Formulate an Offer

Stephen Lawrence and Frank MoyesGraduate School of Business

University of Colorado

Boulder, CO 80309-0419

Course Outline

This Week

Valuation and Offer

Valuation

• Use VC Method to value company– Assume IPO or acquisition– Five year horizon (max)– Use “reasonable” PE ratio to estimate FV– Use “reasonable” discount rate– Calculate equity give-up

• Develop offer consistent with value

Price-Earnings (PE) Ratio

• PE = 15– Long term average of stock market

• PE > 15– Hot sectors of the economy with rapid growth

• PE < 15– Mature sectors of economy, slow growth

• Look for “comps” in the market

Discount Rates

• Seed capital– 80 to 100%

• Startup financing– 50 to 70%

• First-stage financing– 40 to 60%

• Second-stage financing– 30 to 50%

• Bridge financing– 20 to 35%

• Restart financing– variable

Factors Affecting Discount Rates

Total Discount Rate

Base Rate

Systematic Risk

Liquidity

Value Added

Cash Flow Adjustment

Seed Stage 1 Stage 2 Bridge IPO

Just

ifia

ble

Dis

coun

t Rat

e

Sahlman, A Method for Valuing High-Risk, Long-Term Investments, teaching note, HBS 9-288-006.

Risk-freeinvestment

Marketsensitivity

Risk of failureadjustment

Value ofVC adviceInvestment

not liquid

Offer

• Use valuation to determine offering

• Offer percentage of ownership consistent with investment and future value

• For investor, report– IRR– ROI– Future Value

Valuation & Offer Spreadsheet

Executive Summary

Executive Summary

• Critically important

• First (and only?) chance to sell your concept

• Two pages (max)

• Sections match major parts of plan

• Cut and paste from the rest of the plan

• Rewrite for logic and clarity

• Organization– Introduction

– Company Overview

– Product/Service Description

– Industry and Marketplace Analysis

– Marketing Strategy

– Operations

– Development

– Financials

– Offering

Alternative Executive Summary

• Single page• Selling vs. Summary• Excite quickly• VC’s have less time,

less patience

• Headings– Opportunity

– Solution

– Competitive Advantage

– Process

– Positioning

– Revenue

– Financial

– Management