Formulate an Offer

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Formulate an Offer

• Stephen Lawrence and Frank Moyes
• Graduate School of Business
• University of Colorado
• Boulder, CO 80309-0419

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Course Outline
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This Week
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Valuation and Offer
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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

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Price-Earnings (PE) Ratio

• PE 15
• Long term average of stock market
• PE gt 15
• Hot sectors of the economy with rapid growth
• PE lt 15
• Mature sectors of economy, slow growth
• Look for comps in the market

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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

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Factors Affecting Discount Rates
Total Discount Rate
Risk of failureadjustment
Cash Flow Adjustment
Value ofVC advice
Value Added
Investmentnot liquid
Justifiable Discount Rate
Liquidity
Marketsensitivity
Systematic Risk
Risk-freeinvestment
Base Rate
Seed Stage 1 Stage 2 Bridge
IPO
Sahlman, A Method for Valuing High-Risk,
Long-Term Investments, teaching note, HBS
9-288-006.
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Offer

• Use valuation to determine offering
• Offer percentage of ownership consistent with
  investment and future value
• For investor, report
• IRR
• ROI
• Future Value

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Valuation Offer Spreadsheet
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Executive Summary
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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

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Alternative Executive Summary

• Single page
• Selling vs. Summary
• Excite quickly
• VCs have less time, less patience

• Headings
• Opportunity
• Solution
• Competitive Advantage
• Process
• Positioning
• Revenue
• Financial
• Management