The case is Spiffy Team, Inc: January 2000
Case number: SM-86
Harvard business case study.
The Part A of the case is only relevant to me. I already solved the Part A 3 requirements. I only need someone to write one page executive summary and one page conclusion as per my solution (See attachment).
Executive Summary: What valuation do the assumptions on the bottom of page 1 and top of page 2 suggest? Use the VC Method, without taking into account the additional investment in year 2. The valuation assumptions suggest the following: · Vulture ventures is offering the $4 million for $1/share that would mean they are getting 4 million shares for $1. · The $1/share valuation suggest that Vulture Ventures is valuing the current owner’s 5 million shares and the common stock (future employee shares) of 1.5 million shares at $1/share which would equate to $6.5M prefunding valuation ($1/share X 5M shares +$1/share X 1.5M shares) as shown on Exhibit 1 · With the $4M additional Series A funding from Vulture partners, the total valuation after funding according to Vulture partners will be $10.5M postfunding valuation as shown on Exhibit 2. ($6.5M for SpiffyTerm’s portion + $4M for Venture partner’s portion for $1/share) That would be 48% stake for the owners, 14% stake for the common stock owners which are the future employees and 38% stake for Vulture ventures · Spiffyterm’s IPO valuation of $80 million by year 4 with a 45% discount rate assumes a present value valuation of $18.1M as shown on Exhibit 3 which is $7.6M higher valuation than what Vulture Ventures is valuing the company · Since Vulture Venture’s PV valuation is $10.5M post funding vs. the $18.1M for Spiffyterm’s valuation, that would assume either they utilized a higher discount rate or a lower valuation at year 4 of the IPO than Spiffyterm. As Exhibit 4 shows, for Vulture Ventures to value the company $10.5M, if they assumed the same valuation of $80 million as Spiffyterm they then used 66% discount rate (solved by goal seek) , which is much higher than the 45% Spiffyterm is assuming. · As Exhibit 5 shows, if Vulture Ventures used the same discount rate of 45% as Spiffyterm for the $80M year 4 valuation, then they would have to have assumed, that year 4 valuation would have been $46.5million instead of the $80million Spiffyterm is assuming ($33.6M lower year 4 valuation than Spiffyterm) The founders also wanted to do some sensitivity analysis with their assumptions. What would the valuation be if they used a discount rate of 25% instead of 45%? As shown below in figure 2, a 25% discount rate would mean the PV valuation of $32.7 million for Spiffyterm with $80M valuation in year 4 which is $14.7M higher than the $18.1M valuation at 45% discount trate Based on the term sheet in Exhibit 1, what is the total dollar amount of the liquidity preference they would receive at exit in addition to any gains on the value of their stock? Figure 2 shows the total dollar amount that Vulture Ventures would receive for liquidity preference. They will receive first the original investment for the Series A funding of $4M (1x liquidation preference), plus the accrued dividends which is stated as $0.08 per share of the preferred in this case it assumes 1 year of accrued dividends plus the participating preference amount at the time the liquidation which depends on the valuation at the time of liquidation could range from $4M-$19M. If the valuation is based on the $10.5M post funding amount based on Vulture Ventures then that amount will be 38%(Vulture venture stake) of $10.5M valuation which equates to ~4$M. If the valuation is the capped amount $50M then it will be $19M. This indicates that the total dollar amount of liquidity preference received would be anywhere between $8.3M-$23.3M. Beyond the $50M valuation, the liquidity preference would convert to the same as common stock. Conclusion: Exhibit 4 Post funding Valuation Year 4$80,000,000 Discount Rate66% Term4 years PV Valuation10,500,000$ Vulture Ventures Valuation Exhibit 5Post funding Current Valuation$10,500,000 PV Valuation Discount rate gross up (1+0.45)^4 4.42 Valuation at Year 4$46,415,316 difference from Spiffyterm valution in year 4($33,584,684) Assuming 45% discount rate Vulture Ventures Figure 1 Valuation Year 4$80,000,000$80,000,000 Discount Rate45%25% Term4 years 4 years PV Valuation18,097,475$ 32,768,000$ Spiffyterm, Inc Valuation Sensitivity Analysis Figure 2 Shares $/share Liquidation total Preferred Series A funding4,000,000$1$4,000,000 Accrued Dividends (1 yr)4,000,000$0.08$320,000 ValuationStake $10,500,00038%$3,990,000 $50,000,00038%$19,000,000 $8,310,000 $23,320,000 Participating Preferrence (upto $50M valuation) Total Range Liquidation Preferrence Exhibit 1OwnersCommon StockTotal Shares5,000,000 1,500,000 6,500,000 Valuation $1/share $5,000,000$1,500,000$6,500,000 Vulture Ventures - Pre-funding Valuation Exhibit 2 Owners Employee/ Common Stock Shares5,000,000 1,500,000 4,000,000 10,500,000 Valuation $1/share $5,000,000$1,500,000$4,000,000$10,500,000 % stake48%14%38% Vulture Ventures Postfunding Valuation SpiffyTerm Vulture VenturesTotal Exhibit 3 Spiffyterm, Inc Valuation Valuation Year 4$80,000,000 Discount Rate45% Term4 years PV Valuation18,097,475$