ONLINE CHAPTERS
IMPORTANT EQUATIONS
20.1 FV = A(1 + r)n
20.2 Investment stake (Equity fraction) =FV
Expected market valuationKEY TERMS
angel capitalists, 692
cancellation option, 701
carried interest, 699
corporate venture capital
funds, 692
demand registration rights, 702
entrepreneurial finance, 688
entrepreneurial growth
companies (EGCs), 688
financial venture capital funds, 692general partners, 699
institutional venture capital
funds, 692
investee companies, 700
limited partner, 699
ownership right agreements, 702
participation rights, 702
private equity, 689
ratchet provisions, 702
redemption option, 706repurchase rights, 702
secondary investment, 706
seniority, 703
share option plans, 702
staged financing, 701
term sheet, 702
venture capital, 690
venture capital limited
partnerships, 692SELF-TEST PROBLEMS
Answers to Self-test problems and the Concept review questions throughout the chapter appear on
CourseMate with SmartFinance Tools at http://login.cengagebrain.com.
ST20-1 You are seeking $1.5 million from a venture capitalist to finance the launch of your online financial
search engine. You and the VC agree that your venture is currently worth $3 million and that,
when the company goes public in an IPO five years hence, it will have an expected market
capitalisation of $20 million. Given the company’s stage of development, the VC requires a 50%
return on investment. What fraction of the company will the VC receive in exchange for its $1.5
million investment in your company?
ST20-2 An entrepreneur seeks $12 million from a VC fund. The entrepreneur and fund managers agree
that the entrepreneur’s venture is currently worth $30 million and that the company will likely be
ready to go public in four years. At that time, the company is expected to have a net income of
$6 million, and comparable companies are expected to be selling at a price/earnings ratio of 25.
Given the company’s stage of development, the venture capital fund managers require a 40%
compound annual return on their investment. What fraction of the company will the fund receive
in exchange for its $12 million investment?
ST20-3 Suppose that six out of 10 investments made by a VC fund are a total loss, meaning that the
return on each is –100%. Of the remaining investments, three break even (earning a 0% return)
and one pays off spectacularly by earning a 650% return. What is the realised return on the VC
fund’s overall portfolio?