Moneyvaluation.Forexample, if an

investoreceivesone-thirdof thecompany'sequityfora $1

millioninvestmentth, epost-monevyaluationis$3million(3x

$1 million)andthepre-moneyvaluationis$2million(the$3

millionpost-moneyvaluationminusthe$1 millioninvestment).

Todeterminethevalueof theemergingbusiness, venture

Capitalistswill conductanin-depthfinancialanalysis.

(43) """""""'''''''''''' Formanyearly-stagebusinessesfi,nancial

Projectionsaresouncertainthatcurrentconditionsin the

Venturemarketmaybethemostimportantsinglefactorin

Determiningvaluation.Forexample, if moststart-up

Businesses in thesoftwareindustryarereceivingfirst-round

pre-moneyvaluationsof approximately $2 millionata given

Time,thenegotiationfor aparticularinvestment mayfocusnot

Ontheprecisefinancialforecastfortheparticularbusiness, but

Onthewaysin whichthatparticularbusinessdiffersfromthe

'typical'softwarestart-up.(44)..

Anothercriticalpartof theanalysiswill bethelikelyneedfor,

Andsizeof,prospectiveroundsof financingthatmaybe

requiredbeforetheventurecapitalistis ableto 'cashout' its

investment(.45) .......................

Oncevaluationis establishedth, epricepersharecanbe

Calculate(d4.6) Equitoywnershtiphatis

Assignedto or includedinthepre-moneyvaluationdoesnot

Dilutetheequityinterestreceivedbytheventurecapitalist.

Thereforeonepointof negotiationthatshouldbeaddressedby

Companiesis whetherrightsto acquirestockthatexistor are

Createdat thetimeof investment, includingsharesreserved

For employeestockoptionsorsharesissuableuponexerciseof

Warrants,areto beconsideredoutstandingbeforethe

investmenotraftertheinvestment(.47) """""" ......

Attimes,valuationnegotiationsmayreachanimpasse.In

Orderto bridgeagapbetweentheentrepreneuarndinvestor,

Performance-baseadjustmenmt echanismms aybe

Employed. (48) Thepracticaleffectof these

Mechanismsis oftento shiftinvestment riskfromtheventure

Capitalisto theentrepreneur.

A Key distinguishing factors include experience and depth of the management

Team, state and proprietary nature of the technology, competitive environment

And similar factors.

B These devices, which adjust the number of shares received by the investor

(through the use of warrants, conversion price adjustments or other means),

Operate only when the company achieves (or fails to achieve) a preset financial

Or business milestone.

C In the former case, dilution is borne solely by the founders, and in the latter

Case, dilution is borne ratably by the founders and the venture capital investors.

D Once a venture capitalist makes a preliminary decision to invest in an emerging

Business, the parties must negotiate the terms of the investment.

E Continuing with the above example, if the company has 500,000 shares of

Common stock outstanding prior to the investment, the venture capitalist will pay

$4 per common stock equivalent share and receive 250,000 shares for its $1

Date: 2015-12-11; view: 699