#+title: Section 5 | Lesson 30 - Venture Capital Part 3 #+HTML_HEAD: * 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% |