Venture Capital Deals

Question 1

Structuring a VC deal (and ‘envy’ ratio)

Answer 1

Envy Ratio - the ratio of the price paid by investors to that paid by the management team for their respective shares of the equity

Question 2

Valuing a company

Answer 2

Product / service commercially viable?
Potential for sustained growth?
Management’s ability to exploit potential?
Management’s ability to control through the growth stages?
Does the possible reward justify the undoubted risk?
Does financial return on investment meet investment criteria?

Porter’s 5 Forces

Technology Company VCs:
- Is the technology proven
- IP
- Market need
- USP

‘First mover advantage’ is not always necessary for success

Question 3

Arriving at VC’s required equity stake

Answer 3

VC- Obtain info on:
- Amount needed to raise
- Projected Earnings
- Similar quoted companies

Discount based on company stage in lifecycle.

Work out Terminal Value on exit, then use this to work out Present Value.

Set Target IRR based on risk, give Present Value –> work out equity stake required.

Question 4

Ordinary shares and preference shares

Answer 4

Ordinary Shares - voting rights, no dividends

Preference Shares - no voting rights, first in line for dividends

Question 5

Offer letter / term sheet terms

Answer 5

Amount to be invested, instruments (e.g. convertible preferred shares), valuation (may be pre-money), capital structure

Liquidation preferences, Dividend rights, Conversion rights, Anti-dilution protection, Redemption rights, Lock-ups, Pre-emption rights

Board composition, Consent rights, Information rights

Warranties, Vesting, Option pool, Milestones

Confidentiality, Exclusivity, Fees, Conditions precedent.

Question 6

Shareholders / Investment agreement