Tools

1) Introduction: Evaluating Venture Opportunities

Venture Evaluation Matrix
This spreadsheet allows to analyze the nine cells of the VEM in a synthetic and synoptic way.

Venture Evaluation Matrix: Due diligence
This spreadsheet allows to guide work on due diligence on an entrepreneurial venture by selecting appropriate actions for each of the nine cells of the VEM.

Venture Evaluation Matrix: Drawing conclusions
This spreadsheet allows to bring the analysis of the nine cells of the VEM to conclusion, by deriving the attractiveness and competitive advantages of a venture.

The Venture Evaluation Matrix Spreadsheet Tool
This tool allows to visualize the results of a VEM analysis in a practical way. It is based on the VEM spreadsheet but also requires users to assign a numerical score to each VEM cell, and to choose their own weight for each cell. This yields a summary ‘grade’ that can be used to compare or rank ventures. The VEM scores can also be represented graphically in a radar chart that allows to intuitively grasp the assessment of the venture. The Tool is set up so that users can easily add more questions or modify the existing questions for each cell of the VEM. Users can thus customize the spreadsheet tool to their own specific needs. The VEM Spreadsheet Tool is accompanied by an instruction sheet.

2) Financial Planning

The Financial Projections model
This comprehensive spreadsheet allows to set up financial projections with a considerable degree of flexibility. It covers all three main accounts (P&L, BS, CF) and can be modified to make it suitable for different types of business. It also allows to vary the time frequency and to build financial ratios.

3) Ownership and Returns

Mechanics of Ownership and Valuation
This tool allows to compute the various mechanical relationships between core components of the ownership and valuation variables, extending material explained in the section on Mechanics of Ownership and Valuation.

Capitalization Table
This tool provides a comprehensive approach to build capitalization tables over multiple rounds in a very simple, yet very prices way. It is structured to include details on fundraising at the individual investor.

Investor Returns
This tool expands on the material explained in the section on Investor Returns and allows to compute the three measures of investor returns (IRR, NPV, CCM) as well as the PME measure we introduce in the section on Venture Capital Investors. The tool is structured so as to compute both single-round and multiple-round returns, and can be easily adapted and extended to include for additional investors, rounds, and cash flow patterns.

How to Get the Right Valuation
This tool builds on material explained in the section on Determinants of Valuation and Returns. It provides a very simple way to compute how different valuation offers by different investors can be compared and ranked. The tool illustrates also the role of negotiation and of investor value adding expnained in the sections on Structuring Deals and Corporate Governance, respectively.

FAST
The Founder Allocation of Shares Tool (FAST) makes operational the agreement between founders, based on the assumptions and reasoning developed in the sections on Determinants of Founder Ownership. These are translated into a simple spreadsheet that derives a share allocation starting from the chosen assumptions. The relevance of each criterion can be modified, and a different number of founders, with different preferences, can also be incorporated.

4) Valuation Methods

Venture Capital Model
This tool is built to value a startup using the VC Model under different assumption. It encompasses several variations of the baseline model, and it builds a valuation both for a single round and across multiple rounds.

Failure Risk Premium
This simple tool is handy to compute how a startup’s failure risk affects valuation through the failure risk premium.

DCF Method
This tool is built to value a startup using the DCF method. It is based on financial projections and can be used to obtain different terminal value projections using different assumptions.

Valuation with Investment Comparables and Exit Comparables
This tool allows to value a startup using comparable companies. It considers investment comparables and exit comparables.

Finding comparable companies
This tool provides a simple way for implementing comparables-based valuation.

PROFEX
This tool makes the “Probability of Exit” model. This model incorporates explicitly the probability of different types of exit into consideration, providing a generalization of the Venture Capital Model.

5) Term Sheets

Convertible Stock
This tool can be used to study the effects of preferred stock on the cash flows of entrepreneurs and investors, which is explained in the section on Cash Flow Rights. It allows the analysis of plain convertible preferred, participating preferred, and capped participating preferred. The tool allows to modify several parameters to generate many possible situations and variations in the contract. It also allows to study the consequences of preferred stock on capitalization tables across rounds.

Downside vs. Upside
This tool provides an intuitive way to compare the effects on cash flow and ownership generated by different types of preferred stock. It exposes some common fallacies that we debunk in the section on Valuation versus Terms.

Convertible Note
This tool provides a simple way to understand the working of convertible notes. It includes the case of valuation caps.

6) Structuring Deals

MATCH Tool
This tool provides an operational solution to assessing the fit between entrepreneur and investor. It is based on concepts developed in several chapters of the book, and its construction is developed in the section Finading A Match. The tool can be easily modified along several dimensions to accommodate different approaches to entrepreneur/investor matching.

MATCH Tool Instructions
The instructions to the use of the MATCH tool provide a detailed guide to its practical implementation.

7) Staged Financing

Dilution with Staging
This tool computes share ownership and dilution for entrepreneurs and investors across three rounds, building on materials we explain in the section on Staged Investment and Owbership. It also ncludes the possibility of down rounds. The tool can be extended to different types of investors and different price dynamics.

Real Options
This tool provides a valuation of a startup done using real options, which we explain in the section The Option Value of Staging. The tool is particularly useful to learn about the feasibility of a proposed round and about how staging can make the deal more appealing to investors. The tool allows to change the underlying assumptions to address different business situations.

Tranching vs. Staging
This tool allows to compare a tranched vs. a staged deal structure, building on material we explain in the section on Tranching.

Retention Rate
This tool provides an analysis of how investor ownership changes over multiple rounds, so as to compute the investor’s retention rate that we explain in the section Old versus New Investors. The tool encompasses three rounds and can be modified to include a different number of rounds and multiple investors with different cash flow rights.

Old vs. New Investors
This tool allows to explore the conflict of interests that arises in a new round when new investors arrive and old investors may choose whether or not to keep investing, and how much.

Liquidation Stack This tool allows to dig deep into the comparison of cash flows to different types of investors under different seniority rules for convertible preferred stock issued to investors in a round A and a round B situation. The tool allows for changing priorities and for adding additional rounds or investors.

Dilution with a Stock Option Pool
This tool allows to verify the effect of stock option pools on share ownership.

8) Debt Financing

Cost of Risky Debt
This tool provides a detailed analysis of the material we explain in the section The Fallacy That Debt is Cheaper Than Equity. The tool allows to compare different combinations of debt and equity and shows why entrepreneurs often fail to understand the true cost of debt. The tool can be further developed by incorporating alternative assumptions on equity funding.

Cost of Trade Credit
The tool provides a handy way to compute the cost of trade credit as a function of time and discount rate.

Financing Unexpected Growth This tool compares the cost and other features of different sources of non-equity finance, building on materials we explain in the section on Alternative Types of Debt.

9) Corporate Governance

Voting
This tool provides some simple relationships that make clear the role of dual class shares and other deviations from the one-share-one-vote principle that we explain in the section on Voting Rights.

10) Exits

IPO
This comprehensive tool allows studying the implications of pricing and other IPO choices on the ownership and financial gains of entrepreneurs and investors. It can be extended to include more clauses and investors with different funding contributions.

Secondaries
This tool allows to compare the share ownership implications for shareholders when some investors do a secondary sale to the case of an additional funding.

Epilogue
This tool summarizes the whole financial outcomes for WorkHorse Inc., and can be adapted to be applied and adapted to different funding histories. It puts together the capitalization tables across the whole fundraising history of the company, and computes different measures of investor returns.