A Assuming it is a seed stage firm with no existing investors what annualized

# A assuming it is a seed stage firm with no existing

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A. Assuming it is a seed stage firm with no existing investors, what annualized return is embedded in their anticipation? r = (300,000,000/15,000,000)^(1/5)-1 = 82.0564% B. Suppose the founder wants to have a venture investor inject \$15,000,000 in three r-15-15ounds of \$5,000,000 at time 0, 1 and 2 with time 5 exit value of \$300,000,000. If the founder anticipates returns of 70%, 50% and 30% for round 1, 2 and 3, respectively, what percent of ownership is sold during the first round? During the second round? During the third round? What is the founders’ year-five ownership percentage? First Round FV: 5,000,000 x (1.7)^5 = 70,992,850 Second Round FV: 5,000,000 x (1.5)^4 = 25,312,500 Third Round FV: = 5,000,000 x (1.3)^3 = 10,985,000 Total FV = 107,290,350 First Round % of Total FV = 23.66% = 70,992,850/300,000,000 Second Round % of Total FV = 8.44% = 25,312,500/300,000,000 Third Round % of Total FV = 3.66% = 10,985,000/300,000,000) Founder final ownership = 1 – 23.66% - 8.44% - 3.66% = 64.24% = 192,709,650/300,000,000 C. Assuming the founder will have 10,000 shares, how many shares will be issued in rounds 1, 2 and 3 (at times 0, 1 and 2)? 173 Chapter 10: Venture Capital Valuation Methods Founder shares = 10,000 Total shares at year 5: =10,000 / .6424 = 15,567 Round one shares = .2366 x 15,567 = 3684 Round two shares = .0844 x 15,567 = 1313 Round three shares = .0366 x 15,567 = 570 D. W hat is the second round share price derived from the answers in Parts B and C? Second Round Price = 5,000,000 / 1313 =3808/share E. How does the answer to part D change if 10% of the year-five firm is set aside for incentive compensation? How many total shares are outstanding (including incentive shares) by year 5? Founder final ownership = 1 -23.66% - 8.44% - 3.66% -10% = 54.24% Total shares at year 5 = 10,000 / .54.24 = 18,438 Round two shares = .0844 x 18,438 = 1556 Round two price = 5,000,000 / 1556 = 3213/share 5. [Rates of Return] Suppose a venture fund wishes to base its required return (used in discounting future terminal values) on its historical experience and suggests merely averaging the rates on the last three concluded deals. These deals realized total returns of –67% at the end of 2 years, 50% at the end of 5 years and 70% at the end of three years, respectively. A. Assuming no intermediate flows before the terminal payoff, verify that the associated annualized rates are – 42.55%, 8.45% and 19.35%. 2 years: (1-.67)^.5 – 1 = -42.55% 5 years: (1+.50)^.2 -1 = 8.45% 3 years: (1+.7)^(1/3) -1 = 19.35% B. What is the equally weighted average annualized return? (-42.55% + 8.45% +19.35%) / 3 = -4.92% C. Does it make sense to use this as a single discount rate to apply across scenarios involving different durations? The returns have been realized over a total of 10 investment years. However, the simple average here is only dividing by the three outcomes (not their years). Consequently, it is open for debate whether this simple project averaging is the best way to calibrate a required return for projects of widely varying known durations. However, at the time the venture is funded, it is not known what the duration will be and if it is like a small replication of all of the previous funded ventures, it is reasonable to use the hybrid discount rate for all of the venture’s possible outcomes. 2. [Multiple Financing Rounds] Rework the two-stage example of section 10.5 with 1,000,000 initial founders’ shares (instead of the original 2,000,000 shares). What changes?  #### You've reached the end of your free preview.

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