Venture Capital Notes

Only available on StudyMode
  • Pages : 8 (1113 words )
  • Download(s) : 13
  • Published : April 30, 2013
Open Document
Text Preview
Venture Capital and Private Equity Session 5
Professor Sandeep Dahiya
Georgetown University
Course Road Map
What is Venture Capital - Introduction
VC Cycle
Fund raising
Investing
VC Valuation Methods
Term Sheets
Design of Private Equity securities
Exiting
Time permitting – Corporate Venture Capital (CVC)
Challenges of Venture Financing
Critical issues involved in financing young firms
Uncertainty
Asymmetric Information
Nature of Firm’s assets
Conditions of relevant financial and product markets
How do VCs address these problems
Security Design

Vesting Provisions

Covenants
Securities used by VCs
Common Stock

Debt

Preferred Stock
VCs response #1– Security Design
Redeemable Preferred (RP)
Convertible Preferred (CP) - Forced Conversion Clause
Participating Convertible Preferred (PCP)

VCs response #2 Vesting
Vesting – creates “Golden Handcuffs” for key employees Idea being that you have to “Earn” your share of the company! Also keeps the option pool from being depleted if employees leave VCs response #3 Covenants

Covenants
Positive Covenants
Example Provide regular information
Negative Covenants
Example Sale of assets
Others
Mandatory redemption
Board Seats
Other Term Sheet Features
Vesting
Covenants

Liquidity Preferences
Anti-Dilution Protection
Board Seats
Please read the Note on Private Equity Securities
Liquidation – Quick Review
Deemed liquidation event

Liquidation preference (2X, 3X, etc.)
Non Participating
Fully Participating

Qualified public offering (QPO)

Facebook Cap Table
Biggest VC Success Story
Anti-Dilution Protections
Down round

Full-ratchet vs. weighted average

Adjusted conversion price, adjusted conversion rate
Dilution
A owns 100% of the company which is 1 million shares for which she had paid $2 per share Company issues another 1MM shares and raises 2 MM from B
A is now 50% owner -- she has been diluted!
But A did NOT suffer any ECONOMIC DILUTION – Company now is worth $ 4 million and A’s stake is still $2 million! Similarly, If company reserves 1 MM shares for option pool again the company receives future services from the employees for that option pool again there is no ECONOMIC DILUTION. What is investor B pays $1 per share for its $2 million investment? Now there are 3 Million share post financing and A only owns 33.3% A’s investment declines from $2MM to $1MM

ECONOMIC DILUTION!!!

Antidilution
Company XYZ raised $12 Million from Early Ventures (EV) in Round A financing. EV received 6 million shares (at a $2.00 per share price). The Founders had 4 million shares after Round A. Subsequently the firm falls on hard times and has to raise another $ 10 million. It appears that investors are unlikely to offer more than $1.00 per share valuation. How would the Cap Tables look if (a)EV had NO antidilution protection

(b)EV had Full Ratchet Protection
(c)EV had Broad Weighted Average antidilution Protection

Regular Round
No Antidilution Protection
Full Ratchet Protection
Broad-base weighted average anti-dilution
NCP = OCP * (OB+NM/OCP) / (OB+SI)
NCP= New Conversion Price
OCP= Old Conversion Price in effect immediately prior to new issue OB = Number of shares of shares outstanding immediately prior to this round NM = New Money received by the Corporation
SI=Number of shares of stock issued in this round
Weighted Average Anti-Dilution
Broad-base weighted average anti-dilution
NCP = OCP * (OB+NM/OCP) / (OB+SI)
NCP= New Conversion Price
OCP= Old Conversion Price in effect immediately prior to new issue OB = Number of shares of shares outstanding immediately prior to this round NM = New Money received by the Corporation
SI=Number of shares of stock issued in this round
Term Sheets… Let us look at Trendsetter
Term Sheet
Getting first Term Sheet is MAJOR break through!
Validates entrepreneur/idea
Establishes a price
Can be shopped around (especially in later rounds)
Trendsetter
If you...
tracking img