Venture Capital and the Finance of Innovation, Second Edition

EXHIBIT 14-1
EXIT DIAGRAM FOR THE SERIES A
We can read this exit diagram as
Partial valuation of Series A ¼ V 2 2=3 Cð5Þ: ð14:2Þ
To solve for LP valuation, we must subtract carried interest from Equation (14.2).
Following the same procedures as in the modified VC method of Chapter 10, we estimate LP
and GP valuation as
where
Series A
5
Slope = 1/3
$W
14.2 RP VALUATION 255
LP valuation ¼ partial valuation 2 GP valuation; ð14:3Þ
GP valuation ¼ GP% partial valuation: ð14:4Þ
As in Chapter 10, we estimate GP% using an expected GVM of 2.5 and the formula
GP% ¼ Carry% ðGVM Investment Capital 2 Carry BasisÞ=ðGVM
Investment CapitalÞ: ð14:5Þ
For EBV, we have a GP% of 0.20 (2.5 80 2 100)/(2.5 80) 5 0.10, which implies
an LP valuation equation of
LP Valuation ¼ 0:9 ½V 2 2=3 Cð5ÞŠ: ð14:6Þ
(c) Equation (14.6) expresses the LP valuation of the Series A as a portfolio of options. These
options can be valued using techniques similar to those described in Chapter 13. For example,
the FLEX Calculator at VCVtools.com enables the simultaneous valuation of several options.
The user inputs each component of Equation (14.6), and the calculator values these components
and adds them together. Using this calculator with base-case option-pricing assumptions
and a total valuation assumption of $18M, we can compute a partial valuation of $7.92M, of
which the LP valuation is $7.13M and the GP valuation is $0.79M.
For most of the examples used in this textbook, the FLEX Calculator will not be
necessary, and we can use built-in valuation functions in the AUTO Calculator at VCVtools.
com. In the AUTO Calculator, users need only to input the properties of the preferred stock and