Entrepreneurial Finance

Course Module in Entrepreneurship

Course Modules help instructors select and sequence material for use as part of a course. Each module represents the thinking of subject matter experts about the best materials to assign and how to organize them to facilitate learning. Each module recommends four to six items. Whenever possible at least one alternative item for each main recommendation is included, as well as suggested supplemental readings that may provide a broader conceptual context. Cases form the core of many modules but we also include readings from Harvard Business Review, background notes, and other course materials. I. Overview of suggested content (HBS cases unless otherwise noted) Title Author Product Number 810054 W10015 Publication Year 2009 2011 Pages Teaching Note 812006 810N13

1. Introduction Sources of Financing Avid Radiopharmaceuticals and Lighthouse Capital Partners Alternative 1: Joseph Vigneault and the Capital Pool Company Program (Ivey case) Alternative 2: DermaCare: Zapping Zits Directly Alternative 3: Working Capital Simulation: Managing Growth (HBS simulation) Supplement 1: Financing New Ventures (HBS note) Rhodes-Kropf & Leamon Southam & McDonald Hammermesh & Barley Dahiya 15p 8p

808064 4302

2007 2012

21p 60min

808122 4305

Kerr & Nanda

811093

2011

21p

--

2. Venture Capitalists Principles and Due Diligence AudienceView (Ivey case) Alternative 1: How Venture Capitalists Evaluate Venture Opportunities Alternative 2: Good Money After Bad (HBR case) Supplement: George Doriot and American Venture Capital 3. Valuing a Startup HurryDate Alternative: Venture Valuation AG: The Genedata Assignment (IMD case) Katz, Riedl & Deckinger Leleux, Pahwa & Siebenburger 110035 IMD251 2009 2009 11p 17p 110036 IMD250 Rosenberg Roberts & Barley Mullins Nicholas & Chen 907N06 805019 2007 2004 23p 19p 807N06 805055

R0703X 812110

2007 2012

9p 21p

R0703Z --

Supplement 1: Valuation, Financing and Capitalization Tables in the New Venture Context (HBS note) Supplement 2: A Note on Valuation of Venture Capital Deals (Stanford note) 4. Structuring Deals Internet Securities, Inc.: Path to Sustainability Alternative 1: Prairie Ventures Limited (Ivey case) Alternative 2: Term Sheet Negotiations for Trendsetter, Inc. Supplement 1: A Rich-vs.-King Approach to Term Sheet Negotiations (HBS note) Supplement 2: Deal Structure and Deal Terms (HBS note)

Roberts

806058

2005

5p

--

Hellmann

E95

2001

14p

--

Applegate, Kerr & Johnson Hatch & Zhang Kuemmerle & Coughlin Wasserman, Nazeeri & Anderson Roberts & Stevenson

811098

2011

32p

811109

909N25 801358

2010 2001

16p 10p

809N25 802226

810119

2012

19p

--

806085

2005

8p

--

5. Splitting Equity and Compensation Smartix: Swinging for the Fences Alternative 1: Negotiating Equity Splits at UpDown (HBS role play) Alternative 2: Sports in Your Pocket (Kellogg case) Supplement: A Note on the Legal and Tax Implications of Founders Equity Splits (HBS note) Wasserman Wasserman & Malhotra Rogers & Dame Wasserman & Barley 808116 812701 2008 2012 14p 2 hrs 809134 812048

KEL084 809110

2004 2011

11p 15p

KEL086 --

II. Rationale for selection and sequencing the items in this module Section 1 of this module provides a basic introduction to a range of entrepreneurial financing alternatives. Collectively the three cases look at a wide variety of those options, and focus (respectively) on: 1) venture debt; 2) the features of a capital pool company (CPC) program; and 3) angel investing. The third alternative selection, Working Capital Simulation: Managing Growth, depicts a situation familiar to many entrepreneurs: how does one best manage cash flow and growth when external funding sources are slim? This simulation challenges students to optimize the use of "internal" and external credit as they balance the desire for growth with the need for maintaining liquidity. Finally, entrepreneurial financing alternatives are spelled out in some detail in the introductory note, Financing New Ventures.

Section 2 explores the question: what criteria do venture capitalists apply in evaluating a business plan, and what steps are covered in the process of analysis? The main recommendation, AudienceView, presents students with a view into the type of information available to a venture capitalist (VC) in the early stages of determining whether to pursue an investment opportunity. An intriguing supplementary reading for this segment is George Doriot and American Venture Capital, a case which provides students with historical background to the venture capital industry in the United States. Section 3 focuses on the calculation of what a business concept might be worth its valuation. The main selection, HurryDate, illustrates a comprehensive valuation of a firm which, in this instance, specializes in the "speed dating" niche of the dating/entertainment industry. Either of the two alternative notes should provide students with a basic understanding of key issues in valuation, even if they havent yet studied valuation intensively in their finance courses. Section 4 examines the kinds of deals that entrepreneurs make with investors with a particular focus on term sheets. The section opens with the case Internet Securities, Inc., which contains a term sheet that can be reviewed to support analysis and decision making. The supplementary readings include a background note that offers students and entrepreneurs a framework to guide their term-sheet negotiations with venture capitalists; this is followed by a brief but substantive note on deal structure and terms. Section 5 includes cases that focus on how money will be distributed within the startup enterprise. In the main selection, Smartix, founding partners of a firm grapple with splitting equity amongst themselves while they are simultaneously engaged in other many internal and external negotiations with employees and investors. The first alternative, Negotiating Equity Splits at UpDown, provides a rich account of the relationship between three co-founders and of an early-stage negotiation regarding equity splits.