MANAGEMENT SCIENCE & ENGINEERING 272
ENTREPRENEURIAL FINANCE

 
   
 
   
 

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CLASS SCHEDULE, READINGS AND ASSIGNMENTS

Class 1: April 4, 2005
Welcome, Introduction and Course Registration

Class 2: April 11, 2005
Valuation Basics

Reading:
Text: A Note on Valuation in Entrepreneurial Ventures (Ch. 9, pp 179-192)
Reader: The Basic Venture Capital Formula
Reader: A Method for Valuing High Risk, Long-Term Investments
Reader: Note on Free Cash Flow Valuation Models

Assignment (due Tuesday April 11th by 10am):
Reader: The Venture Capital Method—Valuation Problem Set (Problems #1-3)


Class 3: April 18, 2005
Overview of Entrepreneurial Finance

Reading:
Text: Introduction to Entrepreneurial Finance (Ch.1, pp 1-11)
Text: Some Thoughts on Business Plans (Ch. 5, pp 80-111)

Prepare Case:
Reader: CCBN.com

Study Questions:           

1) Analyze the business plan for CCBN.com using the FIT Framework discussed in the reading
2) If you were Rob Adler, would you join CCBN.com (and invest your career)?
3) As a potential investor, how attractive do you find the business plan?
4) How would you value CCBN.com for its upcoming financing? How much ownership should the proposed $2.5M financing buy?


Class 4: April 25, 2005
Sources of Value

Reading:
Reader: Note on the Financial Perspective: What Should Entrepreneurs Know?
Text: Note on Strategic Alliances (Ch. 26, pp 463-473)

Prepare Case:
Text: The Knot (Ch. 2, pp 12-31)

Study Questions:
1) As a potential investor in The Knot, how attractive do you find the business opportunity?
2) Describe The Knot’s “deal” with AOL in as much detail you can based on the facts in the case. What was exchanged? When? How was the equity of The Knot valued in this transaction?
3) How should The Knot’s management team and board price the Series B deal? What price per share is reasonable from their point-of-view? Construct the share ownership table (or capitalization table) for The Knot assuming the Series B financing gets done at some reasonable price.
4) The Knot’s financial advisors, Schroder’s, agreed that the company’s financing would be an attractive investment for both venture capitalists and strategic investors. As a venture capital investor, what price would you be willing to pay for a share of Series B Preferred Stock? Are there any particular terms you would like added to the existing Term Sheet? As a potential strategic partner, how would your analysis differ?
5) What factors, in addition to the business plan forecast, are likely to influence this financing? How?


Class 5: May 2, 2005
Venture Capital

Reading:
Text: A Note on Private Equity Securities (Ch. 17, pp 291-298)
Reader: A Note on the Venture Capital Industry
Reader: How Venture Capitalists Evaluate Potential Venture Opportunities

Prepare Case:
Reader: Charles River Partnership

Study Questions:     
1) As a Limited Partner of Charles River, how would you react to the General Partner's decision?
2) What are the implications of the partners' belief that there was "far too much capital in the venture industry"? to the industry? to CRV?
3) In this environment, how does CRV increase the likelihood that their portfolio companies would succeed?


Class 6: May 9, 2005
Structuring Smart Deals

Reading:
Reader: Deal Structure
Reader: Note on Financial Contracting: "Deals"
Reader: VC Negotiations: VC versus Entrepreneur
Web Handout: Venture Capital for High Technology Companies - Fenwick & West

Prepare Case:
Reader: Term Sheet Negotiations for Trendsetter, Inc

Study Questions:
1) Lay out the post-closing capitalization tables that would result for each of the two term sheets proposed.
2) If you are Wendy Borg, which term sheet do you prefer? Why?
3) As Wendy Borg, which terms would you prioritize for your upcoming negotiations with the two venture firms? Develop a strategy for getting the terms you want from the firm you want, starting with these two proposals.


Class 7: May 16, 2005
Alternative Capital Sources

Reading:
Text: Note on Angel Financing (Ch. 19, pp 324-333)
Text: Note on the Venture Leasing Industry (Ch. 21, pp 359-368)
Text: Note on Franchising (Ch. 23, pp 395-414)
Text: Note on Government Sources of Financing (Ch. 28, pp 495-507)

Prepare Case:
Text: Honest Tea (Ch. 20, pp 334-358)

Assignment (due Monday May 15th by 10pm):           

1) Using the FIT Framework discussed in the readings and in class, analyze the opportunity, the context, the people, and the deals to date (not including the prospective new financing). What is your assessment of the Honest Tea business opportunity?

2) Assuming the terms exactly as proposed to third round investors in Exhibit 12 in the case (and assuming no further dilution beyond the third round), answer the following questions:

a) If the company is liquidated for $20 million in the future, how would the six different shareholder groups (ie. Founders, Employees, Seed Investors, First Round Investors, Second Round Investors, and Third Round Investors) split the proceeds?
b) Same as (a), but the company is liquidated for $30 million?
c) Same as (a), but the company is liquidated for $50 million?

3) If you were the prominent West Coast venture firm looking to structure the terms for a $5 million investment:

a) What valuation would you propose and how would you justify that valuation?
b) What two or three other important key terms might you propose?

4) If you were Seth Goldman, TeaEO of Honest Tea, and you had a choice between accepting a $2 million investment from Investors’ Circle and other angels as laid out in Exhibit 12; or accepting $5 million of venture capital on the terms you laid out in your answer to Question #3, which would you take and why?


Class 8: May 23, 2005
Managing Through Multiple Stages of Financing

Reading:
Handout: Mini-Case

Assignment (Due Monday May 22 by 10pm, please submit as a team assignment):

1) Answer Question #6 from the Valuation Problem Set

2) Mini-Case:

    • Organize in groups of 4 students to analyze and prepare case
    • Name your company
    • Decide which of the four of you is CEO
    • Decide the positions of the other three founders
    • Allocate 1M shares of founders’ stock among the four of you
    • Determine recruiting priorities and rough equity budget for recruiting
    • Prepare yourselves by laying out first round financing objectives (e.g. capital sought, valuation sought, milestones, risks to remove, type of investors sought, etc.)
    • Also come prepared as a potential investor in this company with key questions and your best “investor pitch”


Class 9: May 30, 2005
Going Public: Why, When & How

Reading:
Text: Note on the Initial Public Offering Process (Ch. 30, pp 532-537)

Prepare Case:
Reader: Preview Travel

Study Question:
What financing path would you recommend Ken Orton pursue? Why?

Guest:
Jim Hornthal, former Chairman, Preview Travel


Class 10: June 6, 2005
Course Wrap-Up

Reading:
Reader: Compensation Incentives in High Potential Ventures

Final Exam
The final exam is an individual take home exam. It will be distributed at the end of the last class June 6 and will be due June 12th by 10am in Terman 453A. Please submit two hardcopies of your exam writeup.