Entrepreneurial Finance Assignment

Posted: August 26th, 2021

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Entrepreneurial Finance Assignment

Part I

Question 1

Pre-money valuation is an organization’s value that excludes the most recent round of funding or external funding. It includes how much a business is worth before investors invest in an organization. The main advantage is that it gives investors or venture capitalists a rough estimate of the business value providing the value of every share in the company. Post-money refers to the company’s value after receiving external funding or investments (Nasser 49). Post-money valuation comprises of the outside financing or the owner’s latest capital injection. Pre-money valuation and post-money valuation are both techniques of calculating the worth of a company by considering equity and the number of outstanding shares in the market.Given the following details;

Initial investment=$500,000

Stake= 25%

1. Pre-Money Valuation

25%=$500,000

100%= $500000/250×100= $2,000,000

Pre-money valuation= $2,000,000

• Post-Money Valuation

15% x $2000000= $300000

Post-money valuation=$300000

Question 2

1. Ferguson Giving Up The CEO Role

The CEO position of any organization is very crucial in deciding who controls the daily operations of a business. The post’s holder is responsible for all the managerial decision-making process of the organization. The CEO should be someone with vast experience, skills, and possess the right education qualifications (Rosa et al. 147). Handing over the business leadership to the venture capitalists ensures he gives up ownership of the organization to someone experienced. By acquiring the minority shareholding, it implies that the power of the CEO position as the business owner is diluted with minimizing their say in the running of the business.  It also results in ensuring that they control the direction and vision of the organization, while Charles Fergusson concentrates with the operations aspect.

• Ferguson Holds On The CEO Role

Most new business owners lack the necessary expertise required for the successful daily running of a new firm. Venture capitalists bring the essential people skills that are crucial in dealing with a diverse workforce. The contribution of venture capitalists also includes them contributing to business success through their vast organizational skills, which are essential in planning the daily work and long term projects (Rosa et al. 187). Venture capitalists taking over the management of new firms will bring negotiation skills that are crucial in negotiating with suppliers and expanding into new market contacts. They also know how to staff the organization with the right and talented staff who will contribute to the new business achieving its mission and goals quickly. Venture capitalists will bring fund-raising skills that may be required in the future if the company keeps expanding its operations. They will also bring the mentorship to the new entrepreneur, assisting them in learning how to manage the development and strategy of the company.

Question 3

The future value of an investment is a technique for calculating the worth of money in a future period taking into account a discount rate or rate of return. It is calculated as follows,

Where: r= rate of interest

            t= time

Initial investment= $2000000

Valuation= 25 times

Cash flow= $2400000

Valuation after 5 years= $2400000 x 25= $60,000,000

Annual return= 30%

Where: r= rate of interest

            t= time

 1,411,282,002.97

Percentage minimum investment = 4.25%

Question 4

Angel Investments and Venture Capital

An angel investor is a person who finances the growth of small businesses during the startup period by contributing his business experience and advice. Angel investors can be either a wealthy, well-connected individual, many investors who fund startups, or a relative who invests in a startup business. Angels make independent decisions about an investment and take shares in a company in return for personal equity provision (Drover et al. 24). They can provide small or large amounts in business together with business advice to grow startups in big companies. Angel investing is mostly involved in seed funding and does not lead to dilution of the company, as they will be engaged in the business operations.

On the contrary, venture capital companies are made of professional investors who fund businesses, and their source of capital comes from corporations, pension funds, and foundations. Ventures also invest funds in venture capital funds, commonly known as limited partners and general partners. They fund startups with high potential in growth, and the enterprises own part of the business in return of their capital (Drover et al. 20). Venture capital investors make operational decisions in the company and expect high returns on their investment. After sometimes, venture capitalists sell the shares back to the proprietors or through an IPO, making more money. They usually invest in flourishing business due to the risk involved in startup businesses. The ventures are engaged in the business’ daily operations. Thus, they will lead to dilution, as more people will be included in decision-making.

Question 5

Post investment valuation is the market value accorded to a start-up business after angel investors and venture capitalists have completed financing the business. It occurs after the pre-investment valuation (Nasser 166). Post investment valuation is calculated using the following formula;

The calculation of the post-investment valuation is considered simplistic as it is easy to calculate, understand, and simple to put into action in the valuation of startup businesses.

Question 6

QualiPro is a startup business, and the respective costs associated are provided in the QualiPro financial spreadsheet.  I would recommend the firm to raise cash from sources such as bootstrapping, crowdfunding, angel investment, and venture markets. It would be unwise for the business to take loans that are repayable with high interests as the company may fall and be unable to repay the loans. High-interest costs may also chock a startup, as they are additional costs to the business (Finley and Virginia 13). I would also recommend the company to exercise measures such as having monthly projections, planning for the unforeseen business scenarios. This would also involve adjusting the business to grow by avoiding misuse of capital through withdrawals to increase the cash outflows and the company to improve to unforeseeable future.

Question 7

Earnings before interest, tax, depreciation, and amortization (EBITDA) are used to value a venture as it is an indicator of a firm’s operating performances and shows the operating profit of an organization. Multiples of EBITDA are used in the valuation of private equity as is essential in value creation, compare the pricing of private companies, and used as an indicator of the company’s debt value (Mercer 86-102). Earn-out refers to a provision in the acquisition contract that states that the seller of a company will get an additional payment in the future when the business achieves specific economic goals, which is indicated as a percentage of total sales or profit margins. Earn-out is used in the purchasing of entrepreneurial ventures as they eliminate the uncertainty. Thus, the seller receives financial benefits for business growth in the future period.

Part II

Question 1

Post-money valuation refers to an organization’s estimated value after outside capital addition to the balance sheet. The post-money valuation is the approximate business market value of a start-up after Angel Investors and venture capitalists capital injection. It is given by summing up additional investments to pre-money valuations (Nasse 43). The assessment indicates the business value’s new equity and outstanding shares in the market after external funding.

Question 2

Pre-valuation= $ 2 million

Additional investment= $ 6 million

If the company is sold, the founders will collect $8,000,000

Question 3

Pre-valuation= $ 2 million

Post- valuation= $3 million

= 1000000

If the company is sold, the buyer will add $1,000,000

Question 4

Adjusted pre-money valuation= $300,000

Adjusted Option price= 20%

The option price will dilute the shareholding of the company to 20%. It implies the value of the shareholder’s equity, vested shares, and unallocated option pool will decrease by 20%. The investor’s ownership will increase by 20%, but the shareholder’s equity, vested shares, and unallocated option pool ownership will decrease by 20%. The table below shows the impact of an increase in pre-money valuation to $3,000,000 and the rise of option price by 20%.

Table 1: post-money valuation

	Common	Series A round	Common Equivalents	Ownership (%)
Series A Investor	–	2,400,000.00	2,400,000.00	60.00
Founders	400,000.00		400,000.00	16.00
Vested shares	300,000.00		300,000.00	12.00
Unallocated option pool	300,000.00		240,000.00	12.00
Total	1,000,000.00	2,400,000.00	3,340,000.00	100.00

Question 5

Cliff vesting in startup business refers to a process in which employees or founders have the right to get full benefits from the company’s retirement plan at a specific date, rather than being gradually vested over time. Vesting of outstanding common at TrinityAccel, Inc. is a four-year vest with a one-year cliff, which implies that employees’ shares will not be vested until the end of the first year since the start date. In the first year, 25% of the shares are vested, and then after vesting occurs monthly.

Founder’s stock = 400000 shares

Vested shares at 6 months= 0

Vested shares at 37 months =3 years

Number of shares vested each year = 25% x 400000 shares= 100000 shares

Vested shares at 37 months =3×100000= 300000 shares

Question 6

XYZ Ventures = 1,000,000 shares

Series B = $0.80 per share

After serial b, the shares will be 800000shares

Question 7

When the redemption clause is included in a company’s articles of association, it implies that the shareholders can regulate the transfer of shares and the persons who want to become shareholders. A redemption clause prevents unwanted persons from becoming shareholders in a company and grants a priority to the company’s shareholders to increase their holdings in case any existing shareholders want to transfer their ordinary shares (Nasser 29). A redemption clause of 1.1x means that one share of an existing shareholder can only be transferred against one share if the shareholder wishes to transfer the shares.

Works Cited

Drover, Will, et al. “A review and road map of entrepreneurial equity financing research: venture capital, corporate venture capital, angel investment, crowdfunding, and accelerators.”            Journal of management 43.6 (2017): 1820-1853.

Finley, Virginia. 2016 Annual Site Environmental Report. No. PPPL-5443. Princeton Plasma        Physics Lab. (PPPL), Princeton, NJ (United States), 2017.

Mercer, Z. Christopher. “EBITDA Single-Period Income Capitalization for Business Valuation.” Business Valuation Review 35.3 (2016): 86-102.

Nasser, Stéphane. “Valuation for Startups—9 Methods Explained.” (2016).

Rosa, Meita Clara Wijaya, Eko Ganis Sukoharsono, and Erwin Saraswati. The role of venture       capital on start-up business development in Indonesia. Muhammadiyah University       Yogyakarta, 2019.