Valuation: Venture Capital Method
[Enter Company Name]
Entrepreneur's Assumptions
3 Number of years until your projected harvest date
$90,000,000 Harvest-date value of the venture assuming success
60.00% annual hurdle rate Customary discount rates for Seed to Start-up ventures
are 50-100% per year. Discount rates are lower for more established
ventures, declining gradually to tares of 20-30% for expansion-stage
financing. The discount rate for turnaround financing is comparable to that
of a start-up.
$21,972,656 Post-money valuation of the venture
$7,159,376 Amount of financing required
32.58% Fraction of harvest-date equity needed to justify the financing.
Venture Capital Method (Single Round Financing)
Investor's Assumptions
4 Number of years until your projected harvest date
$81,000,000 Harvest-date value of the venture assuming success
60.00% annual hurdle rate Customary discount rates for Seed to Start-up ventures
are 50-100% per year. Discount rates are lower for more established
$12,359,619 Post-money valuation of the venture
$8,008,895 Amount of financing required
64.80% Fraction of harvest-date equity needed to justify the financing.
Years to complete, success-scenario harvest value, and amount of investment as an irrevocable commitment are from figure
4. The hurdle rate is selected by the venture capitalist based on judgment. The entrepreneur's initial valuation can be
determined by changing the assumed hurdle rate to 18 percent in the first panel.
Venture Capital Method

Staging
Staged Investment Decision Model
Complete Success
Fund Stage 4:
Success
Boat Owners
Success with
Fund Stage 3:
Success
Three Groups
Marine OEM
Success with Two
Fund Stage 2:
Success Failure Stop Investing
Groups
Aircraft Owners
Fund Stage 1: Success with One
Failure Stop Investing
Avionics OEM Group
Failure Abandon Failure
Financing:
Round 1 Round 2 Round 3 Round 4 Harvest
Staged investment model of aircraft and marine navigation software venture. The aircraft market is pursued before the marine market, and OEM sales are
pursued in each market before end users. Options to invest in development of new markets are exercised only if the prior effort was successful.

Figure 4
Panel (a)
Entrepreneur's Assumptions - Financial Model Based on Business Plan
Conditional Scenario
Cash Flows Probabilities Round One Round Two Round Three Round Four
Harvest Value Forecast
Success with All Groups $90,000,000 20% $18,000,000 $27,692,308 $32,727,273 $51,428,571
Success with Three Groups $60,000,000 15% $9,000,000 $13,846,154 $16,363,636 $25,714,286
Success with Two Groups $25,000,000 20% $5,000,000 $7,692,308 $9,090,909
Success with One Group $15,000,000 10% $1,500,000 $2,307,692
Failure $0 35% $0
Expected Cash Flow at Harvest $33,500,000 $51,538,462 $58,181,818 $77,142,857
Standard Deviation of Cash Flows $34,427,460 $29,896,270 $27,738,448 $14,846,150
Investment
Burn Rate per Year $2,000,000 $3,000,000 $2,500,000 $3,000,000
Years 1 0.5 1 0.5
Total Investment $7,500,000
Present Value of Unconditional Total Investment $7,159,376
Present Value of Expected Investment $4,709,907
Panel (b)
Investor's Assumptions - Financial Model Based on Business Plan
Conditional Scenario
Cash Flows Probabilities Round One Round Two Round Three Round Four
Harvest Value Forecast
Success with All Groups $81,000,000 18% $14,580,000 $22,430,769 $31,695,652 $48,600,000
Success with Three Groups $54,000,000 12% $6,480,000 $9,969,231 $14,086,957 $21,600,000
Success with Two Groups $22,500,000 16% $3,600,000 $5,538,462 $7,826,087
Success with One Group $13,500,000 8% $1,080,000 $1,661,538
Failure $0 46% $0
Expected Cash Flow at Harvest $25,740,000 $39,600,000 $53,608,696 $70,200,000
Standard Deviation of Cash Flows $31,047,261 $28,371,817 $25,104,545 $13,227,245
Investment
Burn Rate per Year $1,800,000 $2,500,000 $2,000,000 $2,500,000
Years 1.25 1 1.25 0.5
Total Investment $8,500,000
Present Value of Unconditional Total Investment $8,008,895
Present Value of Expected Investment $4,915,176
Figure 4 Panel (a) shows the entrepreneur's expectations of harvest cash flows conditional on each scenario and the entrepreneur's belief of the probability of
each scenario. These inputs are used to compute the expected harvest cash flow and standard deviation of cash flows at the time of each investment round.
The lower portion of the panel shows the entrepreneur's assumed burn rate from each stage and the entrepreneur's expectation of the duration of the stage.
The information is used to compute the total investment, present value of the total as an unconditional investment, and present value of expected investment.
Panel (b) shows the same information based on the investor's beliefs.

Figure 5
Valuation of Unstaged Investment - Venture Capital Investor
Entrepreneur's Investor's
Assumptions Assumptions
Market and Contract Data
Annual Risk-free Rate 4.0% 4.0%
Annual Market Rate 10.0% 10.0%
Standard Deviation of Market 20.0% 20.0%
General Partner's Annual Fee 2.5% 2.5%
General Partner's Carried Interest 20.0% 20.0%
Correlation of Venture with Market 0.25 0.25
Single-Stage Investment and Timing
Total Investment Committed $7,159,376 $8,008,895
Years to Harvest 3.00 4.00
Investor Valuation of Harvest Cash Flows
Expected Harvest Value $33,500,000 $25,740,000
Standard Deviation of Harvest Cash Flows $34,427,460 $31,047,261
Value of Venture at Time of Investment $18,794,406 $12,456,062
Investor's Required Rate of Return
Annualized VC Cost of Capital 21.25% 19.90%
Investor Ownership Requirement
Ownership Requirement
Round 1 Investment $7,159,376
$7 159 376 $8,008,895
$8 008 895
Value at Round 1 $18,794,406 $12,456,062
Share of Incremental Value Required 38.09% 64.30%
Valuation of Entrepreneur's Interest in Venture
Entrepreneur's Wealth
Entrepreneur's Wealth in Market $1,700,000 $1,600,000
Valuation of Harvest Cash Flows
Venture (Entrepreneur's Financial Claim)
Expected Harvest Value $20,738,805 $9,189,910
Standard Deviation of Venture Cash Flows $21,312,966 $11,084,752
Market
Expected Harvest Value $2,262,700 $2,342,560
Standard Deviation of Market Cash Flows $588,897 $640,000
Portfolio
Expected Portfolio Value $23,001,505 $11,532,470
Standard Deviation of Portfolio Cash Flows $21,335,812 $11,119,175
Value of Entrepreneur's Portfolio $9,161,414 $2,866,299
Value to Investment in Market $1,700,000 $1,600,000
Value of Entrepreneur's Interest in Venture $7,461,414 $1,266,299
Entrepreneur's Required Rate of Return
Annualized Portfolio Cost of Capital 35.91% 41.63%
Annualized Venture Cost of Capital 40.60% 64.13%
Figure 5 Single-stage contract based on CAPM-based valuation. Valuations are based on the assumption that
all necessary capital to achieve success is committed at the outset and that approaching the venture without
staging does not affect conditional cash flows of each scenario outcome, the probability of the outcome or timing.

Figure 6
Valuation Template 8
Valuation of Staged Investment - Venture Capital Investor
Entrepreneur's Investor's
Market and Contract Data Assumptions Assumptions
Annual Risk-free Rate 4.0% 4.0%
Annual Market Rate 10.0% 10.0%
Standard Deviation of Market 20.0% 20.0%
General Partner's Annual Fee 2.5% 2.5%
General Partner's Carried Interest 20.0% 20.0%
Correlation of Venture with Market 0.25 0.25
Staged Investment Timing and Burn Rates
Round 1 - Aircraft OEM
Burn Rate per Year $2,000,000 $1,800,000
Years to Complete 1.00 1.25
Round 2 - Aircraft Owners
Probability of Stage 1 Success 65% 54%
Burn Rate per Year $3,000,000 $2,500,000
Years to Complete 0.50 1.00
Round 3 - Marine OEM
Cumulative Probability of Stage 2 Success 55% 46%
Burn Rate per Year $2,500,000 $2,000,000
Years to Complete 1.00 1.25
Round 4 - Boat Owners
Cumulative Probability of Stage 3 Success 35% 30%
Burn Rate per Year $3,000,000 $2,500,000
Years to Complete 0.50 0.50
Valuation of Harvest Cash Flows
Round 4
Expected Harvest Value $77,142,857 $70,200,000
Standard Deviation of Harvest Cash Flows $14,846,150 $13,227,245
Value to Investor at Time of Investment $59,211,238 $53,893,465
Round 3
Expected Harvest Value $58,181,818 $53,608,696
Standard Deviation of Harvest Cash Flows $27,738,448 $25,104,545
Value to Investor at Time of Investment $40,431,577 $36,534,155
Round 2
Expected Harvest Value $51,538,462 $39,600,000
Standard Deviation of Harvest Cash Flows $29,896,270 $28,371,817
Value to Investor at Time of Investment $33,958,352 $23,969,483
Round 1
Expected Harvest Value $33,500,000 $25,740,000
Standard Deviation of Harvest Cash Flows $34,427,460 $31,047,261
Value of Round 1 at Time of Investment $18,794,406 $12,456,062
Investor's Implicit Cost of Capital at Each Round
Round 1 21.25% 19.90%
Round 2 23.19% 20.03%
Round 3 27.46% 24.50%
Round 4 69.74% 69.67%
Figure 6 Venture capital investor CAPM-based valuation by round. Implicit cost of capital estimates are gross of
the venture capitalist's management fee and carried interest.

Figure 7
Valuation-based Contracting Model
Ownership Requirement
Entrepreneur's Investor's
Assumptions Assumptions
Investor's Round 4 Investment $1,500,000 $1,250,000
Venture Value at Round 4 $59,211,238 $53,893,465
Incremental Equity Required 2.53% 2.32%
Investor's Value from Round 3 $12,577,607 $19,043,975
Investor's Value Required With Investing $14,077,607 $20,293,975
Investor's Required Ownership after Investing 23.78% 37.66%
Investor's Round 3 Investment $2,500,000 $2,500,000
Venture Value at Round 3 $40,431,577 $36,534,155
Incremental Equity Required 6.18% 6.84%
Investor's Value from Round 2 $6,088,445 $10,409,831
Investor's Value Required With Investing $8,588,445 $12,909,831
Investor's Required Ownership after Investing 21.24% 35.34%
Investor's Round 2 Investment $1,500,000 $2,500,000
Venture Value at Round 2 $33,958,352 $23,969,483
Incremental Equity Required 4.42% 10.43%
Investor's Value from Round 1 $3,613,666 $4,329,726
Investor's Value Required With Investing $5,113,666 $6,829,726
Investor's Required Ownership after Investing 15.06% 28.49%
Investor's Round 1 Investment $2,000,000
$2 000 000 $2,250,000
$2 250 000
Venture Value at Round 1 $18,794,406 $12,456,062
Investor's Required Ownership after Investing 10.64% 18.06%
Required Percentage Increases in Investor's Shares if New Shares are Issued
Round 4 - New Shares to Investor 15.65% 10.53%
Round 3 - New Shares to Investor 52.14% 37.14%
Round 2 - New Shares to Investor 48.87% 80.75%
Figure 7 Investor's incremental required ownership for investment at each round and total ownership
assuming no dilution of earlier round investments.

Figure 8
Risk and Return of Entrepreneur's Financial Claim
Based on Entrepreneur's Projections
Ownership by Round Investor Share Entrep. Share
Round 4 23.78% 76.22%
Round 3 21.24% 78.76%
Round 2 15.06% 84.94%
Round 1 10.64% 89.36%
Venture Entrepreneur's Probability
Conditional Scenario Conditional Weighted
Harvest Value Forecast Cash Flows Probabilities Cash Flows Cash Flows
Success with All Groups $90,000,000 20% $68,602,294 $13,720,459
Success with Three Groups $60,000,000 15% $45,734,863 $6,860,229
Success with Two Groups $25,000,000 20% $19,689,519 $3,937,904
Success with One Group $15,000,000 10% $12,741,204 $1,274,120
Failure $0 35% $0 $0
Expected Cash Flow of Entrepreneur's Claim $25,792,712
Standard Deviation of Entrepreneur's Claim $26,144,060
Based on Investor's Projections
Ownership by Round Investor Share Entrep. Share
Round 4 37.66% 62.34%
Round 3 35.34% 64.66%
Round 2 28.49% 71.51%
Round 1 18.06% 81.94%
Entrepreneur's Probability
Conditional Scenario Conditional Weighted
Harvest Value Forecast Cash Flows Probabilities Cash Flows Cash Flows
Success with All Groups $81,000,000 18% $50,498,863 $9,089,795
Success with Three Groups $54,000,000 12% $33,665,908 $4,039,909
Success with Two Groups $22,500,000 16% $14,549,325 $2,327,892
Success with One Group $13,500,000 8% $9,653,388 $772,271
Failure $0 46% $0 $0
Expected Cash Flow of Entrepreneur's Claim $16,229,867
Standard Deviation of Entrepreneur's Claim $19,311,842
Figure 8 Determination of Entrepreneur's residual harvest-date cash flow based on investor's required
ownership at each round and the scenario probabilities.

Figure 9
Valuation Template 9
Valuation of Entrepreneur's Interest in Venture
Entrepreneur's Investor's
Market Data and Entrepreneur's Wealth Assumptions Assumptions
Annual Risk-free Rate 4.0% 4.0%
Annual Market Rate 10.0% 10.0%
Standard Deviation of Market 20.0% 20.0%
Correlation of Venture with Market 0.25 0.25
Entrepreneur's Wealth in Market $1,700,000 $1,600,000
Timing of Staged Investments
Round 1 - Aircraft OEM
Years to Complete 1.00 1.25
Round 2 - Aircraft Owners
Years to Complete 0.50 1.00
Round 3 - Marine OEM
Years to Complete 1.00 1.25
Round 4 - Boat Owners
Years to Complete 0.50 0.50
Valuation f Harvest Cash Flows
V l ti of H t C h Fl
Venture (Entrepreneur's Financial Claim)
Expected Harvest Value $25,792,712 $16,229,867
Standard Deviation of Venture Cash Flows $26,144,060 $19,311,842
Market
Expected Harvest Value $2,262,700 $2,342,560
Standard Deviation of Market Cash Flows $588,897 $640,000
Portfolio
Expected Portfolio Value $28,055,412 $18,572,427
Standard Deviation of Portfolio Cash Flows $26,297,466 $19,481,699
Value of Entrepreneur's Portfolio $11,029,559 $3,625,754
Value to Investment in Market $1,700,000 $1,600,000
Value of Entrepreneur's Interest in Venture $9,329,559 $2,025,754
Figure 9 CAPM-based valuation of entrepreneur's portfolio and residual interest in the venture.

Selling out cash flows
Panel (a)
Entrepreneur's Assumptions - Financial Model Based on Business Plan
Conditional
Net Cash Scenario Round Round Round Round
Flows Probabilities One Two Three Four
Harvest Value Forecast
Success with All Groups $80,746,303 20% $16,149,261 $24,845,016 $29,362,292 $46,140,744
Success with Three Groups $50,746,303 15% $7,611,945 $11,710,685 $13,839,901 $21,748,415
Success with Two Groups $17,021,058 20% $3,404,212 $5,237,248 $6,189,475
Success with One Group $9,583,097 10% $958,310 $1,474,323
Failure ($2,632,182) 35% ($921,264)
Expected Cash Flow at Harvest $27,202,464 $43,267,273 $49,391,668 $67,889,160
Standard Deviation of Cash Flows $31,935,074 $28,838,037 $27,185,195 $14,846,150
Investment
Burn Rate per Year $2,000,000 $3,000,000 $2,500,000 $3,000,000
Years 1 0.5 1 0.5
Total Investment $7,500,000
Present Value of Unconditional Total Investment $7,159,376
Present Value of Expected Investment $4,709,907
Panel (b)
Investor's Assumptions - Financial Model Based on Business Plan
Conditional
Net Cash Scenario Round Round Round Round
Flows Probabilities One Two Three Four
Harvest Value Forecast
Success with All Groups $71,746,303 18% $12,914,334 $19,868,207 $28,074,640 $43,047,782
Success with Three Groups $44,746,303 12% $5,369,556 $8,260,856 $11,672,949 $17,898,521
Success with Two Groups $14,521,058 16% $2,323,369 $3,574,414 $5,050,803
Success with One Groupp $8,083,097 8% $646,648 $994,843
Failure ($2,632,182) 46% ($1,210,804)
Expected Cash Flow at Harvest $20,043,104 $32,698,320 $44,798,391 $60,946,303
Standard Deviation of Cash Flows $28,412,132 $26,984,610 $24,556,467 $13,227,245
Investment
Burn Rate per Year $1,800,000 $2,500,000 $2,000,000 $2,500,000
Years 1.25 1 1.25 0.5
Total Investment $8,500,000
Present Value of Unconditional Total Investment $8,008,895
Present Value of Expected Investment $4,915,176
Panel (a) shows the entrepreneur's expectations of net harvest cash flows conditional on each scenario and the entrepreneur's belief of the
probability of each scenario. These inputs are used to compute the expected harvest cash flow and standard deviation of cash flows at the time of
each investment round. The lower portion of the panel shows the entrepreneur's assumed burn rate from each stage and the entrepreneur's
expectation of the duration of the stage. The information is used to compute the conditional net cash flows and net present value. Panel (b) shows
the same information based on the investor's beliefs.

Figure 10
Valuation of Unstaged Investment - Venture Capital Investor
Entrepreneur's Investor's
Assumptions Assumptions
Market and Contract Data
Annual Risk-free Rate 4.0% 4.0%
Annual Market Rate 10.0% 10.0%
Standard Deviation of Market 20.0% 20.0%
General Partner's Annual Fee 2.5% 2.5%
General Partner's Carried Interest 20.0% 20.0%
Correlation of Venture with Market 0.25 0.25
Single-Stage Investment and Timing
Years to Harvest 3.00 4.00
Investor Valuation of Harvest Cash Flows
Expected Net Harvest Value $27,202,464 $20,043,104
Standard Deviation of Net Harvest Cash Flows $31,935,074 $28,412,132
NPV of Venture at Time of Investment $14,869,240 $9,214,753
Valuation of Entrepreneur's Interest in Venture
Entrepreneur's Wealth
Entrepreneur s Wealth in Market
Entrepreneur's $16,869,240 $11,214,753
Valuation of Harvest Cash Flows
Venture (Entrepreneur's Financial Claim)
Expected Harvest Value $0 $0
Standard Deviation of Venture Cash Flows $0 $0
Market
Expected Harvest Value $22,452,958 $16,419,520
Standard Deviation of Market Cash Flows $5,843,676 $4,485,901
Portfolio
Expected Portfolio Value $22,452,958 $16,419,520
Standard Deviation of Portfolio Cash Flows $5,843,676 $4,485,901
Value of Entrepreneur's Portfolio $16,869,240 $11,214,753
Value to Investment in Market $16,869,240 $11,214,753
Value of Entrepreneur's Interest in Venture $0 $0
Entrepreneur's Required Rate of Return
Annualized Portfolio Cost of Capital 10.00% 10.00%
Calculation of NPV of 100 percent ownership by investor, after providing from conditional investment outlays
each round. Entrepreneur's valuation assumes all positive NPV (after investor fees and carried interest are paid
to entrepreneur.