Formulate an Offer Stephen Lawrence and Frank Moyes Graduate School of Business University of...
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Transcript of Formulate an Offer Stephen Lawrence and Frank Moyes Graduate School of Business University of...
Formulate an Offer
Stephen Lawrence and Frank MoyesGraduate School of Business
University of Colorado
Boulder, CO 80309-0419
Valuation
• Use VC Method to value company– Assume IPO or acquisition– Five year horizon (max)– Use “reasonable” PE ratio to estimate FV– Use “reasonable” discount rate– Calculate equity give-up
• Develop offer consistent with value
Price-Earnings (PE) Ratio
• PE = 15– Long term average of stock market
• PE > 15– Hot sectors of the economy with rapid growth
• PE < 15– Mature sectors of economy, slow growth
• Look for “comps” in the market
Discount Rates
• Seed capital– 80 to 100%
• Startup financing– 50 to 70%
• First-stage financing– 40 to 60%
• Second-stage financing– 30 to 50%
• Bridge financing– 20 to 35%
• Restart financing– variable
Factors Affecting Discount Rates
Total Discount Rate
Base Rate
Systematic Risk
Liquidity
Value Added
Cash Flow Adjustment
Seed Stage 1 Stage 2 Bridge IPO
Just
ifia
ble
Dis
coun
t Rat
e
Sahlman, A Method for Valuing High-Risk, Long-Term Investments, teaching note, HBS 9-288-006.
Risk-freeinvestment
Marketsensitivity
Risk of failureadjustment
Value ofVC adviceInvestment
not liquid
Offer
• Use valuation to determine offering
• Offer percentage of ownership consistent with investment and future value
• For investor, report– IRR– ROI– Future Value
Executive Summary
• Critically important
• First (and only?) chance to sell your concept
• Two pages (max)
• Sections match major parts of plan
• Cut and paste from the rest of the plan
• Rewrite for logic and clarity
• Organization– Introduction
– Company Overview
– Product/Service Description
– Industry and Marketplace Analysis
– Marketing Strategy
– Operations
– Development
– Financials
– Offering