FVC2046. Negotiating a VC Equity Stake: the VC Method in Early Stage Valuation

The Venture Capital Method is a common approach to valuation for negotiating new stakes in portfolio company deals. One of the challenges of the Venture Capital method is how to reconcile the "Target Returns" that VC investors aspire to in entering into a new deal (typically 30% or above) with the "Required Returns" that investors expect to achieve based on the historical evidence of venture capital fund returns. In this presentation we show some practical examples of how, given the (1) time horizon, (2) projected exit value for the deal; (3) expected risk of failure and (4) expected dilution percentage over the term to exit, an investor can determine the ownership percentage that needs to be negotiated in order to achieve its required return in a specific deal.

Learning Objectives:

• Illustrate how to set up a model under the Venture Capital Method to determine the target equity valuation and ownership percentage in a venture capital deal.
• Determine how to factor into the model expectations on the company's probability of success and equity dilution.
• Analyze the relationship between Target Returns and Required Returns under the VC method.
• Demonstrate the interaction between time to exit, valuation at exit, and returns in evaluating performance for a VC deal.