The Deal: Valuation, Structure & Negotiation

1. The Deal:Valuation, Structure & Negotiation Venture Planning Chapter 15 Dowling Fall 2005

2. Valuation, Structure & Negotiation • Ingredients to the entrepreneurial valuation • Cash • Time • Risk

3. 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 ”

4. Valuation, Structure & Negotiation • Determining Value: At least a dozen ways • A Key Consideration: • Investor’s Required Rate of Return (ROR) (IRR)

5. 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

6. Valuation, Structure & Negotiation • Staged Capital Commitments • Delivers funding in stages, rather than in lump sum • Allows investors to evaluate company as time passes

7. Valuation, Structure & Negotiation • Conservation of capital • To “encourage” managers to conserve, VCs apply strong sanctions if capital is misused, by: • Diluting management’s equity share at punitive rate • Shutting down operations completely

8. Valuation, Structure & Negotiation • Structuring the deal • Deals involve allocation of cash flow streams, allocation of risk and allocation of value between different groups

9. 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

10. Valuation, Structure & Negotiation • Lessons Learned: • Raise money when you don’t need it • Learn about the process and how to manage it • Know your relative bargaining position • If all you get is money, you’re not getting much • Assume the deal will never close

11. 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.

12. Valuation, Structure & Negotiation • Sand traps Legal circumference

13. Valuation, Structure & Negotiation • Sand traps • Attraction to Status and Size

14. Valuation, Structure & Negotiation • Sand traps • Unknown territory

15. Valuation, Structure & Negotiation • Sand traps • Opportunity Cost • Underestimation of other costs • Greed

16. Valuation, Structure & Negotiation • Sand traps • Being too anxious • Impatience • Take-the-money-and-run myopia