Venture Capital and the Finance of Innovation, Second Edition

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valuations considered in Exhibit 15-3, which structure would EBV prefer that Talltree choose? 15.3 Using the same setup as Example 15.2, (a) Compute the LP valuation for the Series B investors (Talltree) under Structures 1 and 2 for Series C. For the same range of total valuations considered in Exhibit 15-6, which structure would Talltree prefer that Owl choose? (b) Compute the LP valuation for the Series A investors (EBV) under Structures 1 and 2 for Series C. For the same range of total valuations considered in Exhibit 15-6, which structure would EBV prefer that Owl choose? 15.4 Draw the exit diagrams for Series B-F for Example 15.5. EXERCISES 289
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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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CHAPTER8 TERM SHEETS IN THIS CHAPTE
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148 CHAPTER 8 TERM SHEETS Pre-Money
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150 CHAPTER 8 TERM SHEETS The pretr
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152 CHAPTER 8 TERM SHEETS Optional
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154 CHAPTER 8 TERM SHEETS Jones Rep
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156 CHAPTER 8 TERM SHEETS Managemen
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158 CHAPTER 8 TERM SHEETS 8.3.1 Reg
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160 CHAPTER 8 TERM SHEETS Board of
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162 CHAPTER 8 TERM SHEETS REFERENCE
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164 CHAPTER 9 PREFERRED STOCK For p
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166 CHAPTER 9 PREFERRED STOCK Alter
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168 CHAPTER 9 PREFERRED STOCK EXHIB
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174 CHAPTER 9 PREFERRED STOCK broad
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176 CHAPTER 9 PREFERRED STOCK REALI
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CHAPTER10 THE VC METHOD THIS CHAPTE
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180 CHAPTER 10 THE VC METHOD about
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182 CHAPTER 10 THE VC METHOD exampl
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184 CHAPTER 10 THE VC METHOD 10.2 T
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186 CHAPTER 10 THE VC METHOD for tw
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188 CHAPTER 10 THE VC METHOD Step 5
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190 CHAPTER 10 THE VC METHOD EXHIBI
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192 CHAPTER 10 THE VC METHOD SUMMAR
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194 CHAPTER 10 THE VC METHOD expect
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196 CHAPTER 11 DCF ANALYSIS OF GROW
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CHAPTER12 COMPARABLES ANALYSIS IN T
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216 CHAPTER 12 COMPARABLES ANALYSIS
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232 CHAPTER 13 OPTION PRICING Secti
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234 CHAPTER 13 OPTION PRICING EXHIB
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238 CHAPTER 13 OPTION PRICING 13.3
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242 CHAPTER 13 OPTION PRICING distr
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244 CHAPTER 13 OPTION PRICING we ne
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246 CHAPTER 13 OPTION PRICING In al
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248 CHAPTER 13 OPTION PRICING We ca
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CHAPTER14 THE VALUATION OF PREFERRE
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254 CHAPTER 14 THE VALUATION OF PRE
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Page 632: for a finite threshold. To solve fo
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Page 648: EXHIBIT 16-7 LP VALUATION AND COST
Page 652: Series D cap point 5 WDðcapÞ 5 $1
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Page 660: CHAPTER17 IMPLIED VALUATION IN CHAP
Page 664: EXHIBIT 17-1 VALUE DIVISION AFTER S
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Page 672: EXHIBIT 17-5 VALUE DIVISION AFTER S
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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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