SECTION 1: BASIC VALUATIONS The founders of SpiffyTerm, Inc. wanted to begin by calculating what they...

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SECTION 1: BASIC VALUATIONS The founders of SpiffyTerm, Inc. wanted to begin by calculating what they thought would be an appropriate valuation. Annabella suggested they read "A Note on Valuation of Venture Capital Deals" (Stanford GSB Case Study E-95) that one of her young and brilliant professors had written up in a moment of utter lucidity. This method required that the owners take account of the current as well as anticipated future financing rounds. The founders thought they needed to raise $4 million at this time. Currently they had allocated 5 million shares to themselves, and they wanted to put aside an option pool of 1.5 million shares for future hires. The founders also believed that they would need to raise an additional $2 million after two years. Wolf C. Flow had offered to invest $4 million at a price of $1 per share, but the founders were not convinced that this was a fair valuation. Instead, they wanted to model what an appropriate valuation might look like. They were quite confident that SpiffyTerm, Inc. would be able to do an IPO after four years, at a valuation of about $80 million. But they realized that there were risks in their venture, so they thought that everybody would apply a discount rate of 45 percent. Question 1a: What valuation do these assumptions suggest? Question 1b: The founders also wanted to do some sensitive analysis with their assumptions. They wanted to know how the valuations would change if the second round of financing required $3 million? And what would the valuation be if they raised $6 million up front with no further round thereafter? Obviously, these valuations differed from the one proposed by Wolf C. Flow. The founders thought that Wolf C. Flow had worked off the same base assumptions, but that he used maybe a different discount rate, or maybe a different IPO value. Question 1c: If Vulture Ventures used the above valuation model, and indeed used a 45 percent discount rate, what implicit valuation after 4 years must they have used? (Hint: for this and many subsequent questions it is helpful to use the "goal seek" command in Excel.) SECTION 1: BASIC VALUATIONS The founders of SpiffyTerm, Inc. wanted to begin by calculating what they thought would be an appropriate valuation. Annabella suggested they read "A Note on Valuation of Venture Capital Deals" (Stanford GSB Case Study E-95) that one of her young and brilliant professors had written up in a moment of utter lucidity. This method required that the owners take account of the current as well as anticipated future financing rounds. The founders thought they needed to raise $4 million at this time. Currently they had allocated 5 million shares to themselves, and they wanted to put aside an option pool of 1.5 million shares for future hires. The founders also believed that they would need to raise an additional $2 million after two years. Wolf C. Flow had offered to invest $4 million at a price of $1 per share, but the founders were not convinced that this was a fair valuation. Instead, they wanted to model what an appropriate valuation might look like. They were quite confident that SpiffyTerm, Inc. would be able to do an IPO after four years, at a valuation of about $80 million. But they realized that there were risks in their venture, so they thought that everybody would apply a discount rate of 45 percent. Question 1a: What valuation do these assumptions suggest? Question 1b: The founders also wanted to do some sensitive analysis with their assumptions. They wanted to know how the valuations would change if the second round of financing required $3 million? And what would the valuation be if they raised $6 million up front with no further round thereafter? Obviously, these valuations differed from the one proposed by Wolf C. Flow. The founders thought that Wolf C. Flow had worked off the same base assumptions, but that he used maybe a different discount rate, or maybe a different IPO value. Question 1c: If Vulture Ventures used the above valuation model, and indeed used a 45 percent discount rate, what implicit valuation after 4 years must they have used? (Hint: for this and many subsequent questions it is helpful to use the "goal seek" command in Excel.)

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Question 1a To calculate the valuation using the assumptions provided we need to consider the curren... View the full answer