the venture capital method valuation of venture capital deals the basic venture capital method with...

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The Venture Capital Method Valuation of Venture Capital Deals The Basic Venture Capital Method with Required Rate of Return

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Page 1: The Venture Capital Method Valuation of Venture Capital Deals The Basic Venture Capital Method with Required Rate of Return

The Venture Capital Method

Valuation of Venture Capital Deals The Basic Venture Capital Method

with Required Rate of Return

Page 2: The Venture Capital Method Valuation of Venture Capital Deals The Basic Venture Capital Method with Required Rate of Return

The Basic Venture Capital Method

Step 1: Determine the post-money valuation

Step 2: Determine the pre-money valuation

Step 3: Determine the ownership fraction

Step 4: Obtain the number of shares

Step 5: Obtain the prices of shares

Page 3: The Venture Capital Method Valuation of Venture Capital Deals The Basic Venture Capital Method with Required Rate of Return

Take aways:

This method shows the minimum of what the investor must have of shares in order to get the money back…

It is a sophisticated method that divides the emerging values (in the company) between the parties…

NB! The actual split is not driven by the venture capital method, but is a result of the negotiation process…

It is the parties relative negotiation strength that is the actual economic determinant of the actual valuation…

The valuation method is however important as the method contribute with both the qualitative and quantitative bases for the negotiation process…

Page 4: The Venture Capital Method Valuation of Venture Capital Deals The Basic Venture Capital Method with Required Rate of Return

This means:

Given the discount rate, and the number of years to exit, it is the amount of your actual capital asking, and the terminal value that determines if - and to what extent you will receive funding. Your asking, and the timing of it, also have an effect on how many shares (the size of the ownership) you will retend

NB! All these factors are negotiable!