Venture Capital and the Finance of Innovation, Second Edition

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172 CHAPTER 9 PREFERRED STOCK EXHIBIT 9-10 EXIT DIAGRAM FOR THE SERIES A CP CP in Series A 1 EXHIBIT 9-11 EXIT DIAGRAM FOR RP + CP Series A 5 4 5 7 $W 5 $W Structure I. At first glance, one might think that Structure VI would provide a higher payoff than the RP 1 common combination of Structure III, but the exhibit shows this is not the case. The reason is that once the CP converts, there is only $4M of APP paid for the RP (not $5M as in Structure III). Finally, the original CP structure from the charter is a hybrid 7 Slope = 1/3 Slope = 1/3
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EDITOR Lacey Vitetta PROJECT EDITOR
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vi BRIEF CONTENTS PART III PARTIAL
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viii PREFACE TO 2 ND EDITION—A RE
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x PREFACE TO 2 ND EDITION—A READE
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xviii CONTENTS CHAPTER 3 VC RETURNS
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xx CONTENTS Reference 177 Exercises
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xxii CONTENTS Summary 288 Key Terms
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xxiv CONTENTS 23.3 Sequential Games
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4 CHAPTER 1 THE VC INDUSTRY EXHIBIT
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6 CHAPTER 1 THE VC INDUSTRY capital
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8 CHAPTER 1 THE VC INDUSTRY Because
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10 CHAPTER 1 THE VC INDUSTRY a succ
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12 CHAPTER 1 THE VC INDUSTRY EXHIBI
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14 CHAPTER 1 THE VC INDUSTRY compan
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16 CHAPTER 1 THE VC INDUSTRY The ma
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18 CHAPTER 1 THE VC INDUSTRY EXHIBI
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20 CHAPTER 1 THE VC INDUSTRY rapid
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22 CHAPTER 2 VC PLAYERS focusing on
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24 CHAPTER 2 VC PLAYERS EXHIBIT 2-2
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26 CHAPTER 2 VC PLAYERS just a few
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30 CHAPTER 2 VC PLAYERS true that d
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32 CHAPTER 2 VC PLAYERS methods, we
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34 CHAPTER 2 VC PLAYERS EXAMPLE 2.2
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36 CHAPTER 2 VC PLAYERS As an illus
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40 CHAPTER 2 VC PLAYERS restriction
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42 CHAPTER 2 VC PLAYERS GPs are com
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44 CHAPTER 2 VC PLAYERS Distributio
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CHAPTER3 VC RETURNS VCS SPEND their
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48 CHAPTER 3 VC RETURNS EXHIBIT 3-2
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50 CHAPTER 3 VC RETURNS unfolded in
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52 CHAPTER 3 VC RETURNS CA clients
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54 CHAPTER 3 VC RETURNS and the ann
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58 CHAPTER 3 VC RETURNS Gross value
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66 CHAPTER 4 THE COST OF CAPITAL FO
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84 CHAPTER 5 THE BEST VCs First, we
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86 CHAPTER 5 THE BEST VCs reason to
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88 CHAPTER 5 THE BEST VCs EXHIBIT 5
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90 CHAPTER 5 THE BEST VCs multiple
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92 CHAPTER 5 THE BEST VCs time with
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94 CHAPTER 5 THE BEST VCs among the
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96 CHAPTER 5 THE BEST VCs and other
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98 CHAPTER 5 THE BEST VCs SUMMARY A
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100 CHAPTER 6 VC AROUND THE WORLD E
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102 CHAPTER 6 VC AROUND THE WORLD c
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104 CHAPTER 6 VC AROUND THE WORLD p
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106 CHAPTER 6 VC AROUND THE WORLD T
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108 CHAPTER 6 VC AROUND THE WORLD c
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110 CHAPTER 6 VC AROUND THE WORLD E
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112 CHAPTER 6 VC AROUND THE WORLD 6
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114 CHAPTER 6 VC AROUND THE WORLD P
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116 CHAPTER 6 VC AROUND THE WORLD s
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118 CHAPTER 6 VC AROUND THE WORLD 6
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120 CHAPTER 6 VC AROUND THE WORLD B
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124 CHAPTER 7 THE ANALYSIS OF VC IN
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Page 342: CHAPTER8 TERM SHEETS IN THIS CHAPTE
Page 346: 148 CHAPTER 8 TERM SHEETS Pre-Money
Page 350: 150 CHAPTER 8 TERM SHEETS The pretr
Page 354: 152 CHAPTER 8 TERM SHEETS Optional
Page 358: 154 CHAPTER 8 TERM SHEETS Jones Rep
Page 362: 156 CHAPTER 8 TERM SHEETS Managemen
Page 366: 158 CHAPTER 8 TERM SHEETS 8.3.1 Reg
Page 370: 160 CHAPTER 8 TERM SHEETS Board of
Page 374: 162 CHAPTER 8 TERM SHEETS REFERENCE
Page 378: 164 CHAPTER 9 PREFERRED STOCK For p
Page 382: 166 CHAPTER 9 PREFERRED STOCK Alter
Page 386: 168 CHAPTER 9 PREFERRED STOCK EXHIB
Page 390: 170 CHAPTER 9 PREFERRED STOCK EXHIB
Page 396: EXHIBIT 9-12 EXIT PROCEEDS UNDER AL
Page 400: 9.2 ANTIDILUTION PROVISIONS 175 Pro
Page 404: KEY TERMS Conversion condition, Con
Page 408: about the reduction to the proposed
Page 412: 10.1 THE VC METHOD: INTRODUCTION 18
Page 416: for all first-round investments was
Page 420: our estimate of the exit valuation.
Page 424: Conceptually, it is straightforward
Page 428: EXHIBIT 10-2 VC METHOD SPREADSHEET
Page 432: Step 4: For this example, we assume
Page 436: EXERCISES 193 (a) Suppose that each
Page 440: CHAPTER11 DCF ANALYSIS OF GROWTH CO
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figure out how long rapid growth wi
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To do this, we abstract from the ac
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the acquisition of assets from othe
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EXHIBIT 11-5 NI AND CF CALCULATIONS
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GV 5 ð1 2 g=RÞ E=ðr 2 gÞ: ð11:
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matching the firm’s revenue growt
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EXHIBIT 11-8 REALITY-CHECK DCF MODE
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EXHIBIT 11-9 REALITY-CHECK DCF FOR
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Earnings 5 Net Income Net investmen
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12.1 INTRODUCTION TO COMPARABLES AN
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(not bondholders), the P/E numerato
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12.2 CHOOSING COMPARABLE COMPANIES
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have about $50M in revenue, 150 emp
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EXHIBIT 12-5 VALUATION MULTIPLES 12
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12.3 USING COMPARABLE COMPANIES TO
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KEY TERMS Comparables analysis 5 mu
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PARTIII PARTIAL VALUATION 229
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CHAPTER13 OPTION PRICING PART III P
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13.1 EUROPEAN OPTIONS 233 Exhibit 1
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EXHIBIT 13-3 BOND VALUES ON GOOD DA
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13.2 PRICING OPTIONS USING A REPLIC
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The Black-Scholes formula may look
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is zero. An unbiased approximation
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same Black-Scholes formula to price
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Problem What is the value of the RE
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Problem What is the exit equation c
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investments. Although the assumptio
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EXHIBIT 13-13 SURVIVAL PLOT FOR RE
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In Section 14.3, we show how to ext
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EXHIBIT 14-1 EXIT DIAGRAM FOR THE S
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14.3 EXCESS LIQUIDATION PREFERENCES
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Reality Check: The preceding analys
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EXHIBIT 14-6 SENSITIVITY ANALYSIS F
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14.6 CP WITH EXCESS LIQUIDATION PRE
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EXAMPLE 14.6 Suppose EBV is conside
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EXHIBIT 14-11 EXIT DIAGRAM FOR SERI
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EXHIBIT 14-13 EXIT DIAGRAM FOR SERI
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14.3 Suppose EBV is considering a $
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Problems (a) What is the LP valuati
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A comparison of Equations (15.5) an
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15.2 A CONVERSION SHORTCUT 15.2 A C
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Next, we estimate partial valuation
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EXHIBIT 15-5 EXIT DIAGRAM FOR SERIE
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15.4 DIVIDENDS IN LATER ROUNDS 283
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Series A RVPSðTÞ 5 ð1 1 0:12TAÞ
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Series C conversion condition : 1=3
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valuations considered in Exhibit 15
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for a finite threshold. To solve fo
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proceeds. At W 5 90, this share wou
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The (voluntary) conversion conditio
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(d) Plot the LP valuation for both
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EXHIBIT 16-7 LP VALUATION AND COST
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Series D cap point 5 WDðcapÞ 5 $1
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We can read this diagram as Partial
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CHAPTER17 IMPLIED VALUATION IN CHAP
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EXHIBIT 17-1 VALUE DIVISION AFTER S
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(c) The GP valuation is GP valuatio
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EXHIBIT 17-5 VALUE DIVISION AFTER S
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EXHIBIT 17-6 EXIT DIAGRAM FOR SERIE
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the value of the RP component, and
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We can read this diagram as The LP
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EXERCISES EXERCISES 319 17.1 True,
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proceeds to be given to management.
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We can read this diagram as Partial
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EXHIBIT 18-4 EXIT DIAGRAM FOR MANAG
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(b) To compute the breakeven valuat
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EXHIBIT 18-8 EXIT DIAGRAM FOR THE S
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So far, these are exactly the same
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EXHIBIT 18-10 EXIT DIAGRAM FOR THE
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EXERCISES 335 18.2 We use the same
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PARTIV THE FINANCE OF INNOVATION 33
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CHAPTER19 R&D FINANCE RESEARCH AND
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EXHIBIT 19-2 R&D SHARE OF GDP, MOST
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EXHIBIT 19-4 R&D EXPENDITURE BY SOU
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more than $5B in R&D are “transpo
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the FDA relies heavily on advisory
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EXHIBIT 19-8 FUEL CELL PROJECT Proj
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EXHIBIT 19-9 R&D EXPENDITURE AND CO
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19.3 HOW IS R&D FINANCED? 353 far a
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Exhibits 19-7 and 19-8, summarize t
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CHAPTER20 MONTE CARLO SIMULATION IN
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analyst generates random numbers an
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EXHIBIT 20-3 EVENT TREE WITH THREE
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point x, which can be written as th
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anch represents the maximum of the
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is 5 E 2 $1B f(E). Then, the expect
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EXHIBIT 20-12 LOG-NORMAL PDF 0.5 0.
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EXHIBIT 20-15 MONTE CARLO SIMULATIO
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20.3 SIMULATION WITH MULTIPLE SOURC
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375 EXHIBIT 20-19 DCF MODEL FOR NEW
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of development. (Note that this pro
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21.1 DECISION TREES When a decision
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compute the expected value at Node
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EXAMPLE 21.1 (Fuelco) Fuelco is con
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EXHIBIT 21-5 FUELCO’S DECISION TR
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Denoting shares of the binary optio
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where V(β) is given by Equation (2
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21.5 DRUGCO, REVISITED In this sect
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397 EXHIBIT 21-12 DCF MODEL FOR NEW
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(a) Draw the decision tree for Semi
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EXHIBIT 22-1 CALL OPTION IN A DECIS
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subperiod, we allow only two possib
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22.1 THE BLACK-SCHOLES EQUATION, RE
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EXHIBIT 22-5 JOE’S PROBLEM, BASE
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22.2 MULTIPLE STRIKE PRICES AND EAR
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EXHIBIT 22-9 EXCERPTS FROM TREES FO
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In Exhibit 22-11, we show the optio
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value. Thus, if Fuelco delays the p
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EXHIBIT 22-14 EXCERPTS FROM TREES F
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CHAPTER23 GAME THEORY R&D DECISIONS
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EXHIBIT 23-2 PRISONER’S DILEMMA,
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As in the prisoner’s dilemma game
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EXAMPLE 23.2 Drugco and Pharmco pro
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EXHIBIT 23-8 ODDS-AND-EVENS GAME, N
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Problems (a) Draw the extensive for
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Thus far in the book, we have perfo
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EXHIBIT 23-12 STANDARDS GAME, NORMA
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EXHIBIT 23-14 ENTRY GAME, NORMAL FO
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EXHIBIT 23-16 ENTRY GAME, WITH COMM
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competitor can just come along and
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EXHIBIT 23-19 PROJECT C, STEP 2, WE
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ugly head: both Fuelco and Cellco w
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CHAPTER24 R&D VALUATION IN THIS CHA
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EXHIBIT 24-1 SCHEMATIC FOR THE FULL
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449 EXHIBIT 24-4 DCF MODEL, DEAL 1
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EXHIBIT 24-5 BIGCO NPV AS OF PHASE
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24.1 DRUG DEVELOPMENT 453 (c) To ev
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EXHIBIT 24-9 DRUGCO ZERO-PROFIT CUR
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Problems (a) Draw the decision tree
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EXHIBIT 24-12 FUELCO’S DECISION T
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EXHIBIT 24-14 FUELCO’S DECISION T
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EXHIBIT 24-17 NODE 12, EXPANDED 12
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can reap great rewards, it is dange
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TERM SHEET FOR SERIES A PREFERRED S
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APPENDIX A SAMPLE TERM SHEET 469 Li
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APPENDIX A SAMPLE TERM SHEET 471 of
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APPENDIX A SAMPLE TERM SHEET 473 su
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[regarding technology ownership, co
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Lock-up: Investors shall agree in c
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Non-Competition and Non-Solicitatio
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holding greater than [1]% of Compan
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Company breaches this no-shop oblig
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in Chapters 13. We describe below h
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APPENDIXC GUIDE TO CRYSTAL BALL s C
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EXHIBIT C-2 SPREADSHEET SETUP FOR C
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APPENDIX C GUIDE TO CRYSTAL BALL EX
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EXHIBIT C-6 RUN PREFERENCES WINDOW
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EXHIBIT C-8 SPREADSHEET SETUP FOR C
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501 EXHIBIT C-13 SPREADSHEET SETUP
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EXHIBIT C-14 STATISTICAL OUTCOME FO
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“exercises” are given without s
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507 EXHIBIT C-19 SPREADSHEET SETUP
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APPENDIX C GUIDE TO CRYSTAL BALL s
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REFERENCES 511 EXHIBIT C-24 OUTCOME
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GLOSSARY 513 Adjusted conversion pr
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GLOSSARY 515 then general partners
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GLOSSARY 517 Discount rate: The rat
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GLOSSARY 519 Expiration diagram: On
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GLOSSARY 521 Hedge funds: Hedge fun
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GLOSSARY 523 exclusive (only the li
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GLOSSARY 525 Mixed-strategy NE: A N
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GLOSSARY 527 Periodic return: The r
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GLOSSARY 529 Rapid-growth period: I
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GLOSSARY 531 Rule 144A: A Securitie
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GLOSSARY 533 Tagalong: (5 Take-me-a
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INDEX Abnormal returns, 68, 512 neg
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EV/Revenue, 216 Price/Book, 217 Pri
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Exercise price, 518 Exit diagram, 1
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Implied valuation, 305 319, 521. Se
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LP cost, 186 LP valuation, 186 Moni
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Private Equity Performance Monitor,
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Series C investment, 278 282 exit d
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spreadsheet, 189 standard VC method
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