Spiffy Term Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Spiffy Term Inc. Case Study Solution

The partners have allocated 5 million shares to themselves, and they have kept 1.5 million shares for the future hires. The company has to raise capital of $4 million in first rounding assuming that there would be no second round of the investments. The pre-valuation and post-valuation refers to the valuation before and after financing of the project by the venture capitalists in the company.

There are many complications and complexities that needs to be understood. Such as the pre-valuation assumptions states that company would need no other round raising investment from the investors or capitalist in the market. However, the assumptions of the founderssuggest that they want to raise around $4 million in first round, and $2 million in second round. Indeed, they do not have sufficient shares because they have 5 million shares, and 1.5 million for future.

They also have rejected the option by the venture capitalists that they would finance the company $4 million on $1/per share. But, the founders estimate that they are being undervalued by the investors given that they have good potential to grow, and could have IPO of $80 million right of two years of this initial investment.

Thus, it can be determined that founders’ assumptions are based on approaching an IPO through two round of raising capital through venture capitalists, and they assume that value of company would increase rapidly that would help company valuation in pre money and post money has well. Furthermore, in the first investment round, the investors are given confidence over the company by realizing that there is no over or under valuation of the company.

The changes in the founders’ assumptions would have impacts on the pre and post valuation process. Since, it is assumed that company would require $2 million capital for the second round of investment. Since, the first case suggests that company is trying to raise capital of $4 in the first round, and founders also has kept 5 million shares for themselves, and 1.5 million for future hires.

Spiffy Term Inc. Harvard Case Solution & Analysis

So, company has measured the risks, and benefits and has many assumptions behind, and set of reasons behind these financing activities. Thus, a single change in one thing would have an effect on the whole process from the financing to raising capital, and from founder to investors. If the company requires more financing in the second round than assumed for example $3 million capital instead of $2 million as it was stated by the founders.So, it would have an effect on the company as a whole, the founders and investors. The investor’s concerns would rise, that’s why the company needs additional capital more than it has assumed, and financiers might also give tough time to the company. On the other hand, the structure of financing, capital structure, capital raising and investment policies would change. It might affect the structure of ownership, and right of ownership.

If we assume that company would have a discount rate of 45%. The investment is discounted on the discount rate to measure its feasibility, and profitability as well. A positive NPV at the end indicates that company has good and feasible investment opportunity in which company should take part and make investment. Also,after using the discount rate of 45% investment is discounted for four years to get the value of investment to approach the terminal value.

The terminal value is referred as the long-term value of the investment. Because, it represents the value of long-term benefit that company would have from the investment. It is calculated bydividing last year’s discounted cash flow by the discount rate minus growth rate which is assumed to be 16% because the discount rate is assumed at 45%. In this way vulture’s ventures drove their offer for $4 million 1 share per dollar. See Exhibit 1

There are many complications and complexities in the discount rate determination, and growth rate determination. However, there is no more data given about the company so that these values could be calculated. Therefore, trial and error method was used to calculate the values such as growth rate, discount rate and terminal values. However, if the vulture ventures used same approach to valuation, then there would be some additional assumptions. The discount rate was assumed to be 9%, growth rate to be 5%. See exhibit 2

The reason that bob is fantastic that would make everything clear since things were complicated before. Because the financiers were not ready to finance more $4 million for 1 share per dollar. Which means that company would have to issue 4 million shares to the financers in order to get investment from venture capitalists. So, it can be determined that there are many complications in this process because, the company only has 6.5 million shares in hand........................

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