Lecture 4: The Founder's Dilemma | Intro to Venture Capital-FINAN 6300 | Chad Jardine, University of Utah, 2008–

Venture Capital: FINAN 6300
Course copyright © Chad Jardine. Images, works cited, etc. are copyright © their respective owners.

Advanced Venture Capital: FINAN 6310
Recap
Premoney vs. postmoney
P/E to PEG ratio
The Founder’s Dilemma
Agenda

Businesses start
as a spark of inspiration
about an opportunity or
the solution to a problem

Venture Capital: Financing New Ventures: FINAN 6300
FINANCING ROUND
Price per Share (PPS) Bootstrap Angel Seed Series A Series B IPO
EOPP
$203,450,000
ITY
VALUATION
15,650,000
How much is each investor worth now?
• 35.1% Public $71,500,000
• 22.4% B-VC $45,500,000 (17,500,000)
• 16.0% A-VC $32,500,000 (5,000,000)
• 5.1% Seed $10,400,000 (1,000,000)
• 2.2% Employees $4,550,000
• 0.6% Angel $1,300,000 (100,000)
• 18.5% Entrepreneur $37,700,000 (10,000)

Investor Rules of Thumb
Investor Type Investment Typical IRR Typ. Horizon
Founder ? 100% to 500% 5–10 years
Angel $100k–$300k 25% to 100% 2–5 years
Super Angel/Seed VC $500k–$2M 100% to 200% 3–7 years
VC Series A $1M–$10M 100% to 200% 3–7 years
VC Series B $5M–$100M 200% and up 2-5 years
IPO Investors $50M + 20% to 50% 1 year or less
Consider the risk, time horizon, and required
return of your target investor when you design
your capital structure.
InvestorTypes

Can’t Sell Until
Lock Up Period Expires.
Typ 180 days
Lock Up/Leak Out Agreements
http://www.sec.gov/answers/lockup.htm

Earnings Projections for NewCo
YEAR One Two Three Four Five
Earnings per Share (EPS) $1.00 $1.75 $2.50 $3.25 $4.00
Est. Growth Rate (CAGR) NA 75% 43% 30% 23%
Estimated Price/Earnings (P/E) Ratio 20 40 40 30 23
Price per Share (Low) $13 $35 $50 $65 $80
Price per Share (High) $20 $70 $100 $97.5 $91
Post IPO: When Should You Sell Your Stock?
Are investors happy now?
Yes, you orchestrated an accretive deal structure.

Four Possible Exits for Investors:
• Cash Cow
• M&A
• IPO
• Crash & Burn

Recap
P/E to PEG ratio
Agenda
✓

Premoney & Postmoney Valuations
Premoney = value at new price before investment
Postmoney = value at new price after investment

Series A Series B
Investment $2,000,000
New Shares 1,000,000
Price per Share $2.00
Total Shares After
Closing 2,500,000
Premoney ?
Postmoney ?

Series A Series B
Investment $2,000,000
New Shares 1,000,000
Price per Share $2.00
Total Shares After
Closing 2,500,000
Premoney $3,000,000
Postmoney $5,000,000

Series A Series B
Investment $2,000,000 $5,000,000
New Shares 1,000,000 1,250,000
Price per Share $2.00 $4.00
Total Shares After
Closing 2,500,000 3,750,000
Premoney $3,000,000
Postmoney $5,000,000

Series A Series B
Investment $2,000,000 $5,000,000
New Shares 1,000,000 1,250,000
Price per Share $2.00 $4.00
Total Shares After
Closing 2,500,000 3,750,000
Premoney $3,000,000 $10,000,000
Postmoney $5,000,000 $15,000,000

Recap
P/E to PEG ratio
Agenda
✓
✓

P/E Ratio
Price to Earnings Ratio (P/E Ratio)
Price per Share (PPS) ÷ Earnings per Share (EPS)

Deep Dive

Deep Dive
Employees 3,600 3,529

Deep Dive
Revenues $1.17 B $1.59 B

Deep Dive
Earnings (Profit) -$964 M $950 M

Deep Dive
EPS -$1.79 $0.41

Deep Dive
EPS -$1.79 $0.41
P/E N/A 32.1

Deep Dive
Why?
EPS -$1.79 $0.41
P/E N/A 32.1
Market Cap $22 B $2 B

Deep Dive
P/E Ratio, DCF, NPV
How much will they earn in the future?

P/E Ratio

Growth Rate = Year Over Year %
Growth in Earnings
41% Compound Annual Growth
Rate (CAGR)
=
Doubling of PPS
over 2 Years
P/E Ratio

P/E Ratio
P/E Ratios above 40 are
considered unsustainable

Earnings Projections for NewCo
YEAR One Two Three Four Five
Earnings per Share (EPS) $1.00 $1.75 $2.50 $3.25 $4.00
Est. Growth Rate (CAGR) NA 75% 43% 30% 23%
Estimated Price/Earnings (P/E) Ratio 20 40 40 30 23
Price per Share (Low) $13 $35 $50 $65 $80
Price per Share (High) $20 $70 $100 $97.5 $91
Post IPO: When Should You Sell Your Stock?

P/E Ratio / Earnings Growth Rate = PEG Ratio
Does P/E match Growth Rate?
P/E ÷ Growth Rate = PEG Ratio
(PEG Ratio of 1 = “Fair Value”)
Growth Rate 53% 91% 75% 40% 35% 20%
P/E Ra7o 40 40 40 40 35 20

Recap
P/E to PEG ratio
Agenda
✓
✓
✓

Only 25% of founders are
still CEO at the company’s
IPO.

“Most entrepreneurs want
to make a lot of money
and to run the show. New
research shows that it’s
tough to do both. If you
don’t figure out which
matters more to you, you
could end up [doing
neither].”

Recap
P/E to PEG ratio
Agenda
✓
✓
✓
✓

Lecture 4: The Founder's Dilemma | Intro to Venture Capital-FINAN 6300 | Chad Jardine, University of Utah, 2008–

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Lecture 4: The Founder's Dilemma | Intro to Venture Capital-FINAN 6300 | Chad Jardine, University of Utah, 2008–