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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