Assessing the Economic Value of Venture Capital Contracts: by Jil Caroline Onimus

By Jil Caroline Onimus

Jil C. Onimus makes a contribution to the nascent learn line at the monetary worth a big gamble capital contracts which lies on the intersection a bet capital agreement layout and actual alternative pricing. She identifies the hampers of actual recommendations embedded in version enterprise capital contracts as released by way of the nationwide enterprise Capital organization (NVCA) and indicates how they are often priced in interplay utilizing Least Squares Monte Carlo simulation. The pricing version is calibrated by way of a dataset of deal phrases in Silicon Valley in addition to records from the NVCA. by way of utilizing the version to straightforward funding situations (multiple financing rounds with a number of investors), the writer obtains estimates of alternative values for person phrases and for complete contracts with interplay effects.

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Example text

Option: a security which gives the holder the right to purchase shares in a company at a pre-determined price. Options are usually used for long term, phased compensation to management and employees. – Warrant: A warrant is a long term option, usually valid for several years or indefinitely. Typically, warrants are issued concurrently with preferred stocks or bonds in order to increase the appeal of the stocks or bonds to potential investors. – Combinations of debt and equity: instruments composed of debt capital in combination with straight or preferred equity capital.

2 is broken down into three consecutive steps: (1) identify the pricing methodology applicable in the context of VC contract pricing and specify the general model parameters, (2) gradually build the VC contract pricing model by first analyzing groups of similar provisions and then combining the findings into a comprehensive model, and (3) provide an application of the model to standard investment situations in order to obtain numerical estimates of contract values. This translates into the detailed structure described in the following.

Furthermore, the LSM method has been extended in Gamba (2003) to cope with interaction effects arising in the presence of multiple options. This extension makes LSM applicable to the mutually exclusive options generated by convertible preferred equity in VC contracts. 36 2 General Methodology The LSM method provides a numerical estimate of net option value for a designated full contract, covering all provisions of this contract with interactions. For the given contract (in the following called the “base scenario” of the analysis), the option values of individual terms can be derived using “adjusted scenarios”, which differ from the base scenario only with regard to the individual term under analysis.

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