05 - VC Capital Structure

05 - VC Capital Structure - Venture Capital Private Equity...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Venture Capital & Private Equity Capital Structure in VC-Backed Firms Capital Structure in VC-Backed Firms Professor David Wessels © 2008 The Wharton School of the University of Pennsylvania 3620 Locust Walk, Philadelphia PA 19104
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Venture Capital & Private Equity Capital Structure in VC-Backed Firms The Language of Venture Capital The financial issues related to venture capital are no different than those of a traditional finance class. Theories and predictions related to DCF valuation, multiples, contingent claims, options, capital structure, Modigliani & Miller, still hold. But the differences in language used can be daunting. Consider how valuation is described: – “I’ll put in $4 million based on six pre-money” – “I’m looking for two-fifths of the company post, and for that I’ll put up e fo r” the four” – “It’s worth six pre-money, and I want to own 40% after we close.” Professor David Wessels The Wharton School of the University of Pennsylvania 2
Background image of page 2
Venture Capital & Private Equity Capital Structure in VC-Backed Firms Translating VC Language to Capital Structure Your company current has three million shares outstanding (no price is available). Prior to the Pre-Money Valuation + New Money = Post oney Valuation transaction, there has never been a discussion of valuation. ow does: “It’sworth n post and Post-Money Valuation Money New wnership How does: It s worth ten post , and I want to own 40% after we close ,” Let’s translate to the pre-money Valuation Money - Post Ownership % = h valuation , the number of shares to be issued , and the share price ? Shares New Shares Old Shares New Ownership % + = Professor David Wessels The Wharton School of the University of Pennsylvania 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Venture Capital & Private Equity Capital Structure in VC-Backed Firms There’s More… Employee Option Pools Option Pool Shuffle ou have successfully negotiated a $4M investment on a $6M pre You have successfully negotiated a $4M investment on a $6M pre- money valuation by pitting the famous RedCap Ventures versus Blue Shirt Capital. Triumphant, you return to your company’s tastefully decorated loft to tell the team that their hard work has created $6M of value. itle ange (%) Typical Silicon Valley Grants (Series A) Your teammates ask what their shares are worth. You explain that the company currently has 3M shares outstanding so the investors must be valuing the company’s stock at $2/share: $6M pre-money ÷ 3M existing shares = $2/share. Title Range (%) Chief Executive Officer 5 10% Senior Executives 2 5% Vice Presidents 1 2% dependent Board Member % Later that evening you review the term sheet from RedCap. It states that the share price is $1.50. This must be a mistake! Reading on, the term sheet states, “The $6 million pre-money valuation includes an option pool equal to 15% of the post-financing fully diluted capitalization.” Independent Board Member 1% Director 0.4 1.25% Lead Engineer 0.5 1% 5+ years experience Engineer 0.33 0.66% Manager or Junior Engineer 0.2 0.33%
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

Page1 / 26

05 - VC Capital Structure - Venture Capital Private Equity...

This preview shows document pages 1 - 5. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online