Lecture 1 Chapter 9: motiv 4 staged fin, ep: reduces cost fundraising & dilution, inv: option value of waiting, incr control power of shares to pe firm, need to use 350M own funds-> pe firm owns all E (750M), paid 350M, again max profit= 400M. eg2: if
Credit rationing: want to borrow at eq i, but cant -> market failure? If feature of lr-eq. eg asym info when adv sel or mh. purse, easier termination of inv. Issue shares=dilution, staging can incr success prob in earlier stages. Tranching: offer 50%, what fin position? V0=100M, V1=130M (30% incr by pe), D=50M, E1=80M (-price decr so need to buy 100% E,
Adv sel: bank profits incr with i until safe firms drop out -> then decr., rational to not lend beyond certain i -> unserved specifies amount&share price, 2nd tranche released cond on milestone (automatic, inv), no negotiation. Insider round:
firms are cr in eq. mh: same risk type, diff assets > suc dep on effort (shirk), cant observe, need skin > firms w unsuf pay 50M more), so fin position: 100% os, 30M profit. Trends in Corp Borrowing: bond markets, firms larger, more transp,
old inv, good signal, no new ideas or nw. Outsider round: new inv, bad signal, info asymm, new exp&nw. retention rate:
assets are cr, again rational.> prov ep w col assets fosters ep for founders w no exp. Chapter 1: What? 3 fund princ: high credit qual> less marginal inv. Why? bank credit pro-cyclical, but undrawn credit insures against cap market
inv stake reduc if no reinv. >to estim future return. Insider confl incentives: high val reduc dilution, low val to buy
1.ep recomb of existing resources (conv inv), 2.process inherently uncertain 3.ep = experiment& dynamic flexibilty (org drying. AISD (new loans) pro cyclical, fees important. AISU pro cyclical. TCB is weighted average, smaller than AISD
cheap. Term sheet 1.liquidation stack: seniority inv by series, negotiation largely btwn inv (early push back new if
struct imp 4 incetiv & pivot) Why? ep: money is key & not green (inv impact), inv: returns,diversif ,strategy + share after crisis, higher before. >aisd term loans, <aisd for revolving credit lines. Non-price terms: maturities procycl, higher
shaky). 2.Anti-dilution clauses: down round&flat round – prot inv against paying too high price, specify rule to adj price,
knowledge&expertise.broader ec&societal: market-driven selection system, jobs,innov,growth > is: findings of pos link for non-ig-loans, shorter mat: less mature firms, incr roll-over risk, more debt overhang. Coven: #decr, more for non-ig
complement to downside prot (conv prot against disapp exit, this against disap future rounds) & to pre-emption rights
w tfp, creates most lt g, vc-backed ef higher tfp, more innov, more startups, jobs&income> ef = ec growth! Key: young firms, revolv cred lines retain coven Funding sources: igm: credit lines/liq banks, ob-bs borrow from bond market. Non-
(preserve ownership share, this prot value owned by inv). Full-ratchet prot: re-price first round at new price; weighted-
1.most fail, death is rule,”gazelles”not 2. Vcbacked fail less. How understand? FIRE: fit=matching, search&selection igm: on-bs borrow banks/institute inv. (fund) Liq also banks. Funds issuance vol highly cyclical. Loan purpose: most term
average prot: reprice at PWA= P1*(Sbase+I2/P1)/(Sbase+I2/P2), base can be broad (incl ep shares) or narrow (only inv shares).
chall (network, screen, dd, signal); invest=closingdeal, affect by needs ep&inv, expect firmfuture, marketconditions. loans for transact (acq, M&A, lbo) or corp purp, credit lines/revolving mostly for daily liq management (corp purp). EU vs
Pre-emption rights: right purch new shares to pro rate; right of first refusal: comp can buy shares sold by inv or founders
Ride=path(pivots), jointly grow, requires:learning(company,market,eachother) &governance (decisions?)! US: eu lower i but higher fees (diff compos of tcb), tcb>aisd in eu, vs <in usa. Covenan reduc, institute inv incr = usa
on terms offered by 3rd party. Prot ep clause: duty to participate pro rate: “pay to play”. Fin diff situations: struct down
stagedfinancing,sfexit=returns, when?(timingconstraints),how?(ipo,acq,sale,or closing down). sf: ep:lower fundraising trend. More undrawn cred line, trans lending important. Similar trends, not public debt markets!
round diff: need consent inside sh, keep founders motiv, deal w stock options washing out, find willing outside inv
cost&dilution,but refin risk(internal&external) inv: option value of waiting, more control power of purse. FUEL: focus on Lecture 10
despite neg signal. Turnarounds or washouts: comp lost traction but still valuable assets, inv want to restart proj > sign
inv. Fundam struct: who?(indiv vs fund; own vs raised money; decisions?structures?). Underlying motiv: what want? Fin Bonds: coupon, mat, fv, underwriting fees, discount. Bearer bonds, registered bonds. Unsecured debt (claim to assets
value drop & dilution, conflict btw old&new inv & litigation, executed by insiders or specialized outsiders. Dynamic inv
return vs not. risk tolerance Expertise&network: what contribute? Standing w peers. Logic&style:how operate? logic: not collat), secured debt: -mortgage bonds (property collat), asset-backed bonds (any asset). Tranches: diff classes of
strategies: inv 4 choices: when first inv, reinv?,with who co-inv,split? How structure staging to get good exit? 1.When?
how select comp (location,stage,industry? = fit&invest), style: how interact(ride&exit) .Chapter2:VEM eval, ep:find sec comprising single boond issue, all paid from same cf source. Call feature! Covenants. Repayment: normal, call,
timing of first inv drivers: fin resources, expertise&ability to value comp, risk attitude. 2.reinv? how much? drivers:
weak&strength inv: screening&dd. Based on customer,company,ep. Value prop cells: 1.Need=knowcustomer,wtp? buyin the market, tender off. Call provision: if i falls,call & refinance at lower rate. So lower price for these. So if
portfolio strategy, confidence in venture, interest in sharing os, 3 approaches: never, typically, opportunity-driven. Ep 4
Strong need? 2.Solution =knowproduct, solveneeds,compare alternative, protect idea,iterative process use feedback. yield<coupon: call, price is par, close to price of non-call bond with maturity on call date. yield>coupon: no call,
choices: inv choice, how much money&when, valuation profile(too high early=risk of downround), what exit. Chapter
3.Team=talent scarce ,req skills,motiv,cohesive. Industry cells: 4.Market= bigopportunity?size,growth,adoption, price=equiv non-call bond. Price is capped at par. ytc! Convertible provision: eg fv 1000, conversion ratio 15,
10: debt financing, D=I*(1+r)T. default X<D. lender no benefit if grow beyond repayment, no share in upside. 3
5.Competition=curr&future comp? naturecompet,how differentiate. 6.Network=reputation,accessnetwork,relationships? converting: price=66.67$, so if price stock>66$ you convert, otherwise take 1K. often call & conversion, if issuer wants
dimensions: 1.installment (standard loan) vs revolving credit (draw from line, fee, higher interest), 2.Secured (collateral)
Strategy cells: 7.Sales=howreach cust,distrib/marketing strategies?pricing? 8.Production= call, inv can still convert. Sudden stop risk: high risk for non-ig firms, they issue cll bonds and exercise call option often,
vs unsecured credit (trust), 3.personal (own capacity be4 company is bankable, liable) vs corporate credit (limited
efficiency,operation,activities(milestones). 9.Organization=role of founders, 2 motives: 1.cost saving motive, i declines. 2.reduce rollover risk, exposure to sudden stop. – agency conflict: cost is
liability). elem of debt contract: amount, maturity, cost (interest rate, fees), collateral (recourse loans=lender can seize
governancestruct,talentstrategy.>Attractiveness:value,scale,growth. Competadv: borne by sh. Paper: contract mat 10y, effective 6y. moneyness: when in the money, firms call bonds ig instant, non-ig
assets not pledged as collateral), covenants (legal clauses against misbehavior) -neg cov (prohibit eg paying div b4
access,entrybarriers ,competencies ./marketrisk,techrisk,peoplerisk>decision! For ep: identify weak&strength,reduce still rational. After control for cost saving motiv firm with high rollover risk= higher likelihood of calling. Firms less likely
debt) vs affirmative cov (induce good behaviour, eg targets, limits of fin ratios). Debt vs equity mm: cost of D&E same,
info asym,write bp. For inv: dd, filter, where can add value. to call when call option is out-of-the-money, but! Even when this is, more likely to be called when rollover risk is higher.
but mh & as important! Debt weaker incentives for ep than eq (as lender don’t support company) = higher costs (lender
Lecture 2+3 Lecture 12
req collat, coven,) .2 insights: 1.payoff & risk profiles of D&E depend on their mix; 2. D not neces cheaper than E,
Chapter 2.5: fp = better position for negotiation w inv, predict fin need. 2 horizons, 1.M-LT: growth strategy 2.ST: cash & IPO adv: liquidity, access to capital. Disadv: eq holders dispersed (diff to monitor), many reportig req. Best-effort basis:
depends on proj risk profile. Comparing D&E via 1.transaction costs: time of deal(dd&negot,lowerD), during inv(taxes,
wc management. (WCR>WC – need st loans). wc= equity + LT loans – fixed assets. Wcr = inventories + customercredit no guarantee by underwriter, but tries to sell stock at best possible price -> often all-or-none clause. Firm commitment:
not clear), at repayment(E: organize exit, D: default cost, D cheaper for safe ef) 2.incentives cost: lenders downside
-supplier credit. growth req inv in fixed assets, but wcr also grows (more than profits) -> manage! Also diff btwn wcr and underwriter guarantees to sell all stock at offer price. Auction IPO: selling new issues directly to public, underwriter
prot, but no upside benefit high exit – X>D, for SH X>>D. why banks no lend startups: no stable business model,
wc via st borrowing = wcm. Chapter 3:1.fin proj -> 2.fin plan -> 3.business plan. early stage=detailed, short horizon, takes bids.>winning auction price that satisfies #shares, if demand>supply, higher bids get full, pro rata to at winning
revenues, profits, collateral. They lend to: safe, predictable cf, liquid assets. Banks criteria lending: prob default,
later stage= less freq, lt-projections. Fin proj: reflect bus model, bus plan, and ep. Limitations: inacc, snel outdated, price bidders. Lead underwriter (responsible 4 managing), syndicate (jointly underwrite& distribute). SEC filings:
recovery rate if default, chargeable interest rate -> all bad for ef. Who lends to ef? Alternative debt sources: early stage
optimistic. structure: income statement, balance sheet, cash flow statement. 4 sources of info: primary data (market), registration statement, preliminary prospectus (circulated to inv to get sense of price), final prospectus (all details, offer
= informal loans (personal, family&friends), later=company bankable. Other: trade credit, discounting&factoring,
secondary data (filtered&prepared), learn from similar companies, use own past. 5steps, 1.timeline: price, #shares). Underwriter compensation can be discount on buying shares. Valuation: road show (travel around to
leasing. Venture debt: lend money, next round funding to repay, adv: lenders free ride on expertise eq inv, repayment
milestones,horizon,account detail(timebtwnmilestones). 2.estimate revenues: rev = P*Q, unit?(cust,prod,contract), net largest inv explaining price) or book building (based on customer’s interest). Spread: fee to underwriters (%of issue
from fundraising, high interest rates, warrant incr prof inc success ef.
average price (price distribution!), quantity top down=demand side, secondary data (marketsize,share,) good when price). Incentive to not get price wrong (underwriting risk)- 75% IPOs have incr in share price on first day. Over-
Lecture 6
share well-defined, bad when large,not exist. bottomup= supplyside, companydata, req estim growthrate. Crosscheck: allotment Allocation – option allows underwriter to issue more stock at offer price if high demand. Eg 10M shares, but
Chapter 11: exit is crucial goal 4 inv (returns,liquidity event) timing > market conditions, planning. IPO(value=acq in
Estimated market share S = C/M (c-bottomup,m-topdown). Case1(s<5%): market broadly, bottomupconservative?, sold 11M > 1M short sell, if price incr underwrite don’t want to buy on market, take option & buy shares back at original
usa), acq (most eu&usa, value most eu), sale = upside condition, or closing down = downside condition. Exit is a
case2(<25%)realistic? Case3(>50%)largestplayer? Case4(>100%) market no support growthstrategy,imposs. 3.estim IPO price from comp. price decr buy back on market to cover short. Lockup: prevents existing sh from selling for period.
decision (continuation, opportunity cost, real options framework) timing depends: preferences inv&ep, expect comp,
costs: cogs(bu-lookatinputs,td-lookatcompet, direct&var),opex(indirect,salaries & stockoptions ,fixed) ,capex(non IPO puzzles: underwriting risk -> underpricing. Underwriters benefit, pre-IPO sh bear costs. Ipo returns cant be earned
time market- cant postpone indefinitely! Chapter 12: financial flows in vc 2 phases (cycle) 1.investment: money from inv
recc),non-opex(recur:intest,reval, d&a, remaincompet) development costs(one-off,creation of venture, by all inv. When D>S, alloc is rationed > winners curse. eg: 2000shares, 80% success -> 20% profit but 16 to 1. 20%
to comp (cap lp to fund, management fee to vc, eq inv fund to comp) 2. Return: money comp to inv & vc firm (exit to
relativelyrecurring 4 innovativecompanies). 4.build fin model: is(proj rev&cost timing&growth) ,bs,cfs. Testingfp(sa), fail> -5%. So return success: 2000/16 * price * return = 375. Fail: price * 2000 * -5% = -1500. -> 0.8*375 + 0.2 * -1500
fund, carried interest fund ot vc, fund distribution to lp) LPs: 1.asset alloc choice – howmuch to ef? low b2m of ef=low
5.formulate fp: how fin attractive & what fin resources need? Chapter 4: valuation: %of eq to inv? Estim exp returns. = 0$!. Number of issues highly cyclical: good times = markets flood, bad times = dry. Cost of IPO: relatively high fee,
returns, small size of ef= high returns – conflict 2.choice of building gp portfolio- vc market= illiquid& segmented: diff to
Val=Inv/Ownership(F) – VPOST=I/FINV , VPOST = VPRE+I. formulas: VPOST = P x SPOST; VPRE = P x SPRE; I = P x SINV; SPOST = SPRE + not sensitive to issue size (underw charges less = signal bad quality?) total costs decrease with size (IPO, SEO, bonds,
inv in GP (raise funds every few y, tiny 2ndary markets, gatekeepers complicate access). Fundraising cycle: gp go back
SINV; FPRE = SPRE/SPOST; FINV=SINV/SPOST stock options pool(sop): SPOST=SPRE+SINV+SSOP; VPRE=P x (SPRE + SSOP); FPRE=SPRE/SPOST; …) ipo: often long-run underperformance. SEO: new shares, raise add eq, same steps as ipo but price already exists.
so performance pressure to LPs. GP capital calls to LPs-liquid&ready-trust!> LPA rules: 1.investment restrict (on
FINV=SINV/SPOST; FSOP=SSOP/SPOST. Multiple rounds: new valuation: VPOST(r) = I(r)/Fr(r) and: VPRE(r)=VPOST(r)-I(r), SPOST(r) = SPOST(r- Primary shares or secondary (sold by existing sh), cash offer (at large) & rights offer (only to existing sh, protect from
exposure, cross-fund, specific strategy-no drift!) 2.management rules: govern distrib to lp, recycling limit (reinvest
1)+Sr(r), I(r)=P(r) * S(r), VPOST(r)=P(r) * SPOST(r) , VPRE=P(r) x SPOST(r-1), Fi(r)= Si(r)/SPOST(r). Dilution: Fi(r)=Fi(r-1) x (1-Fr(r)). underpricing). Exercise: if price after issue>issue price, sh will exercise rights. Price reaction seo: decline, rational: adv
profits early). 3.partner activity restrict: (pers inv & cherry picking, activity&time commit, separation procedure for
Inv returns: 1.realized, XINV=FINV*X, 2.expected. ef: 1. Extreme risk,skewed; 2.liq risk, illiquid. Inv risk-tolerant. 3 sel: if you believe comp is doing well, you would issue debt (upside), eq not. Issuance cost: around 5% underwriting fees
leavers, key man rule). GP compensation: 2/20-cover operat costs& give incentiv, man fee: quarterly, level & basis
measures: 1.NPV=XINV/(1+d)T-I, d diff to find. 2. CCM=XINV/I 3.IRR, I*(1+IRR)T= XINV. -> comb: CCM=(1+IRR)T, bad for (7% ipo), still expensive. Rights offers < costs than cash offers.
(commit or inv capital) > incentive raise large funds. Carried int: to align incentives lp&gp, + hurdle, paid eu wf (when Guest Lecture
comp inv w diff horizons. NPV best,IRR good, CCM simple&usedalot. 6insights: 1.given val, +exit=+inv return,2.given fund liq) or us wf (each exit event), % of profits= exit-contr cap + man fees. VC firms: manage lp, firm, network, source Coll features: asset eligibility, ownership, priority & seniority, enforceability. Collaterall value, liquidity, durability, redeployability.
exit, +val=-return. -for inv. For ep: 3.given val, +exit=+return, 4.given exit, +val=+return. 5.given req return, +exp deals. unanimity model for inv decisions. Fundraising key, market conditions. Success builds reputation 4 future. Supply: benefits: mitigate risk, reduce LGD, reduce adv sel & mh, discipline effect borrow behavior, capital relief. Costs: val & monitor,
exit=+val. 6.given exp exit, +req return=-val. Determ of val: opportunity itself, market, dealcompet, inv quality. Alternatives (evergreen – no target exit date, listed vc- raise on public markets, captive- partly owned by other funds, enforcement risk (eg no strong legal environm). Demand: benefits: easy access to credit, signal creditworthiness, improve loan terms.
Founder agr: split equity, keep people commit, +futurevalue=most incentiv. 5 issues: who?, salaries/compens, eg banks). Inv strategy: 1.only certain industries (dynamic progress-tech,deregul; moderate capital, scalability) Costs: asset encumbrance (unavailable), risk of losing assets, legal & transaction costs. Influence factors: Supply: cap req, property
obl&rights, ownership alloc, contingencies= more shares/rights if targets met. Chapter 5: why diff: uncertainty, lack 2.proximity (interactions & knowledge of environ key, but more openness to long distance). 3.early vs late stage rights for enforcement, market conditions. Demand: availability of assets, of info on verifiable income/ credit record, keep control rights
relev info, asym info, inadeq acc for intangibleassets. Trade-off simple v complex. 4 ways: 1.VCM: VPOST = Xe/(1+ρ)T; Returns: 1.company level, 2.to vc fund(with fees), 3.to LPs(net fees). Diff assess returns: data availability (opaque)& & flexibility. If collat incr debt capacity, why not everyone use? Eg neg shock decr asset price-coll value2-borrowing cap2-firm inv drop-
VPRE=VPOST-I; FINV=I/VPOST. For multiple periods: VPOST(r)=VPRE(1+r)/CCM e; CCMe=(1+ρ)T(r+1); VPRE(r)=VPOST(r)-I(r); ec act slow-feedbacj loop… Misallocation: 1.credit alloc distort. 2.collat prevent firms from divesting assets.
data quality (only good returns, unreported val report opportunistic). Company-level: highly skewed, reflects freq
FINV(r)=I(r)/VPOST(r). req estim I,T,X e,ρ: I from fp, T know market,often diff for inv, X e not statistical but if successful Exercises
failures. Fundlevel: better quality data no fees, overall: top quartile returns good, below top are low for risk taken . 1: Management fee every year, carried interest start when cum profits positive. Distribution to LP = exit proceeds-
outcome (dcf, comparable), req RoR ρ: riskless ror, fin risk-premium, illiq premium, failure rate prem, service prem >
Chapter 13: early stage inv: founders (skin), fff (relations, no returns), no exp&nw, struct: pure, no maturity, not a lot, carried int., LP cf= exit proceeds-cap calls-carriedint.
calc failure risk prem? VPOST = Xe(1-z)T/(1+d)T; ρ=(d+z)/(1-z). vcm extend 1.time-varying ρ (risk decr as mature), 2.CCM
no eq. angel inv: wealthy, inv own money. 2 types: savers, former ep. 2 structures: networks (group inv separate), 2: given: inv need=300K; own E=13K; X(success)=1M; X(fail)=150K; success prob=70% r f=5%.-> risky debt+equity:
instead of ρ, CCM e=(1+ρ)T, 3.forecast to next round, push need to estim X e later. 2.DCF not used, uncertainty. diff w
funds(pool capital inv jointly, profess managers). Motivation: fin, but also give back, learn, pool expertise& knowledge D=300K, E=13K, req D at maturity=D(1+r f)=315K; req E= 13650, a) what will be i on loan? D(fail)= X(fail)= 150K,
vcm: horizon= stable growth, FCF, terminal value main comp, disc rate only fin elem. 3.Comparables inv comp
vs lone wolfs. Corporate inv: strategic on behalf of companies, why? new tech, relation innov, influence compet D(success)= (reqD – (1-prob)* D (fail)) /prob -> D(s)= (315K-(1-0.7)*150K)/0.7= 385.714 i = (D(s)/D)-1 =
=similardeal inv, diff(what is similar?,lack of info). Or exit compar=look at similar mature companies values. 2 choices:
dynamics (kill acq). Relevant: 1.transaction costs: high-integrate,hire full time/acq low-market trans (hire by hour, (385K/300K)-1 = 28.57%. b) min E stake in return for 13K inv? E(success)= X(s)-D(s)= 615K, E(f)=0, E e=0.7*E(s)
1.set of compar comp: chall1 identify comp w similar cf struct,business risk,dependency on market. Chall2(find what
partnerships,alliances) 2.asset specificity: specialized- integrate, fungible-market trans. Corp inv cyclical (if comp does +0.3*E(f)=430K min E fraction = reqE/Ee = 3.17%. c) VPRE? VPOST(net)= E/minEfraq = 13K/3.17%= 410K. V POST(gross)=
should be compar comp), 2. Choose compar metric (M) def in terms of performance ratio (PM): M=X/PM, val is then:
bad, venture part first budget cuts), motiv by strategic gains. 1-high,2-low: alliance, 1-low,2-low: customer/ supplier 410K+300K=710K. VPRE= VPOST(gross)-D-E= 710K-300K-13K=397K
Xe=PMe*Mcomp.,metric based on earnings, CF, revenues, operating measures. Caveats: measure consistently, look at
relation, 1-high,2-high: jv/acq, 1-low,2-high: strategic investment – intermediate solution. 3.benefits market: give price 3:
whole distribution, consider that multiples reflect market val & prone to herding.exit vs inv comparables: diff refer
information. -> Strat inv: reduc trans costs & holdup, still have price info, it is temporary by nature. Crowdfunding:
(public vs private), val criteria(exp perf vs actual val), treatment of val(direct vs derivative) model uncertainty:
1.donations&rewards, 2.lending: diff for startups (no verifiable info), limited size loans, low interest rates but trans fees,
1.scenario anal 2.simulations (chose param,contin uncertainty) 3.profex=prob of each stage,calc exp return backwards,
used more by SMEs. 3.equity: slow due to regulations, complex (voting rights), usually pool votes as 1 sh. lending
exit outcomes (vcm).
platforms dominate: simplicity (no os rights, sh meetings), predictable (easy estim if comp is safe enough to return, no
Lecture 4
valuing-equity). EP face 2 tradeoffs: 1.info disclosure (less info = less inv, but too much is risk of imitation) 2. Learning
Chapter 5.2: no interim action, contracts only made conditional on proj success, IC: p H × Rb ≥ pL × Rb + B; PC: pH × (R –
vs exposure (learn from feedback, but is public so inv & compet learn about weaknesses). Incr viable for SMEs & retail
Rb) ≥ I – A; no int act, contracts condit on imperfect signal, IC: σHH × Rb ≥ σLH × Rb + B; PC: pH × R – σHH × Rb ≥ I – A.
proj. Retention rate: To keep OS pro rata, need to buy fraction equal to fraction you already own: F 1=F2
interim action, cond on proj success, w ep control, IC: p H × Rb ≥ pL × Rb + B; PC: pH × (R – Rb) ≥ I – A. w inv control, IC: pH
Lecture 7
× Rb ≥ pL × Rb + B; PC: (pH + 𝜏) × (R – Rb) ≥ I – A. interim action, cond on imperfect signal, cond inv control, IC: σ HH × Rb
Mature firms diff ef: growth=economy, established margins, debt capacity, cash, inorganic growth. In eu: most firms
– σHL × 𝛾 ≥ σLH × Rb – σLL × 𝛾 + B; PC: (pH + σHL × 𝜏) × R – σHH × Rb ≥ I – A; uncond inv control, IC: σHH × Rb ≥ σLH × Rb + B; small/micro(>50% value added,>99% of firms), very small amount expect growth, around half moderate, ¼ same, 10%
PC: (pH + 𝜏) × R – σHH × Rb ≥ I – A. with interim action; ep loses, inv wins. If ep not constrained she prefers to keep smaller. value driver: operations (cf, exp g), managing non-operat assets, financial- manage mix of D&E, choose optimal
control, and not implement. If ep is constrained it can be good to transfer control to inv, who will implement (ez funding funding instrument. Top 3 fin instrum: credit lines, leasing, bank loans. use: fixed inv, wc. Mne: debt~20% ,moderate g.
access), but irl only when firm underperformes: damage control: access easier if ep controls int action. Or contingent diff eu & usa: bank loans vs debt securities (bonds). Chapter Cap Struct: fin policies (cap struct or div policies) affect
control rights: access to fin only ez when inv take control when low effort signals. Chapter 6: term sheet=basis4: corp firm value (in perf markets) but arbitrage! eg trade credit, income tax liabilities. In imperfect markets: choices can VPOST=X*prob(s)/(1+d)^(time2proto+time2market+time2scale); or if multiple rounds: V POST(r2)>see previous; VPOST(r1)=
charter, inv rights agr&purchase agr, founder employment agr. Functions: govern rights,obl,rewards; shape incentives; change future cf. eg taxes (inv pay higher taxes on priv interest income than div). high tax inv & firm (mature)- prefer VPRE(r2)*prob(s)/ (1+d)^(timestagesleft); P/share=V PRE/S;New shares=I/P; OS=Sx/total S
clarify expect, allocate risk; specify rights&duties to 3rds. Specify: cf rights, control rights, compensation&employment, debt; high tax inv & low firm(startup – prefer equity! Low tax inv always prefer debt. Too much debt-bankruptcy & 4: (week2) value=I/%req, osI decr: F1*(1-fraqInv2) = F2, eg Inv has 12.5%, new Inv for 20%-> new OS= 12.5%*0.8
other rights (antidilution,..). contracts incomplete, so ts contingent contracting(milestones: elusive(when prototype distress costs inc default-favors equity. Tradeoff theory: too much debt, suffer inc trouble, too little debt, too much tax. 5: given: X at t(2): 10M, I need t(0): 1M, S Ft(0):3M. scenario1: I need t(1): 1M, P t(1): 2. scenario2: I need t(2): 2M, P t(2):
finished?), no pivoting/short-termism) -> clauses w verifiable actions vs clauses alloc decision rights. CF rights for Debt pos operat effects: force manager to pay out to inv, reduces fcf (manager perks), reduces theft, reduces 0.25. a&b: 2 offers VW: 2M at VPOST: 5M, XY: 1M at VPRE: 3M: find… for funding round only t(0). c&d: VW offer +
downside protection & incentivize-convertibles > give preferred terms(pt). pt = I+div = I+I*D*T. conv in common stock stakeholder holdup power – agency conflicts favor debt. But also costs: bondholder expropriation by manager: scenario1, vw + scenario2. e&f: same for XY offer. g: scenario1 75%, which offer best for AB(founder), h: now 25%
if cf>pt or FINV*X>pt, conversion threshold is CT = pt/FINV. Multiple liq preference: pt=M*I+DIV, ct is higher: scenario1. Solutions: with at t(0): VPRE=VPOST-I, P=VPRE/SF, FF=VPRE/VPOST. With at t(1): I1 = I1(need)-(I0-I0(need)), New_Inv
CTM=(M*I+DIV)/FINV >CT. participating preferred: if X>pt, inv gets: CFINV=pt+(X-pt)*FINV, if X<pt, inv gets X. part pref w 1.increase risk of proj, 2.issue bonds of higher quality. Solution: natural risk-averse, covenants, conversion. Other share (FI)= (I1/P1)/(SF+(I0/P0)+(I1/P1), FF,1=FF,0*(1-FI), VPOST=I1/FI, VPRE=VPOST-I1. at t(2): Value SF,2= FF,1*X2,
cap, for incent ep, drop in cf smooth. Why preferred securities? Incentives founders, screening, align expect. problem of leverage: underinvestment/ debt overhang – too high debt prevent manag of distressed firms inv in pos NPV
Compens&employ: 2 principles: defer pay, incentives for lt value creation. Stock! Vested (earned back): time vesting proj. if insiders knw proj great they prefer D (more upside), outsiders only buy E at low price (inside info, adv sel), leads
(cliff=min time) or performance vesting ,often stock options. control voting rights, BoD, contractual rights, informal
control. Inv liquidity redemption rights (reasonably long), tag-along(along w funders), drag-along(force sh), to pecking order. Also trans costs, behavior issues (inv like div). dynamic cap struct? diff
registration&piggy-back (force listing) other clauses: information rights, legal, keyman insurance, representationt& Lecture 8
warranties, negotiation. Upside-downside trade-off can give inv diff pieces of the cake (less/more ownership shares vs Banks: alloc cap, raise st debt - distr as lt loans, access to payment system. Act: liq/pay services, asset&matur transf,,
less/more downside protection). Convertible notes autom conv into stock at first qualif round, into same security, conv risk manag, mitigate info frict. ROE: gdp g, npl ratio, cost-2-income, bm, market concent, st rates, yield curve. Profit: net Other: VPOST=X*prob(s)/(1+d)^t; D&E: reqD=D(1+safe RoR), reqE; Debt value= D(1+i); Esuc(net debt)=Xs-Dvalue; Efail(net
rate predetermined, fixed mat <2y. Conv rate: PCN=(1-DIS)*PINV; ownership: SCN= ICN/PCN; val cap (no paying for success): interest margin, npl, regulation, bm, c2income. #banks decr-> consolid. Banks liabil: 1.households, 2.NFC, 3.interbank debt)=Xf-Dvalue > Exp E(netdebt)= probs*Es…; Eq OS fraction= Exp E(netdebt)/reqE. V POST (netdebt)= E/EqOS fraction,
PCN = min(VCAP/SPRE, (1-DIS)*PINV), new inv: PINV = VPRE/(SPRE+SCN). Chapter 7: deals have hard (val, ts) & soft elements deposits. Asset side: 1.households, 2.nfcs (closer to 1!), 3.fin corp. NFC funding: most to manufact., then real estate, VPOST(grossdebt)=VPOST(net)+D; VPRE= VPOST(gross)-E. for E&riskyD, All risky -> i =/ safe RoR: reqD = prob(f)*(D(1+i)+X f) >
(buffer, eg interest in venture?) 5 steps in structuring: 1.fundraising: prepare, engage inv, execute (coldcall vs be wholesale, retail trade, add services. Types of credit: 1.asset based (~40% vol, 25%#), 2.CF (~50%vol, 50%#) 3.Trade find I
introduced, many inv), disclosure dilemma! (patents, NDAs), value idea is in comb w assets, what is their opportunity fin (5%vol,12%#), 4.leasing(2.5%,8%)., also firms primar use On-BS-lending: 1.transaction loans (most), 2.wc loans, !safe D & E/naïveE > eq OS fraction!; E & naive risky D/ riskyD or all risky D > interest rate!
cost? 2.screening: vc get many pitches, only inv in handful; 3.syndication: 2 nd opinion, diversify, get invitations, compl
3.term loans, 4.combinations. off-BS-commitm: credit line (fees, pre specified), Loan agreement: specifies princ, mat,
skills&networks. Lead inv (dd, negotiate), followers (capital, exp&nw), synd deals perform better “past succ breeds
pricing, conditions precedent, warranties, covenants. Credit analysis: capacity, character (reputation), own capital,
future succ” > access to better deals cuz they think u have something, better inv choices, good fit co-inv. 4.negotiation:
collateral, ec conditions. ST fin: credit line, uncommit (no legal bind) vs commit (fee on unused+more interest). Total
3variables: party’s outside option, joint value by coop, rule for split surplus. (zopa->more downside prot=inv higher val
cost of loan = i * borrowed + commit fee * unused. Other fees: loan origination fee (charge to initiate loan): 0.5M loan,
accept). 5.deal closing: coord activities, threat to get commit from external parties (fund cond on hire manager, who
3months, 12%(APR), fee 1% > fee=5K on principal, interest payments: 0.5M*(12%/4)=15K. actual i=515K/ 495K-
accept cond on fund), benefit from compet, trust & lt perspective important! Chapter 8: motiv 4 governance: protect inv
1=4.04%, EAR=1.04^4 -1. Compensating balance requirement (up to 10% of loan in non-i-bearing acc): same eg, 10%
(reduce downside risk, push larger upside, conflict of interest, companies’ need 4 guidance (no bus experience, need
cbr-500K*10%=50K set aside-450Kusable. i paym= 15K, firm must pay: 515K-50K = 465K after 3 months, actual i =
mentoring&network). Control structures: voting rights (share class voting, dual-class, non-voting), BoD (small, ep,inv,
3.33%, EAR=14.01%. >80% syndic loans 1 or more fees, they price embedded options (drawdown for credit lines,
indep party for balance), informal control (power of purse inv, personality ep, persuasion both) VC add value or inv in
cancel for term loans) – help screen borrowers. Matter? Inv, employ, default affect. More for low credit rating/unlisted
anticipation of success? When more time spent w ef, flight routes eg=more success, how add value? Mentoring &
firms! Mitigate- multiple lenders!. PE: types: acq sponsor, public listing, corp acq., most in market-based ec. Leveraged
coaching (personal), advising (company), networking (industry), pressuring (company)
Buyouts: eg1 max value: V0=800M, pe firm generates 50%>∆V=400M. V 1=1.2B, 100%D = 400M, so E 1= 800M, pe firm
Lecture 5
owns 50% of E= 400M without inv own funds is max value extractable what is D=450M?, E 1=750M, price decr so sh sell
Credit rationing: want to borrow at eq i, but cant -> market failure? If feature of lr-eq. eg asym info when adv sel or mh. purse, easier termination of inv. Issue shares=dilution, staging can incr success prob in earlier stages. Tranching: offer 50%, what fin position? V0=100M, V1=130M (30% incr by pe), D=50M, E1=80M (-price decr so need to buy 100% E,
Adv sel: bank profits incr with i until safe firms drop out -> then decr., rational to not lend beyond certain i -> unserved specifies amount&share price, 2nd tranche released cond on milestone (automatic, inv), no negotiation. Insider round:
firms are cr in eq. mh: same risk type, diff assets > suc dep on effort (shirk), cant observe, need skin > firms w unsuf pay 50M more), so fin position: 100% os, 30M profit. Trends in Corp Borrowing: bond markets, firms larger, more transp,
old inv, good signal, no new ideas or nw. Outsider round: new inv, bad signal, info asymm, new exp&nw. retention rate:
assets are cr, again rational.> prov ep w col assets fosters ep for founders w no exp. Chapter 1: What? 3 fund princ: high credit qual> less marginal inv. Why? bank credit pro-cyclical, but undrawn credit insures against cap market
inv stake reduc if no reinv. >to estim future return. Insider confl incentives: high val reduc dilution, low val to buy
1.ep recomb of existing resources (conv inv), 2.process inherently uncertain 3.ep = experiment& dynamic flexibilty (org drying. AISD (new loans) pro cyclical, fees important. AISU pro cyclical. TCB is weighted average, smaller than AISD
cheap. Term sheet 1.liquidation stack: seniority inv by series, negotiation largely btwn inv (early push back new if
struct imp 4 incetiv & pivot) Why? ep: money is key & not green (inv impact), inv: returns,diversif ,strategy + share after crisis, higher before. >aisd term loans, <aisd for revolving credit lines. Non-price terms: maturities procycl, higher
shaky). 2.Anti-dilution clauses: down round&flat round – prot inv against paying too high price, specify rule to adj price,
knowledge&expertise.broader ec&societal: market-driven selection system, jobs,innov,growth > is: findings of pos link for non-ig-loans, shorter mat: less mature firms, incr roll-over risk, more debt overhang. Coven: #decr, more for non-ig
complement to downside prot (conv prot against disapp exit, this against disap future rounds) & to pre-emption rights
w tfp, creates most lt g, vc-backed ef higher tfp, more innov, more startups, jobs&income> ef = ec growth! Key: young firms, revolv cred lines retain coven Funding sources: igm: credit lines/liq banks, ob-bs borrow from bond market. Non-
(preserve ownership share, this prot value owned by inv). Full-ratchet prot: re-price first round at new price; weighted-
1.most fail, death is rule,”gazelles”not 2. Vcbacked fail less. How understand? FIRE: fit=matching, search&selection igm: on-bs borrow banks/institute inv. (fund) Liq also banks. Funds issuance vol highly cyclical. Loan purpose: most term
average prot: reprice at PWA= P1*(Sbase+I2/P1)/(Sbase+I2/P2), base can be broad (incl ep shares) or narrow (only inv shares).
chall (network, screen, dd, signal); invest=closingdeal, affect by needs ep&inv, expect firmfuture, marketconditions. loans for transact (acq, M&A, lbo) or corp purp, credit lines/revolving mostly for daily liq management (corp purp). EU vs
Pre-emption rights: right purch new shares to pro rate; right of first refusal: comp can buy shares sold by inv or founders
Ride=path(pivots), jointly grow, requires:learning(company,market,eachother) &governance (decisions?)! US: eu lower i but higher fees (diff compos of tcb), tcb>aisd in eu, vs <in usa. Covenan reduc, institute inv incr = usa
on terms offered by 3rd party. Prot ep clause: duty to participate pro rate: “pay to play”. Fin diff situations: struct down
stagedfinancing,sfexit=returns, when?(timingconstraints),how?(ipo,acq,sale,or closing down). sf: ep:lower fundraising trend. More undrawn cred line, trans lending important. Similar trends, not public debt markets!
round diff: need consent inside sh, keep founders motiv, deal w stock options washing out, find willing outside inv
cost&dilution,but refin risk(internal&external) inv: option value of waiting, more control power of purse. FUEL: focus on Lecture 10
despite neg signal. Turnarounds or washouts: comp lost traction but still valuable assets, inv want to restart proj > sign
inv. Fundam struct: who?(indiv vs fund; own vs raised money; decisions?structures?). Underlying motiv: what want? Fin Bonds: coupon, mat, fv, underwriting fees, discount. Bearer bonds, registered bonds. Unsecured debt (claim to assets
value drop & dilution, conflict btw old&new inv & litigation, executed by insiders or specialized outsiders. Dynamic inv
return vs not. risk tolerance Expertise&network: what contribute? Standing w peers. Logic&style:how operate? logic: not collat), secured debt: -mortgage bonds (property collat), asset-backed bonds (any asset). Tranches: diff classes of
strategies: inv 4 choices: when first inv, reinv?,with who co-inv,split? How structure staging to get good exit? 1.When?
how select comp (location,stage,industry? = fit&invest), style: how interact(ride&exit) .Chapter2:VEM eval, ep:find sec comprising single boond issue, all paid from same cf source. Call feature! Covenants. Repayment: normal, call,
timing of first inv drivers: fin resources, expertise&ability to value comp, risk attitude. 2.reinv? how much? drivers:
weak&strength inv: screening&dd. Based on customer,company,ep. Value prop cells: 1.Need=knowcustomer,wtp? buyin the market, tender off. Call provision: if i falls,call & refinance at lower rate. So lower price for these. So if
portfolio strategy, confidence in venture, interest in sharing os, 3 approaches: never, typically, opportunity-driven. Ep 4
Strong need? 2.Solution =knowproduct, solveneeds,compare alternative, protect idea,iterative process use feedback. yield<coupon: call, price is par, close to price of non-call bond with maturity on call date. yield>coupon: no call,
choices: inv choice, how much money&when, valuation profile(too high early=risk of downround), what exit. Chapter
3.Team=talent scarce ,req skills,motiv,cohesive. Industry cells: 4.Market= bigopportunity?size,growth,adoption, price=equiv non-call bond. Price is capped at par. ytc! Convertible provision: eg fv 1000, conversion ratio 15,
10: debt financing, D=I*(1+r)T. default X<D. lender no benefit if grow beyond repayment, no share in upside. 3
5.Competition=curr&future comp? naturecompet,how differentiate. 6.Network=reputation,accessnetwork,relationships? converting: price=66.67$, so if price stock>66$ you convert, otherwise take 1K. often call & conversion, if issuer wants
dimensions: 1.installment (standard loan) vs revolving credit (draw from line, fee, higher interest), 2.Secured (collateral)
Strategy cells: 7.Sales=howreach cust,distrib/marketing strategies?pricing? 8.Production= call, inv can still convert. Sudden stop risk: high risk for non-ig firms, they issue cll bonds and exercise call option often,
vs unsecured credit (trust), 3.personal (own capacity be4 company is bankable, liable) vs corporate credit (limited
efficiency,operation,activities(milestones). 9.Organization=role of founders, 2 motives: 1.cost saving motive, i declines. 2.reduce rollover risk, exposure to sudden stop. – agency conflict: cost is
liability). elem of debt contract: amount, maturity, cost (interest rate, fees), collateral (recourse loans=lender can seize
governancestruct,talentstrategy.>Attractiveness:value,scale,growth. Competadv: borne by sh. Paper: contract mat 10y, effective 6y. moneyness: when in the money, firms call bonds ig instant, non-ig
assets not pledged as collateral), covenants (legal clauses against misbehavior) -neg cov (prohibit eg paying div b4
access,entrybarriers ,competencies ./marketrisk,techrisk,peoplerisk>decision! For ep: identify weak&strength,reduce still rational. After control for cost saving motiv firm with high rollover risk= higher likelihood of calling. Firms less likely
debt) vs affirmative cov (induce good behaviour, eg targets, limits of fin ratios). Debt vs equity mm: cost of D&E same,
info asym,write bp. For inv: dd, filter, where can add value. to call when call option is out-of-the-money, but! Even when this is, more likely to be called when rollover risk is higher.
but mh & as important! Debt weaker incentives for ep than eq (as lender don’t support company) = higher costs (lender
Lecture 2+3 Lecture 12
req collat, coven,) .2 insights: 1.payoff & risk profiles of D&E depend on their mix; 2. D not neces cheaper than E,
Chapter 2.5: fp = better position for negotiation w inv, predict fin need. 2 horizons, 1.M-LT: growth strategy 2.ST: cash & IPO adv: liquidity, access to capital. Disadv: eq holders dispersed (diff to monitor), many reportig req. Best-effort basis:
depends on proj risk profile. Comparing D&E via 1.transaction costs: time of deal(dd&negot,lowerD), during inv(taxes,
wc management. (WCR>WC – need st loans). wc= equity + LT loans – fixed assets. Wcr = inventories + customercredit no guarantee by underwriter, but tries to sell stock at best possible price -> often all-or-none clause. Firm commitment:
not clear), at repayment(E: organize exit, D: default cost, D cheaper for safe ef) 2.incentives cost: lenders downside
-supplier credit. growth req inv in fixed assets, but wcr also grows (more than profits) -> manage! Also diff btwn wcr and underwriter guarantees to sell all stock at offer price. Auction IPO: selling new issues directly to public, underwriter
prot, but no upside benefit high exit – X>D, for SH X>>D. why banks no lend startups: no stable business model,
wc via st borrowing = wcm. Chapter 3:1.fin proj -> 2.fin plan -> 3.business plan. early stage=detailed, short horizon, takes bids.>winning auction price that satisfies #shares, if demand>supply, higher bids get full, pro rata to at winning
revenues, profits, collateral. They lend to: safe, predictable cf, liquid assets. Banks criteria lending: prob default,
later stage= less freq, lt-projections. Fin proj: reflect bus model, bus plan, and ep. Limitations: inacc, snel outdated, price bidders. Lead underwriter (responsible 4 managing), syndicate (jointly underwrite& distribute). SEC filings:
recovery rate if default, chargeable interest rate -> all bad for ef. Who lends to ef? Alternative debt sources: early stage
optimistic. structure: income statement, balance sheet, cash flow statement. 4 sources of info: primary data (market), registration statement, preliminary prospectus (circulated to inv to get sense of price), final prospectus (all details, offer
= informal loans (personal, family&friends), later=company bankable. Other: trade credit, discounting&factoring,
secondary data (filtered&prepared), learn from similar companies, use own past. 5steps, 1.timeline: price, #shares). Underwriter compensation can be discount on buying shares. Valuation: road show (travel around to
leasing. Venture debt: lend money, next round funding to repay, adv: lenders free ride on expertise eq inv, repayment
milestones,horizon,account detail(timebtwnmilestones). 2.estimate revenues: rev = P*Q, unit?(cust,prod,contract), net largest inv explaining price) or book building (based on customer’s interest). Spread: fee to underwriters (%of issue
from fundraising, high interest rates, warrant incr prof inc success ef.
average price (price distribution!), quantity top down=demand side, secondary data (marketsize,share,) good when price). Incentive to not get price wrong (underwriting risk)- 75% IPOs have incr in share price on first day. Over-
Lecture 6
share well-defined, bad when large,not exist. bottomup= supplyside, companydata, req estim growthrate. Crosscheck: allotment Allocation – option allows underwriter to issue more stock at offer price if high demand. Eg 10M shares, but
Chapter 11: exit is crucial goal 4 inv (returns,liquidity event) timing > market conditions, planning. IPO(value=acq in
Estimated market share S = C/M (c-bottomup,m-topdown). Case1(s<5%): market broadly, bottomupconservative?, sold 11M > 1M short sell, if price incr underwrite don’t want to buy on market, take option & buy shares back at original
usa), acq (most eu&usa, value most eu), sale = upside condition, or closing down = downside condition. Exit is a
case2(<25%)realistic? Case3(>50%)largestplayer? Case4(>100%) market no support growthstrategy,imposs. 3.estim IPO price from comp. price decr buy back on market to cover short. Lockup: prevents existing sh from selling for period.
decision (continuation, opportunity cost, real options framework) timing depends: preferences inv&ep, expect comp,
costs: cogs(bu-lookatinputs,td-lookatcompet, direct&var),opex(indirect,salaries & stockoptions ,fixed) ,capex(non IPO puzzles: underwriting risk -> underpricing. Underwriters benefit, pre-IPO sh bear costs. Ipo returns cant be earned
time market- cant postpone indefinitely! Chapter 12: financial flows in vc 2 phases (cycle) 1.investment: money from inv
recc),non-opex(recur:intest,reval, d&a, remaincompet) development costs(one-off,creation of venture, by all inv. When D>S, alloc is rationed > winners curse. eg: 2000shares, 80% success -> 20% profit but 16 to 1. 20%
to comp (cap lp to fund, management fee to vc, eq inv fund to comp) 2. Return: money comp to inv & vc firm (exit to
relativelyrecurring 4 innovativecompanies). 4.build fin model: is(proj rev&cost timing&growth) ,bs,cfs. Testingfp(sa), fail> -5%. So return success: 2000/16 * price * return = 375. Fail: price * 2000 * -5% = -1500. -> 0.8*375 + 0.2 * -1500
fund, carried interest fund ot vc, fund distribution to lp) LPs: 1.asset alloc choice – howmuch to ef? low b2m of ef=low
5.formulate fp: how fin attractive & what fin resources need? Chapter 4: valuation: %of eq to inv? Estim exp returns. = 0$!. Number of issues highly cyclical: good times = markets flood, bad times = dry. Cost of IPO: relatively high fee,
returns, small size of ef= high returns – conflict 2.choice of building gp portfolio- vc market= illiquid& segmented: diff to
Val=Inv/Ownership(F) – VPOST=I/FINV , VPOST = VPRE+I. formulas: VPOST = P x SPOST; VPRE = P x SPRE; I = P x SINV; SPOST = SPRE + not sensitive to issue size (underw charges less = signal bad quality?) total costs decrease with size (IPO, SEO, bonds,
inv in GP (raise funds every few y, tiny 2ndary markets, gatekeepers complicate access). Fundraising cycle: gp go back
SINV; FPRE = SPRE/SPOST; FINV=SINV/SPOST stock options pool(sop): SPOST=SPRE+SINV+SSOP; VPRE=P x (SPRE + SSOP); FPRE=SPRE/SPOST; …) ipo: often long-run underperformance. SEO: new shares, raise add eq, same steps as ipo but price already exists.
so performance pressure to LPs. GP capital calls to LPs-liquid&ready-trust!> LPA rules: 1.investment restrict (on
FINV=SINV/SPOST; FSOP=SSOP/SPOST. Multiple rounds: new valuation: VPOST(r) = I(r)/Fr(r) and: VPRE(r)=VPOST(r)-I(r), SPOST(r) = SPOST(r- Primary shares or secondary (sold by existing sh), cash offer (at large) & rights offer (only to existing sh, protect from
exposure, cross-fund, specific strategy-no drift!) 2.management rules: govern distrib to lp, recycling limit (reinvest
1)+Sr(r), I(r)=P(r) * S(r), VPOST(r)=P(r) * SPOST(r) , VPRE=P(r) x SPOST(r-1), Fi(r)= Si(r)/SPOST(r). Dilution: Fi(r)=Fi(r-1) x (1-Fr(r)). underpricing). Exercise: if price after issue>issue price, sh will exercise rights. Price reaction seo: decline, rational: adv
profits early). 3.partner activity restrict: (pers inv & cherry picking, activity&time commit, separation procedure for
Inv returns: 1.realized, XINV=FINV*X, 2.expected. ef: 1. Extreme risk,skewed; 2.liq risk, illiquid. Inv risk-tolerant. 3 sel: if you believe comp is doing well, you would issue debt (upside), eq not. Issuance cost: around 5% underwriting fees
leavers, key man rule). GP compensation: 2/20-cover operat costs& give incentiv, man fee: quarterly, level & basis
measures: 1.NPV=XINV/(1+d)T-I, d diff to find. 2. CCM=XINV/I 3.IRR, I*(1+IRR)T= XINV. -> comb: CCM=(1+IRR)T, bad for (7% ipo), still expensive. Rights offers < costs than cash offers.
(commit or inv capital) > incentive raise large funds. Carried int: to align incentives lp&gp, + hurdle, paid eu wf (when Guest Lecture
comp inv w diff horizons. NPV best,IRR good, CCM simple&usedalot. 6insights: 1.given val, +exit=+inv return,2.given fund liq) or us wf (each exit event), % of profits= exit-contr cap + man fees. VC firms: manage lp, firm, network, source Coll features: asset eligibility, ownership, priority & seniority, enforceability. Collaterall value, liquidity, durability, redeployability.
exit, +val=-return. -for inv. For ep: 3.given val, +exit=+return, 4.given exit, +val=+return. 5.given req return, +exp deals. unanimity model for inv decisions. Fundraising key, market conditions. Success builds reputation 4 future. Supply: benefits: mitigate risk, reduce LGD, reduce adv sel & mh, discipline effect borrow behavior, capital relief. Costs: val & monitor,
exit=+val. 6.given exp exit, +req return=-val. Determ of val: opportunity itself, market, dealcompet, inv quality. Alternatives (evergreen – no target exit date, listed vc- raise on public markets, captive- partly owned by other funds, enforcement risk (eg no strong legal environm). Demand: benefits: easy access to credit, signal creditworthiness, improve loan terms.
Founder agr: split equity, keep people commit, +futurevalue=most incentiv. 5 issues: who?, salaries/compens, eg banks). Inv strategy: 1.only certain industries (dynamic progress-tech,deregul; moderate capital, scalability) Costs: asset encumbrance (unavailable), risk of losing assets, legal & transaction costs. Influence factors: Supply: cap req, property
obl&rights, ownership alloc, contingencies= more shares/rights if targets met. Chapter 5: why diff: uncertainty, lack 2.proximity (interactions & knowledge of environ key, but more openness to long distance). 3.early vs late stage rights for enforcement, market conditions. Demand: availability of assets, of info on verifiable income/ credit record, keep control rights
relev info, asym info, inadeq acc for intangibleassets. Trade-off simple v complex. 4 ways: 1.VCM: VPOST = Xe/(1+ρ)T; Returns: 1.company level, 2.to vc fund(with fees), 3.to LPs(net fees). Diff assess returns: data availability (opaque)& & flexibility. If collat incr debt capacity, why not everyone use? Eg neg shock decr asset price-coll value2-borrowing cap2-firm inv drop-
VPRE=VPOST-I; FINV=I/VPOST. For multiple periods: VPOST(r)=VPRE(1+r)/CCM e; CCMe=(1+ρ)T(r+1); VPRE(r)=VPOST(r)-I(r); ec act slow-feedbacj loop… Misallocation: 1.credit alloc distort. 2.collat prevent firms from divesting assets.
data quality (only good returns, unreported val report opportunistic). Company-level: highly skewed, reflects freq
FINV(r)=I(r)/VPOST(r). req estim I,T,X e,ρ: I from fp, T know market,often diff for inv, X e not statistical but if successful Exercises
failures. Fundlevel: better quality data no fees, overall: top quartile returns good, below top are low for risk taken . 1: Management fee every year, carried interest start when cum profits positive. Distribution to LP = exit proceeds-
outcome (dcf, comparable), req RoR ρ: riskless ror, fin risk-premium, illiq premium, failure rate prem, service prem >
Chapter 13: early stage inv: founders (skin), fff (relations, no returns), no exp&nw, struct: pure, no maturity, not a lot, carried int., LP cf= exit proceeds-cap calls-carriedint.
calc failure risk prem? VPOST = Xe(1-z)T/(1+d)T; ρ=(d+z)/(1-z). vcm extend 1.time-varying ρ (risk decr as mature), 2.CCM
no eq. angel inv: wealthy, inv own money. 2 types: savers, former ep. 2 structures: networks (group inv separate), 2: given: inv need=300K; own E=13K; X(success)=1M; X(fail)=150K; success prob=70% r f=5%.-> risky debt+equity:
instead of ρ, CCM e=(1+ρ)T, 3.forecast to next round, push need to estim X e later. 2.DCF not used, uncertainty. diff w
funds(pool capital inv jointly, profess managers). Motivation: fin, but also give back, learn, pool expertise& knowledge D=300K, E=13K, req D at maturity=D(1+r f)=315K; req E= 13650, a) what will be i on loan? D(fail)= X(fail)= 150K,
vcm: horizon= stable growth, FCF, terminal value main comp, disc rate only fin elem. 3.Comparables inv comp
vs lone wolfs. Corporate inv: strategic on behalf of companies, why? new tech, relation innov, influence compet D(success)= (reqD – (1-prob)* D (fail)) /prob -> D(s)= (315K-(1-0.7)*150K)/0.7= 385.714 i = (D(s)/D)-1 =
=similardeal inv, diff(what is similar?,lack of info). Or exit compar=look at similar mature companies values. 2 choices:
dynamics (kill acq). Relevant: 1.transaction costs: high-integrate,hire full time/acq low-market trans (hire by hour, (385K/300K)-1 = 28.57%. b) min E stake in return for 13K inv? E(success)= X(s)-D(s)= 615K, E(f)=0, E e=0.7*E(s)
1.set of compar comp: chall1 identify comp w similar cf struct,business risk,dependency on market. Chall2(find what
partnerships,alliances) 2.asset specificity: specialized- integrate, fungible-market trans. Corp inv cyclical (if comp does +0.3*E(f)=430K min E fraction = reqE/Ee = 3.17%. c) VPRE? VPOST(net)= E/minEfraq = 13K/3.17%= 410K. V POST(gross)=
should be compar comp), 2. Choose compar metric (M) def in terms of performance ratio (PM): M=X/PM, val is then:
bad, venture part first budget cuts), motiv by strategic gains. 1-high,2-low: alliance, 1-low,2-low: customer/ supplier 410K+300K=710K. VPRE= VPOST(gross)-D-E= 710K-300K-13K=397K
Xe=PMe*Mcomp.,metric based on earnings, CF, revenues, operating measures. Caveats: measure consistently, look at
relation, 1-high,2-high: jv/acq, 1-low,2-high: strategic investment – intermediate solution. 3.benefits market: give price 3:
whole distribution, consider that multiples reflect market val & prone to herding.exit vs inv comparables: diff refer
information. -> Strat inv: reduc trans costs & holdup, still have price info, it is temporary by nature. Crowdfunding:
(public vs private), val criteria(exp perf vs actual val), treatment of val(direct vs derivative) model uncertainty:
1.donations&rewards, 2.lending: diff for startups (no verifiable info), limited size loans, low interest rates but trans fees,
1.scenario anal 2.simulations (chose param,contin uncertainty) 3.profex=prob of each stage,calc exp return backwards,
used more by SMEs. 3.equity: slow due to regulations, complex (voting rights), usually pool votes as 1 sh. lending
exit outcomes (vcm).
platforms dominate: simplicity (no os rights, sh meetings), predictable (easy estim if comp is safe enough to return, no
Lecture 4
valuing-equity). EP face 2 tradeoffs: 1.info disclosure (less info = less inv, but too much is risk of imitation) 2. Learning
Chapter 5.2: no interim action, contracts only made conditional on proj success, IC: p H × Rb ≥ pL × Rb + B; PC: pH × (R –
vs exposure (learn from feedback, but is public so inv & compet learn about weaknesses). Incr viable for SMEs & retail
Rb) ≥ I – A; no int act, contracts condit on imperfect signal, IC: σHH × Rb ≥ σLH × Rb + B; PC: pH × R – σHH × Rb ≥ I – A.
proj. Retention rate: To keep OS pro rata, need to buy fraction equal to fraction you already own: F 1=F2
interim action, cond on proj success, w ep control, IC: p H × Rb ≥ pL × Rb + B; PC: pH × (R – Rb) ≥ I – A. w inv control, IC: pH
Lecture 7
× Rb ≥ pL × Rb + B; PC: (pH + 𝜏) × (R – Rb) ≥ I – A. interim action, cond on imperfect signal, cond inv control, IC: σ HH × Rb
Mature firms diff ef: growth=economy, established margins, debt capacity, cash, inorganic growth. In eu: most firms
– σHL × 𝛾 ≥ σLH × Rb – σLL × 𝛾 + B; PC: (pH + σHL × 𝜏) × R – σHH × Rb ≥ I – A; uncond inv control, IC: σHH × Rb ≥ σLH × Rb + B; small/micro(>50% value added,>99% of firms), very small amount expect growth, around half moderate, ¼ same, 10%
PC: (pH + 𝜏) × R – σHH × Rb ≥ I – A. with interim action; ep loses, inv wins. If ep not constrained she prefers to keep smaller. value driver: operations (cf, exp g), managing non-operat assets, financial- manage mix of D&E, choose optimal
control, and not implement. If ep is constrained it can be good to transfer control to inv, who will implement (ez funding funding instrument. Top 3 fin instrum: credit lines, leasing, bank loans. use: fixed inv, wc. Mne: debt~20% ,moderate g.
access), but irl only when firm underperformes: damage control: access easier if ep controls int action. Or contingent diff eu & usa: bank loans vs debt securities (bonds). Chapter Cap Struct: fin policies (cap struct or div policies) affect
control rights: access to fin only ez when inv take control when low effort signals. Chapter 6: term sheet=basis4: corp firm value (in perf markets) but arbitrage! eg trade credit, income tax liabilities. In imperfect markets: choices can VPOST=X*prob(s)/(1+d)^(time2proto+time2market+time2scale); or if multiple rounds: V POST(r2)>see previous; VPOST(r1)=
charter, inv rights agr&purchase agr, founder employment agr. Functions: govern rights,obl,rewards; shape incentives; change future cf. eg taxes (inv pay higher taxes on priv interest income than div). high tax inv & firm (mature)- prefer VPRE(r2)*prob(s)/ (1+d)^(timestagesleft); P/share=V PRE/S;New shares=I/P; OS=Sx/total S
clarify expect, allocate risk; specify rights&duties to 3rds. Specify: cf rights, control rights, compensation&employment, debt; high tax inv & low firm(startup – prefer equity! Low tax inv always prefer debt. Too much debt-bankruptcy & 4: (week2) value=I/%req, osI decr: F1*(1-fraqInv2) = F2, eg Inv has 12.5%, new Inv for 20%-> new OS= 12.5%*0.8
other rights (antidilution,..). contracts incomplete, so ts contingent contracting(milestones: elusive(when prototype distress costs inc default-favors equity. Tradeoff theory: too much debt, suffer inc trouble, too little debt, too much tax. 5: given: X at t(2): 10M, I need t(0): 1M, S Ft(0):3M. scenario1: I need t(1): 1M, P t(1): 2. scenario2: I need t(2): 2M, P t(2):
finished?), no pivoting/short-termism) -> clauses w verifiable actions vs clauses alloc decision rights. CF rights for Debt pos operat effects: force manager to pay out to inv, reduces fcf (manager perks), reduces theft, reduces 0.25. a&b: 2 offers VW: 2M at VPOST: 5M, XY: 1M at VPRE: 3M: find… for funding round only t(0). c&d: VW offer +
downside protection & incentivize-convertibles > give preferred terms(pt). pt = I+div = I+I*D*T. conv in common stock stakeholder holdup power – agency conflicts favor debt. But also costs: bondholder expropriation by manager: scenario1, vw + scenario2. e&f: same for XY offer. g: scenario1 75%, which offer best for AB(founder), h: now 25%
if cf>pt or FINV*X>pt, conversion threshold is CT = pt/FINV. Multiple liq preference: pt=M*I+DIV, ct is higher: scenario1. Solutions: with at t(0): VPRE=VPOST-I, P=VPRE/SF, FF=VPRE/VPOST. With at t(1): I1 = I1(need)-(I0-I0(need)), New_Inv
CTM=(M*I+DIV)/FINV >CT. participating preferred: if X>pt, inv gets: CFINV=pt+(X-pt)*FINV, if X<pt, inv gets X. part pref w 1.increase risk of proj, 2.issue bonds of higher quality. Solution: natural risk-averse, covenants, conversion. Other share (FI)= (I1/P1)/(SF+(I0/P0)+(I1/P1), FF,1=FF,0*(1-FI), VPOST=I1/FI, VPRE=VPOST-I1. at t(2): Value SF,2= FF,1*X2,
cap, for incent ep, drop in cf smooth. Why preferred securities? Incentives founders, screening, align expect. problem of leverage: underinvestment/ debt overhang – too high debt prevent manag of distressed firms inv in pos NPV
Compens&employ: 2 principles: defer pay, incentives for lt value creation. Stock! Vested (earned back): time vesting proj. if insiders knw proj great they prefer D (more upside), outsiders only buy E at low price (inside info, adv sel), leads
(cliff=min time) or performance vesting ,often stock options. control voting rights, BoD, contractual rights, informal
control. Inv liquidity redemption rights (reasonably long), tag-along(along w funders), drag-along(force sh), to pecking order. Also trans costs, behavior issues (inv like div). dynamic cap struct? diff
registration&piggy-back (force listing) other clauses: information rights, legal, keyman insurance, representationt& Lecture 8
warranties, negotiation. Upside-downside trade-off can give inv diff pieces of the cake (less/more ownership shares vs Banks: alloc cap, raise st debt - distr as lt loans, access to payment system. Act: liq/pay services, asset&matur transf,,
less/more downside protection). Convertible notes autom conv into stock at first qualif round, into same security, conv risk manag, mitigate info frict. ROE: gdp g, npl ratio, cost-2-income, bm, market concent, st rates, yield curve. Profit: net Other: VPOST=X*prob(s)/(1+d)^t; D&E: reqD=D(1+safe RoR), reqE; Debt value= D(1+i); Esuc(net debt)=Xs-Dvalue; Efail(net
rate predetermined, fixed mat <2y. Conv rate: PCN=(1-DIS)*PINV; ownership: SCN= ICN/PCN; val cap (no paying for success): interest margin, npl, regulation, bm, c2income. #banks decr-> consolid. Banks liabil: 1.households, 2.NFC, 3.interbank debt)=Xf-Dvalue > Exp E(netdebt)= probs*Es…; Eq OS fraction= Exp E(netdebt)/reqE. V POST (netdebt)= E/EqOS fraction,
PCN = min(VCAP/SPRE, (1-DIS)*PINV), new inv: PINV = VPRE/(SPRE+SCN). Chapter 7: deals have hard (val, ts) & soft elements deposits. Asset side: 1.households, 2.nfcs (closer to 1!), 3.fin corp. NFC funding: most to manufact., then real estate, VPOST(grossdebt)=VPOST(net)+D; VPRE= VPOST(gross)-E. for E&riskyD, All risky -> i =/ safe RoR: reqD = prob(f)*(D(1+i)+X f) >
(buffer, eg interest in venture?) 5 steps in structuring: 1.fundraising: prepare, engage inv, execute (coldcall vs be wholesale, retail trade, add services. Types of credit: 1.asset based (~40% vol, 25%#), 2.CF (~50%vol, 50%#) 3.Trade find I
introduced, many inv), disclosure dilemma! (patents, NDAs), value idea is in comb w assets, what is their opportunity fin (5%vol,12%#), 4.leasing(2.5%,8%)., also firms primar use On-BS-lending: 1.transaction loans (most), 2.wc loans, !safe D & E/naïveE > eq OS fraction!; E & naive risky D/ riskyD or all risky D > interest rate!
cost? 2.screening: vc get many pitches, only inv in handful; 3.syndication: 2 nd opinion, diversify, get invitations, compl
3.term loans, 4.combinations. off-BS-commitm: credit line (fees, pre specified), Loan agreement: specifies princ, mat,
skills&networks. Lead inv (dd, negotiate), followers (capital, exp&nw), synd deals perform better “past succ breeds
pricing, conditions precedent, warranties, covenants. Credit analysis: capacity, character (reputation), own capital,
future succ” > access to better deals cuz they think u have something, better inv choices, good fit co-inv. 4.negotiation:
collateral, ec conditions. ST fin: credit line, uncommit (no legal bind) vs commit (fee on unused+more interest). Total
3variables: party’s outside option, joint value by coop, rule for split surplus. (zopa->more downside prot=inv higher val
cost of loan = i * borrowed + commit fee * unused. Other fees: loan origination fee (charge to initiate loan): 0.5M loan,
accept). 5.deal closing: coord activities, threat to get commit from external parties (fund cond on hire manager, who
3months, 12%(APR), fee 1% > fee=5K on principal, interest payments: 0.5M*(12%/4)=15K. actual i=515K/ 495K-
accept cond on fund), benefit from compet, trust & lt perspective important! Chapter 8: motiv 4 governance: protect inv
1=4.04%, EAR=1.04^4 -1. Compensating balance requirement (up to 10% of loan in non-i-bearing acc): same eg, 10%
(reduce downside risk, push larger upside, conflict of interest, companies’ need 4 guidance (no bus experience, need
cbr-500K*10%=50K set aside-450Kusable. i paym= 15K, firm must pay: 515K-50K = 465K after 3 months, actual i =
mentoring&network). Control structures: voting rights (share class voting, dual-class, non-voting), BoD (small, ep,inv,
3.33%, EAR=14.01%. >80% syndic loans 1 or more fees, they price embedded options (drawdown for credit lines,
indep party for balance), informal control (power of purse inv, personality ep, persuasion both) VC add value or inv in
cancel for term loans) – help screen borrowers. Matter? Inv, employ, default affect. More for low credit rating/unlisted
anticipation of success? When more time spent w ef, flight routes eg=more success, how add value? Mentoring &
firms! Mitigate- multiple lenders!. PE: types: acq sponsor, public listing, corp acq., most in market-based ec. Leveraged
coaching (personal), advising (company), networking (industry), pressuring (company)
Buyouts: eg1 max value: V0=800M, pe firm generates 50%>∆V=400M. V 1=1.2B, 100%D = 400M, so E 1= 800M, pe firm
Lecture 5
owns 50% of E= 400M without inv own funds is max value extractable what is D=450M?, E 1=750M, price decr so sh sell
