The Deal: Valuation, Structure

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The DealValuation, Structure Negotiation

• Venture Planning
• Chapter 15
• Dowling
• Fall 2005

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Valuation, Structure Negotiation

• Ingredients to the entrepreneurial valuation
• Cash
• Time
• Risk

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Valuation, Structure Negotiation

• The core mission is to build the best company
  possible. This is the single surest way of
  generating long-term value for all the
  stakeholders and society.
• -Timmons

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Valuation, Structure Negotiation

• Determining Value At least a dozen ways
• A Key Consideration
• Investors Required Rate of Return (ROR) (IRR)

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Valuation, Structure Negotiation

• Inherent conflicts between users and suppliers of
  capital
• Entrepreneur Wants As much time as possible for
  financing
• Investor Wants To supply capital just in time
• Entrepreneur Wants As much as possible
• Investor Wants To invest just enough
• Entrepreneur Wants Control of Board-o-Directors
• Investor Wants Control of Board-o-Directors

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Valuation, Structure Negotiation

• Staged Capital Commitments
• Delivers funding in stages, rather than in lump
  sum
• Allows investors to evaluate company as time
  passes

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Valuation, Structure Negotiation

• Conservation of capital
• To encourage managers to conserve, VCs apply
  strong sanctions if capital is misused, by
• Diluting managements equity share at punitive
  rate
• Shutting down operations completely

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Valuation, Structure Negotiation

• Structuring the deal
• Deals involve allocation of cash flow streams,
  allocation of risk and allocation of value
  between different groups

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Valuation, Structure Negotiation

• Characteristics of Successful Deals
• Simplicity
• They are robust
• They take into account incentives of all involved
  under variety of circumstances
• They provide mechanisms for communications and
  interpretation
• They are based primarily on trust rather than
  legalese
• They do not make it too hard to raise more capital

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Valuation, Structure Negotiation

• Lessons Learned
• Raise money when you dont need it
• Learn about the process and how to manage it
• Know your relative bargaining position
• If all you get is money, youre not getting much
• Assume the deal will never close

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Valuation, Structure Negotiation

• Lessons Learned
• Always have a backup source of capital
• The experts can blow it sweat the details
  yourself
• Users of capital are at a disadvantage when
  dealing with suppliers of capital
• If you are out of cash when looking for capital,
  suppliers of capital will eat your lunch
• Startup entrepreneurs are raising capital for the
  first time suppliers do it for a living.

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Valuation, Structure Negotiation

• Sand traps
• Legal circumference

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Valuation, Structure Negotiation

• Sand traps
• Attraction to Status and Size

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Valuation, Structure Negotiation

• Sand traps
• Unknown territory

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Valuation, Structure Negotiation

• Sand traps
• Opportunity Cost
• Underestimation of other costs
• Greed

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Valuation, Structure Negotiation

• Sand traps
• Being too anxious
• Impatience
• Take-the-money-and-run myopia