Lecture 3 Flashcards
What is the gross value multiple ?
GVM = (Total distributions to LPs + value of unrealized investments + carried interest) / invested capital
What are initial VC financing offers accompanied by ?
Terms and conditions detailed in term sheet
What is the term sheet’s aim ?
Protect investors from expropriation and this specific to round of financing
What does typical term sheet include ?
- Capitalization table
- Charter
- Investors rights agreement
- Other items
What is $ investment ?
Amount of investment LPs make in firm (sometimes in multiple tranches)
What is the fully diluted share count ?
Shares in firm assuming all preferred stock converted to common and options exercised
What is the proposed ownership percentage ?
Shares LPs receive divided by fully diluted share count
What is the original purchase price ?
Price at which stock of firm will be sold to investors (LPs)
What is the aggregate purchase price ?
APP = OPP x shares purchased
What is the post-money valuation ?
Price per share x fully diluted share count
What is the post-money valuation (2) ?
$investment / proposed ownership percentage
What is the pre-money valuation ?
post-money valuation - $investment
What is the pre-money valuation (2) ?
Price per share x pre-transaction (fully diluted) share count
What is the deemed liquidation event ?
Firm sold, merged or shut down
What is the liquidation preference (2X,3X, etc…) ?
Seniority with which proceeds of deemed liquidation event are distributed to investors
What is a qualified public offering ?
Event triggering automatic conversion of convertible preferred stock
What is the main feature of dividend preferred ?
Paid before dividend to common stock
What are cumulative and non cumulative dividends to preferred stock ?
If cumulative : accumulated dividends f not paid
If non-cumulative : accrue only during final period before paid
What are accrued cash dividends
Dividend paid upon deemed liquidation event
What are stock dividends ?
Payment-in-kind dividends
What is the limitation of stock purchased in private transactions ?
Cannot abe sold in public offering. Need to register stock to lose restriction
What are the registration rights ?
- Demand : investors can force firm to register
- S-3: useful only if firm reports to SEC
- Piggyback : investors can register shares when registered transaction prepared for other shares
What are the redemption rights ?
Specify conditions under which company needs to redeem (buy back) initial investment
What is the Rule 144 ?
Exception allowing shares to be sold to public after have been held for certain period of time
What is the Rule 144A ?
Exception allowing resale of stock to Qualified Institutional Buyers
What are the lockup restrictions ?
Insiders cannot sell stock for number of days after IPO
What are the other issues ?
- Key employees often paid in shares
- Step vesting : when vesting happens over periodical terms
- Cliff vesting : when vesting takes place all at once
- Right to first offer : later round investors offered shares sold by founders before other investors
- Right to first refusal: Later round investors offered shares at price offered to other parties
- Drag-along rights : selling investor given right to force other investors to sell stakes at same price (useful for forcing firm sale)
- No shop: firm obliged not to solicit offers from other parties while deciding current offer
What securities do GPs often receive ?
Preferred stock in various forms
What do the owners of financed firm maintain ?
Common stock
What securities do employees often receive ?
Options
What are the payoffs of these securities ?
Depends on exit proceeds
What are redeemable preferred stocks ?
- Senior to common stock
- Pays owner up to fixed amount per share
- Often only part of total package
- Payoff = straight debt
What is the payoff schedule of a RP + common stock ?
Not simple addition of payoff lines, because under the fixed amount per share of RP, all proceeds are given to RP holders and common stock is worthless.
What are convertible preferred stocks ?
- Senior to common stock
- Pays owner up to fixed amount per share
- Often only part of total package
- Payoff = straight debt
What are the characteristics of Participating Convertible Preferred Stock ?
- Entitled to retrieve from exit proceeds original purchase price in priority
- After participate with common shareholders to remaining proceeds on an as -converted basis
- Close to RP + Common stock but only when conversion to common stock voluntary
- Difference when clause included making conversion to common stock mandatory under certain conditions.
What if there is redeemable preferred + convertible preferred ?
Priority between RP and CP = does not matter for sum of payoff
Why is there anti-dilution protection ?
- Often financing in VC = stages
* Early stges VCs wish protect investment vs dilution = reduction of value because of later round of issuances.
What are the forms of antidilution protection ?
• Full ratchet protection
• Weighted average protection
o Broad based
o Narrow based
What happens with full ratchet protection ?
If financed firm issues additional shares at purchase price < current conversion price, conversion price reduced to price at which new shares are issued
How is the full ratchet calculated ?
Adjusted conversion price set to lowest conversion price of any later stock sale and adjusted conversion rate = OPP divided by adjusted conversion price
! Calculation takes place even if new round of financing only for one share
What does the Weighted average protection differently ?
Uses formula for adjusting conversion price that takes into account size of current + past rounds
How it the Broad-Base wieghted average anti-dilution calculated ?
CP2 = adjusted conversion price = CP1 x (A+B)/(A+C) where :
• CP2 = new series A conversion Price
• CP1 = Series A conversion price in effect immediately prior to new issue
• A = # of shares of common stock deemed to be outstanding immediately prior new issue (only exclude convertible securities from this round of financing)
• B = aggregate consideration received by corporation w. r. to new issue divided by CP1
• C = # of shares of stock issued in subject transaction
What is CP2 x (A+C) ?
New number of shares times adjusted conversion price
What is CP1 x A ?
Value of firm before dilution
What is CP2 x (A+C) ?
Value of firm before dilution + $ new money
What is the difference between Broad-Base and Narrow-Base Average Anti-Dilution ?
A (narrow base ) excludes all shares of outstanding common stock and all outstanding options on as-exercised basis. Otherwise everything the same
