Venture Capital Securities: An Options Based Approach

Valuation is the estimation of an asset’s value, whether real or financial, based on variables perceived to be related to future investment returns, on comparison with similar assets, or, when relevant, on estimates of immediate liquidation proceeds (Pinto, Henry, Robinson, Stowe; 2010). Correct valuation of real assets can present challenges to financial analysts. Different models can be used to arrive at the closest estimate of value and yet certain issues will always arise. This case attempts to tackle two approaches in real asset valuation: Discounted Cash Flow (DCF) analysis and the issues surrounding such, as well as the Black-Scholes Model for Real Options. Questions to be addressed in the study are:

Hart Venture Capital (HVC) specializes in providing venture capital for software development and Internet applications. Currently HVC has two investment opportunities: (1) Security Systems, a firm that needs additional capital to develop an Internet security software package, and (2) Market Analysis, a market research company that needs additional capital to develop a software package for conducting customer satisfaction surveys. In exchange for the Security Systems stock, the firm has asked HVC to provide $600,000 in year 1, $600,000 in year 2, and $350,000 in year 3. In exchange of their stock, Market Analysis has asked HVC to provide $500,000 in year 1, $350,000 in year 2,

Introduces the concepts of finance. Reviews the basic tools and their use for making financial decisions. Explains how to measure and compare risks across investment opportunities. Analyzes how the firm chooses the set of securities it will issue to raise capital from investors as well as how the firm’s capital structure is formed. Examines how the choice of capital structure affects the value of the firm. Presents valuation and integrate risk, return and the firm’s choice of capital structure.

o 20% immediately, 20% at the end of the first year, remaining 60% at a 2% per month

The due date for this quiz is Mon 16 Sep 2013 6:30 PM IST (UTC +0530).

Information problems such as asymmetric information and moral hazard are critical for innovative ventures, which can have a hard time forecasting future cash flow. The banks are usually less informed then the venture capitalists, which creates higher demands for returns from the entrepreneur in order to break even. (Masako Ueda, 2004, p. 601) The value added venture capitalists have a better understanding of the technical milestones and are therefore better equipped to monitor new ventures, which reduce the information problems. They may be willing to finance innovations that investors without expertise wouldn’t. Understandably, not all venture capitalist have technical expertise, but they can make up for this with a good network of experts. (Douglas Cumming, 2010, p. 307)

Financing a firm through the fluctuations of a business cycle is never an easy proposition. Tradeoffs must be made between numerous, competing considerations that include creditor obligations, stakeholder concerns, and future tax liabilities (Sihler, Crawford & Davis, 2004). Though it was once thought that “capital structure has no effect on the value of the firm,” most modern analysts no longer operate under that assumption (Kester & Hoover, 2005, p. 61). Indeed, it is now almost universally agreed that factors like debt and tax obligations certainly do affect a firm’s monetary valuation (Kester & Hoover, 2005). Fortunately, analysts have been kind enough to develop valuation models, such as FRICTO, which can help guide the financing process and enable managers and stakeholders to avoid the various pitfalls that can confront a firm in its quest to stay afloat (Sihler, Crawford & Davis, 2004).

Please answer the following ten (10) questions in preparation for our class discussion. Make sure that you type up your answers and give them to me before the discussion. Keep another

The dataset for the regression model intended to investigate the statistical relationship between the non-financial factor and valuation is collected from Pitchbook. Since valuations in VC rounds are often highly confidential, the sample size is quite small, including 107 companies with 230 founders in total. However, as elaborated in section 4.3, the descriptive statistics for the two separate datasets demonstrated that the dataset is representative of the larger start-up community.

This case has two educational objectives. First, it serves as an introductory case on option valuation in which students can use market data to place a dollar value on an option they are likely to encounter in their business careers. As such, the case encourages a discussion of the application of option pricing models, such as Black-Scholes, and exposes students to popular misconceptions of how options should be valued. Second, the case permits a discussion of the wisdom and efficacy of incentive stock compensation plans using options.

The process of going public provides a company with much needed growth capital.  Although there is incredible wealth transferred in initial public offerings, some companies feel cheated in the bargain.  Since 1980, the first day price increase after an initial offer has averaged 18.8%. (Ritter 2002)[1].  The increase in price

At leave phase of venture capital financing, venture capitalist chooses about disinvestments/acknowledgment options which are identified with the kind of investment, value/semi value and obligation instruments. In this way, the venture capitalist may exit through IPOs, procurement by

Based on Talmor&Vasvari (2012), in spite of the comparatively small number of vehicles, the improvement is striking since some of the largest and most prominent private equity vehicles, such as KRR and Blackstone, have preferred to go public. From an academic angle, the surfacing of listed private equity vehicles drastically increases the opportunities for scrutinizing an industry that is famous for being notoriously private.

Field, L. and Hanka, G., 2001, “The Expiration of IPO Share Lockups”. The Journal of

I compile, through various mediums, information regarding initial public offerings, or IPO’s. The report includes areas such as defining an IPO, the performance of IPO’s, the current market for IPO’s, and the process of buying an IPO. Therefore, the feasibility report is directed at the retail or non-professional investor who may be engaged in purchasing IPO’s. I look to determine if the underlying facts create certainty that these instruments are profitable currently and in the long run. It appears through study that investors have increased their consumption of initial public offerings since the 2007-2008 financial crisis. Many investors believe purchasing IPO’s can create quick realized gains. However, it appears that the performance of these issues has lagged the broader market, which in my opinion should steal zeal from these risky investments. The figures throughout this report should indicate and reaffirm that not all IPOs, whether popular or unpopular, will benefit the professional or non-professional investor. It must be noted that not everything is the same in financial markets and results may vary significantly from this report in a single incident or sample study.