Lecture 19 Flashcards
when was the first VC firm founded?
1946; American Research and Development Corp (ARDC)
Who was ARDC founded by?
Georges Doriot; Karl Compton; Ralph Flanders
What is the small business investment act of 1958?
first step towards professionally managed VC industry; allows us small business administration license (SBA) to license private “small business investment companies”
the relaxation of investment rules for us pension funds in 1979 did..
large inflows from these investors to VC finance; participation by pension funds hastened participation for other institutional investors; beginning of modern VC era and Silicon Valley
which two sectors have VC investments been concentrated in?
health care and IT (communications, semiconductor, software, and hardware)
what are some common characteristics of VC contracts?
preferred stocks; anti-dilution provisions; covenants and control terms; employee terms; staging of capital commitments
In virtually all VC deals, which kind of security does the VC firm own?
preferred stocks
What are the two key features of preferred stock that make it attractive to VC?
Liquidation preference over common stocks (senior to common); Redemption (force liquidity event)
what are anti-dilution provisions?
protect vc against future finnacing rounds at lower valuation than valuation at current round
if a portfolio company raises additional funding at a price below the prior round VC’s price what happens if there’s anti-dilution provisions?
VC’s conversion price of convertible preferred stocks is lowered to protect against dilution
the goal in VC deals is to structure contracts that..?
allocate control to the party that has more benefits and expertise using it
what are the three types of control rights?
voting rights; board representation; protective provisions (some actions required approval of VC)
describe employee terms
compensate employee’s for taking risk and hard work; provide incentives to encourage superior performance; retain talent in company
describe staging of capital commitments
VC’s fund companies in multple rounds (seed, start up, early stage, expansion); rounds tend to be shorter in high tech industries and for smaller sums
what is the dual roles of staging capital commitments?
control mechanism and option to abandon
describe the control mechanism:
entrepreneur has to come back to VC for funding at several points
Describe the option to abandon:
allows investor to monitor firm and shut it down if success probabilities are poor
what are the assumptions of contracting approach to start up finance?
entrepreneur and venture capitalist maximize their own objective ssubject to contractual constraints
what are some motivations for collaboration for entrepreneur?
build successful business; raise money to fund venture; maintain value and control of company; get expertise and contacts to grow company; share risks with investors; financial reward if venture works out
what are motivations for VC to collaborate?
max financial returns to justify risk and effort involved in funding company; ensure firm is using capital in best possible way; participation in later financing rounds; achieving liquidity (exit); building reputation
what are cash flow rights?
fraction of portfolio company’s equity value that different investors and management have claim to
what are the liquidation cash flow rights?
when value of venture is low, cash flow rights go to senior claims
what is similar to required repayment of principal
after some time, liqudation cash flow rights provision gives VC right to demand that firm redeem vc’s claim, typically at liquidation
what are automatic conversion provisions for VC’s?
security held by VC’s automatically converts to common typically during IPO
