SPIFFYTERM INC. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

SPIFFYTERM INC. Case Solution

COMPANY OVERVIEW

Three partners and founders of Sniffyterms Inc and students of West Coast Business School started this company and now they want to officially begin the operations by calculating the appropriate valuation of the company shares. Recently they received a terms sheet from Vulture Ventures, which showed a considerable interest in joining these founders in the financing of capital. Before they take any decision, the founders want to understand the term sheet and with it, the valuation.

QUESTION 1a WHAT VALUATION DO THESE ASSUMPTIONS SUGGEST?

According to the assumption used in the case, the founders want to allocate 5 million shares to the founders. Currently, they need total of $ 4 million and after 2 years, they will an additional need $2 million. The investors will have 4 million shares and future leftover shares for employees of the Spiffyterm Inc would be 1.5

shares (m)		value per share	total value
founders	5	$1	$5
venture capitalist	4	$1	$4
future hire shares	1.5	$1	$2
total shares	11	total valuation	$11
		ipo value after 4 years	$80
		45% discount	$5.78
		additional amount that will needed within four years		($74.2)

The assumptions and the subsequent valuation calculations are shown above.

The assumption s also suggests that the additional amount of 74.2 million will be needed after 4 years when the company will list itself and will initiate public offer.

The value would be changed in such a way that 2 million shares will be raised at $3 dollar per share and for $3 million. Funding in second round will be raised through issuing 1.5 million shares at $2/share. The share price will be set higher if 6 million funds will be needed because there will no round thereafter.

*shares second round(million shares)*	*value per share*	*total value*	*shares needed to be raised(million)*
shares for 2nd round 1.5	$2	$3.00	1.50
shares for 2nd round 1.5	$3	$6.00	2.00

QUESTION 1c WHAT IMPLICIT VALUATION AFTER 4 YEARS MUST THEY HAVE USED?

Vulture Ventures should use an implicit value after years as $2.22 per share on the total shares to 9 million 5 million plus 4 million apart from the 1.5 shares of employees, which are future hire shares.

	shares	share value	paid in capital
Founders	5	$1.00	$5.00
Venture capitalist	4	$1.00	$4.00
total shares	9		$9.00	million
45% discount			$4.05
implicit value after four years			*$2.22*

QUESTION 1d WHAT IMPLICIT DISCOUNT RATE MUST THEY HAVE USED?

The discount rate of 45% will make ipo undersubscribed by 44 million dollars. On the other hand, if they use discount factor less than 45% then the ipo value of$80 million can be fully subscribed. Only 36 million dollars will be raised using 45% discount rate.

ipo value	80	million
discount rate	45%
total shares	9
share value must be (implicit valuation should be after four years)	8.888889
value of share after discount	4
amount raised after discount	36
under subscription by	-44	million

Ipo value on the shares of 9 million the founders’ shares and venture capitalist the value of shares must be 8.88 for full subscription if want will issue 9 million new shares.

First of all by doing this, the control will dilute because the investors will be at same percentage of shares but the founder’s and option pool shares will increase by 100%, which will dilute control........................

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