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Unformatted text preview: Business 173C
Professor Bennet Ix.) DJ - FtNAL EXAM f t n ZoO‘l
Venture Ca ital Method — Valu ion Probl Set _ Roger Harkel, CEO ofGizmo lnc., sought to raise $5 million in a private placement of equity in his early stage consumer electronics company. Harkel conservatively
projected net income of $5 million in year five, and knew that comparable companies
traded at a price earnings ratio of20. a. What share of the company would a venture capitalist require today if her
required rate of return was 50%? What if her required rate of return was only
30%? b. If the company had 1,000,000 shares outstanding before the private placement,
how many shares should the venture capitalist purchase? What price per share
should she agree to pay if her required rate of return was 50%? 30%? c. Roger feels that he may need as much as $12 million in total outside ﬁnancing to
launch his new product. If he sought to raise the full amount in this round, how
much of his company would he have to give up? What price per share would the
venture capitalist be willing to pay if her required rate of return was 50%? 30%? Holly Jones of Gorsam Capital liked Harkel’s plan, but thought it naive in one respect.
To recruit a senior management team, she felt Harkel would have to grant generous
stock options in addition to the salaries projected in his business plan. From past
experience, she felt management should have the ability to own at least a 15% share of
the company by the end of year 5. Given her beliefs, what share of the company should
Holly insist on today if her required rate of return is 50%? 30%? On further analysis and discussion, Holly and Roger agree that the company will
probably need another round of ﬁnancing in addition to the current $5 million. Holly
believes that Gizmo will need an additional $3 million in equity at the beginning of year
3. While the ﬁrst round investors (including her) will require a 50% return, Holly feels
that round 2 investors, in recognition of the progress made between now and then, will
probably have a hurdle rate of only 30%. As before, management should have the
ability to own a 15% share of the company by the end of year 5. a. Based on this new information, what share of the company should Holly seek
today? What price per share should she be willing to pay? b. What share of the company will die Round 2 investors seek? What price per
share will they be willing to pay? l . y 1
4. Roger’s brothelf: has also been woﬂgﬁ’lg o amewwenture. He has invested $20,000 and six months of swcatltvequitxto date developing the concept. While he
believes the-idea has'thasdmi growth and proﬁt potential as Roger’s company, he
knows that outside investors will require more detailed research and proof of his business model before putting up the $1 million required to launch the company. To take the company to an appropriate stage for serious outside ﬁnancing, he seeks to
raise $100000 from outside investors. If he is right, the company will then have a
prototype product, contacts with key customers and a well thought out business plan. If
he is wrong, while it is possible that the business idea could be reformulated and
salvaged, it is likely that the money will be lost and he will move on to a new project. a. How should Henry approach the fund raising process for this seed stage project?
What type of investors should he try to recruit? What problems will he have in
raising money? b. How should Henry value the company at this point? Should he seek to raise
debt or equity? What deal terms are reasonable? ...
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This note was uploaded on 09/08/2010 for the course BUS 173C at San Jose State University .