FINANCING NEW VENTURES

Valuing Early Stage Companies & Agreeing on a Term Sheet with a VCContains unread posts

Topic 1: Valuing Early Stage Companies

Question1:

Look at exhibits 7.6 and 7.7 on pages 164 and 165

What drives the value for a company to acquire you?

Who would you rather have buy you? A strategic buyer who sees synergies with you? Or a financial buyer who sees the profit value of your business? Who will pay more?

Note the small company’s P&L compared to the large company acquiring you. Why are there differences in the % makeup of your expenses?

Why is your lack of profitability not an issue?

(Choose 2-3 questions of these and answer in a short paragraph)

In 7.7 this assumes you got bought by the big company. Why are revenues up?

Why is prod development (R&D) unchanged? What did they really buy you for?

Why are admin and sales costs zero?

And take a look at the net profit!

Lastly, was this buyer a strategic buyer or a financial buyer?

(Choose 2-3 questions of these and answer in a short paragraph)

Question2:

Check out the table on page 148 (Exhibit 7.1).

See how the Market Value rises exponentially with higher growth rates.

Why is the MV/BV ratio always one to one regardless of the growth rate at 10% ROC?

How is the growth rate determined? What is the term in years it theoretically is over? But in real life, how many years is realistic?

What does terminal value mean when calculating the amounts in the table?

Why is 10% the minimum in the table? if your business can not achieve at least a 10% ROC, what are your alternatives? Hint, it’s called an L3C. What is an L3C?

What if your ROC is negative? What are your alternatives?

(Choose 2-3 questions of these and answer in a short paragraph)

Topic 2: Agreeing on a Term Sheet with a VC

Question1: Why investing in a startup isn’t like investing in a public company:

What are some of the differences between investing in a startup (private company) versus a public company?

What are some of the common rules (laws) that protect public shareholders, in say Apple?

Why do VCs insist on getting preferred shares in a startup?

What rights and privileges do they get with the preferred shares?

You as the entrepreneur will only own common shares. What can you do to protect yourself?

(Choose 2-3 questions of these and answer in a short paragraph)

Question2: Company valuation:

Why is the company valuation the foundation for the negotiation of the rest of the term sheet?

Why is it so crucial to success?

Why is it also crucial for the VC’s success?

What can go wrong in preparing a capitalization (cap) table?

Why is it a key document? What is it used for?

(Choose 2-3 questions of these and answer in a short paragraph)

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