Chapter 10 Market Valuations and Quantifiable Analysis Questions Use no more than 6 pages of output. 1) SLE Ventures is making an $8M Series A investment

Chapter 10 Market Valuations and Quantifiable Analysis Questions Use no more than 6 pages of output.

1) SLE Ventures is making an $8M Series A investment in MemChu TechCo. The founders and

employees of MemChu (together called the “founders”) have claims on a total of 12M shares

of common stock (as exercised).

a) SLE is deciding among the following six deal structures for this transaction:

I. 8M shares of Convertible Preferred

II. 8M shares of common

III. Redeemable Preferred ($8M APP) + 8M shares of common

Draw an exit diagram for each structure. Mark any key x-axis and y-axis values, and any

key slope angles on the diagrams. Please show your calculations.

b) For Structure I and III, what is the $W on the x-axis of the exit diagram such that SLE

earns a deal-level gross value multiple (GVM) of 2 on the investment? Show your steps.

2) Crothers Ventures (CV) is considering an $8M Series A investment for CP at $1 per share in

Lagunita Inc. The founders and employees of Lagunita have claims on a total of 12M shares

of common stock (as exercised). Thus, following the Series A investment, Lagunita will have

12M common shares outstanding (on as-exercised basis) and would have 20M shares

outstanding upon conversion of Series A CP. Crothers estimates a 25% probability for a

successful exit, with an expected exit in four years, and an exit valuation of $300M. The

$300M CV II has annual fees of 2.0% of committed capital for each of its ten years of life,

and earns 20% of carried interest on all profits after return of committed capital. Assume

retention of 50%.

a) Using the modified VC method (as covered in class 17 and Chapter 10), what is your

investment recommendation for CV? Please label each term and show all of your steps.

(Assume that the VC cost of capital is 10% for this question.)

b) How sensitive is your recommendation to different assumptions about the exit valuation

and the probability of success?

3) (Bonus question – not required to get full credit)

Perform a reality-check DCF analysis for a high-growth, publicly traded company of your

choice. (Use DCF.xlsx as a starting template.) What assumptions (if any) would be necessary

to justify the company’s current market valuation? Do you think those assumptions are

realistic for the company? Why and why not?

Points will be awarded for demonstration of critical and analytical thinking, as well as for

performing sound quantitative analysis. In other words, please try to go beyond just stating

“The market valuation is justified/unjustified” – find out and explain which model inputs

affect the valuation significantly, and why you think the particular parameter values are

realistic or unrealistic for the company of your choice. Use no more than 6 pages of output.
1) SLE Ventures is making an $8M Series A investment in MemChu TechCo. The founders and
employees of MemChu (together called the “founders”) have claims on a total of 12M shares
of common stock (as exercised).
a) SLE is deciding among the following six deal structures for this transaction:
I. 8M shares of Convertible Preferred
II. 8M shares of common
III. Redeemable Preferred ($8M APP) + 8M shares of common
Draw an exit diagram for each structure. Mark any key x-axis and y-axis values, and any
key slope angles on the diagrams. Please show your calculations.
b) For Structure I and III, what is the $W on the x-axis of the exit diagram such that SLE
earns a deal-level gross value multiple (GVM) of 2 on the investment? Show your steps.
2) Crothers Ventures (CV) is considering an $8M Series A investment for CP at $1 per share in
Lagunita Inc. The founders and employees of Lagunita have claims on a total of 12M shares
of common stock (as exercised). Thus, following the Series A investment, Lagunita will have
12M common shares outstanding (on as-exercised basis) and would have 20M shares
outstanding upon conversion of Series A CP. Crothers estimates a 25% probability for a
successful exit, with an expected exit in four years, and an exit valuation of $300M. The
$300M CV II has annual fees of 2.0% of committed capital for each of its ten years of life,
and earns 20% of carried interest on all profits after return of committed capital. Assume
retention of 50%.
a) Using the modified VC method (as covered in class 17 and Chapter 10), what is your
investment recommendation for CV? Please label each term and show all of your steps.
(Assume that the VC cost of capital is 10% for this question.)
b) How sensitive is your recommendation to different assumptions about the exit valuation
and the probability of success?
3) (Bonus question – not required to get full credit)
Perform a reality-check DCF analysis for a high-growth, publicly traded company of your
choice. (Use DCF.xlsx as a starting template.) What assumptions (if any) would be necessary
to justify the company’s current market valuation? Do you think those assumptions are
realistic for the company? Why and why not?
Points will be awarded for demonstration of critical and analytical thinking, as well as for
performing sound quantitative analysis. In other words, please try to go beyond just stating
“The market valuation is justified/unjustified” – find out and explain which model inputs
affect the valuation significantly, and why you think the particular parameter values are
realistic or unrealistic for the company of your choice.

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