Valuation techniques: Round and Exit Comparables (comps)
Posted on 11. Nov, 2008 by squareroots in Company Valuation
Round Comparables
Round comparables (aka comps) are useful when determining a pre-money valuation for a company that has revenue. A source like Triple Tree provides some nice public comps based on trailing twelve months (TTM) of revenue, however they may be out of date. Even then, it will give point you in the correct direction for [...]
What is Venture Capital?
Posted on 04. Nov, 2008 by squareroots in Basics
Let’s start with some definitions.
Definitions
Venture Capital: Investment into early stage companies by full-time professionals. The majority of the money invested is not their own (99% typically comes from Limited Partners).
Limited Partners: LPs are the money. Limited Partners are typically corporations (private pension plans), endowments, foundations, or state pension plans. Wealthy families also invest as LPs [...]
Valuation of the seed round with friends and family
Posted on 06. Oct, 2008 by squareroots in Pre Venture Capital
The balance between the founders and the investors is critical for any early stage company. This is true even with investments from friends and family. Consider two situations:
High pre-money valuation
Example: a pre-money valuation of $10M for a pre-revenue software company. Although this would appear to favor the company and the founders, what may result is [...]
Types of Preferred and Common Stock
Posted on 02. Oct, 2008 by squareroots in Term Sheets
Types of Common Stock:
Founder’s Stock (owned outright from formation, no vesting)
Restricted Stock (same as founder’s, but with vesting)
Option Pool (usually for incentive plans)
Types of Preferred Stock
Convertible Preferred
Participating Preferred
Types of Stock Options
Incentive Stock Options (ISO)
Non-qualified Stock Options (NSO)
NOTE on Preferred Stock
Preferred Stock is different than stock market, as it includes:
Conversion Rights (go from Preferred to Common)
Liquidation [...]
Warrants vs. Stock Options
Posted on 01. Oct, 2008 by squareroots in Term Sheets
While many people are familiar with stock options, fewer are familiar with warrants. Warrants are widely used in the startup world by investors, so it is important for entrepreneurs to understand their nuances.
Let’s start with stock options. Stock options are created from the Option Pool, which was described in an earlier post. Warrants are not [...]
The importance of a startup’s name
Posted on 30. Sep, 2008 by squareroots in Formation
In February 2008 I started acquiring domain names based around the idea of this web-site. Although some were not “sexy”, most were at least tolerable. Originally, learningvc.com was to be the domain for this web-site. Luckily I learned about backordering domains, which is how I came upon learnvc.com in April 2008.
In May [...]
Liquidation Stack
Posted on 12. Sep, 2008 by squareroots in Graphical Examples
Investors refer to “down-side protection” a lot in funding startups. One way investors protect themselves is with Preferred Stock, which is dependent on the Liquidation Stack. The liquidation stack refers to the order in which shareholders are paid proceeds from a sale.
Let’s look at the example shown on the right. First, [...]
Hurdle Rate
Posted on 12. Sep, 2008 by squareroots in Venture Capital
In the Venture Capital world, IRR (Interal Rate of Return) is used by the Limited Partners to measure the performance of the VC funds. The Venture Capitalists themselves use a guideline, called the Hurdle Rate, when talking about a startups potential. If the startup has the potential to exceed the hurdle rate then they may [...]
Option Pool Creation
Posted on 17. Aug, 2008 by squareroots in Basics, Graphical Examples
One of the more subtle points of valuation is option pool creation. The first method is an option pool created from the pre-money side, but calculated on a post-money basis. The second is an option pool created from the post-money side, and calculated on a post-money basis. This is where a graphical [...]
Convertible vs. Participating Preferred Stock
Posted on 04. Aug, 2008 by squareroots in Graphical Examples
Convertible Preferred Stock will either convert into common or stay as preferred (and take out its liquidation preference and dividend) in a exit event. For Participating Preferred Stock, the liquidation preference and dividends are taken out, and then converts into common. In common, the Participating Preferred Stock takes their ownership amount along with [...]