to convert enterprise value into preferred stock value. 0 3 6 9 1 2 5 8 4 7 Enterprise Value Professor David Wessels The Wharton School of the University of Pennsylvania 2
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Venture Capital & Private Equity Valuation of VC Claims Constructing Tracking Portfolios: Redeemable Earlier, “Redcap Ventures” purchased 2.67 million shares at $1.50 per share in i A fi i (f t h i f $4 illi ) Series A financing (for an aggregate purchase price of $4 million). If preferred stock is redeemable at 2x, but not convertible, how can we construct a portfolio of stocks and options? Exit Diagram for Redeemable Preferred 2 Exit Diagram for Redeemable Preferred 6 8 10 12 red Stock Payof f 6 8 d Stock Payof 0 2 4 0 3 6 9 1 2 5 8 21 4 7 30 Enterprise Value (in $millions) Prefer 0 2 4 24 27 nterprise Value (in $millions) Preferre Professor David Wessels The Wharton School of the University of Pennsylvania 3 Enterprise Value (in $millions)
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Venture Capital & Private Equity Valuation of VC Claims Constructing Tracking Portfolios: Convertible Earlier, “Redcap Ventures” purchased 2.67 million shares at $1.50 per share in eries A financing (for an aggregate purchase price of $4 million) Series A financing (for an aggregate purchase price of $4 million). If preferred stock is redeemable at 2x and convertible into 40% of common, how can we construct a portfolio of stocks and options? Exit Diagram for Redeemable Convertible Preferred 12 Exit Diagram for Redeemable Convertible Preferred 4 6 8 10 erred Stock Payo f 6 8 d Stock Payof 0 2 0 3 6 9 1 2 15 18 21 24 27 Enterprise Value Pref e 0 2 4 5 8 4 7 Enterprise Value (in $millions) Preferre d Professor David Wessels The Wharton School of the University of Pennsylvania 4 p( $ )
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Venture Capital & Private Equity Valuation of VC Claims Valuation of Preferred Stock If the stock is redeemable at MULTIPLE ROUND INVESTMENT VALUATION i l V l ti 2x and also convertible into 40% of common, we can alue the claim as follows: Final Valuation Partial Value $6.51 LP Value $6.51 Assumptions Total Valuation $10.00 Volatility σ= 20.00% terest Rate 00% CALCULATE value the claim as follows: 20) (0.4)C(at 8) C(at EntVal PS 0 0 + = Interest Rate r= 5.00% Expected Holding Period 5 RE Call Inputs Option Numbe Fraction Strike Type Call Valueraction*Value Option 1 1 $0.00 Regular $10.00 $10.00 ption 2 - 8 00 egular 3 77 - 3 77 Supposedly, we purchasing 40% of a $10 million
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This note was uploaded on 09/08/2008 for the course FNCE 750 taught by Professor Wessels during the Spring '08 term at UPenn.

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07 - Valuation of VC Claims - Venture Capital & Private...

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