4 KiB
Section 5 | Lesson 30 - Venture Capital Part 3
- Links
- Notes
Notes
topics within the Venture Capital are relevant
- starting a company
- new division
- raising money
- potential investors
- 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% |