Venture Capital The Business of Innovation

Kellogg-Recanati International Executive MBATel Aviv, March 2017

Session 4

Izhar Shay

VC 101

Venture Capital

Returns

Investment

Year 1 Year 7

VC 101

Venture Capital

Returns

Investment

Year 1 Year 7

Shareholders’ Value Creation

Syndicate Funding - CAP Table

Syndicate Funding - CAP Table

Syndicate Funding - CAP Table Example

Syndicate Funding - Distribution of Proceeds

Company sold for $$$ - who gets what?

Distribution of Proceeds - CAP Table Waterfall

Company sold for $$$ - who gets what?

Typical Waterfall:1. Loans and credit lines paid off2. Investors’ Preferred Shares, “LIFO” (Sometimes with interest)

1. (Example: B Shares A Shares Common)3. Common Shares and Preferred “As Converted”

Typical Preferred Terms:“Participating”, “Participating with a CAP”, “Non Participating”

CAP Table Comments

Different classes of shares:• Investors’ Preferred Shares• Common Shares• Employee Stock Options Plan (ESOP)

Investors:• Earlier investors pay less for higher ownership• Later investors pay more but their risk is reduced• Financial Preference can overpower CAP table holdings

Investors’ and Founders’ dilemmas:• Valuation - Shareholders Value• Dilution - “What’s in it for me by the end of the day?”• Control - “Who is going to call the shots here?”• Financial outcome of CAP table

VC 101

Venture Capital

Returns

Investment

Year 1 Year 7

Thank You!

January 2016

A small slice in a big pieis better

than a big slice of nothing…