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The Venture Capital Method

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

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The Venture Capital Method

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

  2. 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

  3. 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…

  4. 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!

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