1.What are some of the alternative sources from which private companies can raise equity capital?
2.What are the advantages and the disadvantages to a private company of raising money from a corporate investor?
3.Starware Software was founded last year to develop software for gaming applications. Initially,the founder invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified an interested venture capitalist. This venture capitalist will invest $1 million and wants to own 20% of the company after the investment is completed.
a. How many shares must the venture capitalist receive to end up with 20% of the company? What is the implied price per share of this funding round?
b. What will the value of the whole firm be after this investment (the post-money valuation)?
4.Suppose venture capital firm GSB partners raised $100 of committed capital. Each year over the 10-year life of the fund, 2% of this committed capital will be used to pay GSB’s management fee. As is typical in the venture capital industry, GSB will only invest $80 million (committed capital less lifetime management fees). A the end of 10 years, the investments made by the fund are worth $400 million. GSB also charges 20% carried interest on the profits of the fund (net of management fees).
a. Assuming the $80 million in invested capital is invested immediately and all proceeds were received at the end of 10 years, what is the IRR of the investments GSB partners made? That is, compute IRR ignoring all management fees.
b. Of course, as an investor, or limited partner, you are more interested in your own IRR, that is the IRR including all fees paid. Assuming that investors gave GSB partners the full $100 million up front, what is the IRR for GSB’s limited partners (that is, the IRR net of all fees paid).
5.Three years ago, you founded your own company. You invested $100,000 of your money and received 5 million shares of Series A preferred stock. Since then, your company has been through three additional rounds of financing.
a. What is the pre-money valuation for the Series D funding round?
b. What is the post-money valuation for the Series D funding round?
c. Assuming that you own only the Series A preferred stock (and that each share of all series of preferred stock is convertible into one share of common stock), what percentage of the firm do you own after the last funding round?
6.What are the main advantages and disadvantages of going public?
7.Do underwriters face the most risk from a best-efforts IPO, a firm commitment IPO, or an auction IPO? Why?
8.Roundtree Software is going public using an auction IPO. The firm has received the following bids:
Assuming Roundtree would like to sell 1.8 million shares in its IPO, what will the winning auction offer price be?
9.Three years ago, you founded Outdoor Recreation, Inc., a retailer specializing in the sale of equipment and clothing for recreational activities such as camping, skiing, and hiking. So far,your company has gone through three funding rounds:
Currently, it is 2007 and you need to raise additional capital to expand your business. You have decided to take your firm public through an IPO. You would like to issue an additional 6.5 million new shares through this IPO. Assuming that your firm successfully completes its IPO, you forecast that 2007 net income will be $7.5 million.
a. Your investment banker advises you that the prices of other recent IPOs have been set such that the P/E ratios based on 2007 forecasted earnings average 20.0. Assuming that your IPO is set at a price that implies a similar multiple, what will your IPO price per share be?
b. What percentage of the firm will you own after the IPO?
10.What is IPO underpricing? If you decide to try to buy shares in every IPO, will you necessarily make money from the underpricing?