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Table of Contents

Preface to the 2nd Edition-A Reader’s Guide.

Acknowledgments.

PART I VC BASICS.

Chapter 1 The VC Industry.

1.1 What is Venture Capital?

1.2 What Do Venture Capitalists Do?

1.3 The History of Venture Capital.

1.4 Patterns of VC Investment in the United States.

1.4.1 Investments by Stage.

1.4.2 Investments by Industry.

1.4.3 Investments by U.S. Region.

Summary.

Key Terms.

References.

Chapter 2 VC Players.

2.1 Firms and Funds.

2.2 The Limited Partners.

2.3 VC Partnership Agreements.

2.3.1 Management Fees.

2.3.2 Carried Interest.

2.3.3 Restrictive Covenants.

Summary.

Key Terms.

References.

Exercises.

Appendices: Key Terms and Conditions for Three VC Funds.

Appendix 2.A: EarlyBird Ventures I.

Appendix 2.B: Talltree Ventures IV.

Appendix 2.C: Owl Ventures IX.

Chapter 3 VC Returns.

3.1 Industry Returns.

3.1.1 Definitions.

3.1.2 A Gross-Return Index.

3.1.3 A Net-Return Index.

3.2 Fund Returns.

3.2.1 Definitions.

3.2.2 Evidence.

Summary.

Key Terms.

References.

Exercises.

Chapter 4 The Cost of Capital for VC.

4.1 The Capital Asset Pricing Model.

4.2 Beta and the Banana Birds.

4.3 Estimating the Cost of Capital for VC.

Summary.

Key Terms.

References.

Exercises.

Chapter 5 The Best VCs.

5.1 The Economics of VC.

5.2 The Best VCs: A Subjective List.

5.3 VC Value Added and the Monitoring of Portfolio Firms.

Summary.

Key Terms.

References.

Chapter 6 VC Around the World.

6.1 The Global Distribution of VC Investing.

6.2 The Cost of Capital for International VC.

6.2.1 Baseline Model: The Global CAPM.

6.2.2 Objective and Extensions to the Global CAPM.

6.2.3 A Global Multifactor Model for Venture Capital.

Summary.

Key Terms.

References.

Exercises.

PART II TOTAL VALUATION.

Chapter 7 The Analysis of VC Investments.

7.1 VC Investments: The Historical Evidence.

7.2 The Investment Process.

Summary.

Key Terms.

References.

Chapter 8 Term Sheets.

8.1 The Basics.

8.1.1 Investors.

8.1.2 Price Per Share.

8.1.3 Pre-Money and Post-Money Valuation.

8.1.4 Capitalization.

8.2 The Charter.

8.2.1 Dividends.

8.2.2 Liquidation Preference.

8.2.3 Voting Rights and Other Protective Provisions.

8.2.4 Mandatory Conversion.

8.2.5 Redemption Rights.

8.3 Investor Rights Agreement.

8.3.1 Registration Rights.

8.3.2 Matters Requiring Investor-Director Approval.

8.3.3 Employee Stock Options.

8.4 Other Items.

8.4.1 Rights and Restrictions.

8.4.2 Founders’ Stock.

Summary.

Key Terms.

References.

Exercises.

Chapter 9 Preferred Stock.

9.1 Types of Preferred Stock.

9.2 Antidilution Provisions.

Summary.

Key Terms.

References.

Exercises.

Chapter 10 The VC Method.

10.1 The VC Method: Introduction.

10.1.1 Exit Valuation.

10.1.2 Target Returns.

10.1.3 Expected Retention.

10.1.4 The Investment Recommendation.

10.2 The Standard VC Method.

10.3 The Modified VC Method.

Summary.

Key Terms.

References.

Exercises.

Chapter 11 DCF Analysis of Growth Companies.

11.1 DCF Analysis: Concepts.

11.2 DCF Analysis: Mechanics.

11.3 Graduation Value.

11.4 DCF Analysis: The Reality-Check Model.

11.4.1 Baseline Assumptions for the Reality-Check DCF.

Summary.

Key Terms.

References.

Exercises.

Chapter 12 ComparTables Analysis.

12.1 Introduction to ComparTables Analysis.

12.2 Choosing ComparTable Companies.

12.3 Using ComparTable Companies to Estimate the Cost of Capital.

Summary.

Key Terms.

References.

Exercises.

Appendix 12.A: Potential ComparTables for Semico.

PART III PARTIAL VALUATION.

Chapter 13 Option Pricing.

13.1 European Options.

13.2 Pricing Options Using a Replicating Portfolio.

13.3 The Black-Scholes Solution.

13.4 American Options.

13.5 Random-Expiration Options.

13.6 Reading Exit Diagrams.

13.7 Carried Interest as an Option.

Summary.

Key Terms.

References.

Exercises.

Appendix 13.A RE Options: Technical Details.

Chapter 14 The Valuation of Preferred Stock.

14.1 Base-Case Option-Pricing Assumptions.

14.2 RP Valuation.

14.3 Excess Liquidation Preferences.

14.4 Dividends.

14.5 CP Valuation.

14.6 CP with Excess Liquidation Preferences or Dividends.

14.7 Combining RP and CP.

14.8 Comparing RP and CP.

Summary.

Key Terms.

References.

Exercises.

Chapter 15 Later-Round Investments.

15.1 Series B.

15.2 A Conversion Shortcut.

15.3 Series C.

15.4 Dividends in Later Rounds.

15.4.1 Accrued Cash Dividends.

15.4.2 PIK Dividends.

15.5 Beyond Series C.

Summary.

Key Terms.

Exercises.

Chapter 16 Participating Convertible Preferred Stock.

16.1 Binary Options.

16.2 The Valuation of PCP.

16.3 The Valuation of PCPC.

16.4 Series B and Beyond.

Summary.

Key Terms.

References.

Exercises.

Chapter 17 Implied Valuation.

17.1 Post-Money Valuation Revisited.

17.2 Measurement of Portfolio Value.

17.3 Down Rounds?

17.4 How to Avoid Valuation Confusion.

Summary.

Key Terms.

Exercises.

Chapter 18 Complex Structures.

18.1 Management Carve-outs.

18.2 Dealing with Partners.

18.3 A Complex Example.

Summary.

Key Terms.

Exercises.

PART IV THE FINANCE OF INNOVATION.

Chapter 19 R&D Finance.

19.1 R&D Around the World.

19.2 Two Touchstones.

19.2.1 Drug Development.

19.2.2 Energy Innovation.

19.3 How Is R&D Financed?

19.4 Where Do We Go from Here?

Summary.

Key Terms.

References.

Chapter 20 Monte Carlo Simulation.

20.1 Event Trees.

20.2 Simulation with Continuous Probability Distributions.

20.3 Simulation with Multiple Sources of Uncertainty.

Summary.

Key Terms.

Exercises.

Chapter 21 Real Options.

21.1 Decision Trees.

21.2 Real Options in R&D.

21.3 The Valuation of Real Options.

21.4 Risk-Neutral Probabilities.

21.5 Drugco, Revisited.

Summary.

Key Terms.

Exercises.

Chapter 22 Binomial Trees.

22.1 The Black-Scholes Equation, Revisited.

22.2 Multiple Strike Prices and Early Exercise.

22.3 Dividends.

Summary.

Key Terms.

References.

Exercises.

Chapter 23 Game Theory.

23.1 What Is Game Theory?

23.2 Simultaneous Games.

23.3 Sequential Games.

23.4 Game Theory and Real Options.

Summary.

Key Terms.

Exercises.

Chapter 24 R&D Valuation.

24.1 Drug Development.

24.2 Energy.

24.3 The Forest and the Trees.

Summary.

References.

Exercises.

Appendix A Sample Term Sheet.

Appendix B The VCFI Spreadsheets.

Appendix C Guide to Crystal BallÂ®.

Glossary.

Index.