#+title: Section 5 | Lesson 30 - Venture Capital Part 3
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* Links
- [[./../mba-main.org][TOC | Business]]
- [[https://www.udemy.com/course/an-entire-mba-in-1-courseaward-winning-business-school-prof/learn/lecture/4311466#overview][S05:L30 Venture Capital Part 3]]

* Notes

** topics within the Venture Capital are relevant
1. starting a company
2. new division
3. raising money
4. potential investors
5. creating disruptive ideas

** we are in the third round
- years 3-4

- after this
  - go public
  - break up the company
  - file for chapter 11
  - sell the company

- find your passion
  - you better be doing this because you want to

- VCs want to work with the best management team

** example
- the best management team is the most important
- P.O.C "proof of concept"
- P.O.S. "point of sale"

*** starting point
10,000$ equity
2,000,000 shares

** first round vc

*** company estimated:
time: 5 years
net income: $1mn

*** competitor
valuation: $20mn
net income: $2mn

Price / Earning = $20mn / $2mn = 10 times PE multiple.

*** conclusion
the competitor is worth $20mn now with a $2mn net income, leading us to believe the PE ratio is 10

therefore if the net income is expected to be $1mn in 5 years, then the value of the company should be $10mn

PE * net_income = Value

10 * $1mn = $10mn

** what is the company worth today
- VC expects to make 50% per year
- (Value of Company in 5 Years) / (1 + Expected Return Per Year) ^ (Number of Years)
- $10 mn / (1 + 50%) ^ 5 = $1,316,872

*** what does the vc get?
- assume vc invests $1mn
- investment / current value of company
- $1mn / $1.32mn = 76%

*** owner has
- 100 - investors percentage = owners percentage
  - 100 - 76 = 24
  - owner has 24%

*** what are the total number of shares
- if the owner has 2 mn shares then

- total shares = owners shares / owners percentage
- total shares = 2mn / .24 = 8.3 mn

- investor has 6.3 mn shares

*** what is the share price
- value per share = total investment / number of shares
- value per share = $1mn / 6.3mn shares
- value per share = 15.8c per share

*** pre money valuation
- what is the owners value in shares
  - this is the value before we get any investment

- owners share * price per share
  - 2mn shares * 15.8c
  - $316k

*** post money valuation
- Post-money valuation = Investment Amount + Pre-money valuation
  - this is the value after the money is given by the vc

- total number of shares * price per share
  - 8.3mn shares * 15.8c
  - $1.31m

** second round

- in this scenario we need a second round of investments
- a second VC firm wants 25% for the next 2 years to invest 1mn
- shares must be taken from the owner, because the first VC is not giving up their shares.

*** expected return
- Investment Amount * (1 + percentage / 100) ^ years
- $1mn * (1.25) ^ 2 = $1.5625mn
- expected return = $1.5625mn

*** ownership percentage for second VC
- Ownership Percentage = Expected Return / Expected Company Value
- $1.5625mn / $10mn = 15.62%

*** founder ownership
- Founder Ownership - Second VC
- 24 - 15.62 = 8.4%

*** founders shares
- Total Shares / Percentage of Company
- 2mn / 8.4
- 23.7 mn

** employee shares
we also need to set aside shares as employee incentives

those shares will have to come out of the owners share

*** reasons for giving stock options
- cheaper than salary
- motivates to work as a team

*** conditions
- vesting
  - you can only sell after X number of years
  - give more options every yeats

** B round
- if tracking better than expected
- accelerate growth by raising more money at a higher valuation

** VC terminology
| Terminology                | Explanation           |
|----------------------------+-----------------------|
| Unicorn                    | valuation: $1 billion |
|                            | probability: < 0.07%  |
| Black Holes / Walking Dead | break even            |
|                            | probability > 0.07%   |
