SpiffyTerm
- assumptions suggested
These assumptions suggest that the valuation is through the venture capital method of valuation. This is because the founders intend to find and use only one venture capitalist to finance their venture. The valuation that they are taking also involves raising an initial amount of $4 million and making share allocations for that amount. They later intend to raise an additional amount at a later date (after two years).
Further support that the valuation is on the venture capital method of valuation is that there is a pre-money valuation of the company which the owners have set at $4 million. The value of this pre-money valuation is determined by a product of the share price that the owners demand per share and the number of pre-money shares that the owners have for the company.
Another assumption that indicates that this deal is a venture capital valuation is the change in the number of shares. The owners of the venture are proposing a share price of $2.67 per share while the financier was proposing a share value of $1.00 per share. It is only in this method of valuation where the number of shares can be changed freely depending in the agreement of the two parties involved.
- sensitivity analysis with assumptions
- Valuation as per initial plan
- Valuation if second round required $3 million
- Valuation if owners raised $6 million upfront
- If Vulture ventures used the above valuation model, and indeed used a 45% discount rate, what implicit valuation after 4 years must they have used?
Notes:
1 Projected value of the company of exit date.
2 Investment on the year of exit.
3 The choice of valuation method will mostly be a matter of discussion during the venture capital negotiations with the investors. PE ratios for public companies which can be compared to the venture are used as a benchmark to arrive at the PE, making a consideration that such figure for public companies are likely to be higher than most venture companies since they have operated for some time.
4 This is the target rate of return used by venture capitalist. This target rate is used for the calculation of the present value of the projected terminal value of the investment. The rate is usually very high as compared to conventional financing options available.
- The reasoning of Bob is not wise since an increase in the number of shares to meet the demands of the investor would only result in the dilution of ownership of the company. The value of the shares that the owners and investor will hold will be high but the value of the shares would be diminished, and more likely the value of the shares will be lower than when a fewer number of shares has been issued. Such a move would also result in the lowering of the pre-money value of the company and as such may affect the ability of the company to attract new investors. The advice offered by Bob should therefore not be accepted.
- The analysis makes an assumption that investors are holding straight equity. Under the term sheet proposed by Ventures limited, this is a valid assumption since the venture makes an assumption that the firm will conduct an initial public offering at some point in the future and this can only be achieved if the ownership is held in terms of straight equity. Under the arrangement, the investor would acquire from the company a value for his investment in terms of straight equity. As such, a holding of that manner cannot be in another form since other forms of ownership would imply that the management bears responsibilities which are not possible at that point. Preference shareholding would not be possible since at that point, the company has no assets through which their liquidation the preferential shareholders can get preferential treatment. The holding therefore can only be straight equity.
