Assessing the Economic Value of Venture Capital Contracts: An Option Pricing Approach (ebs-Forschung, Schriftenreihe der EUROPEAN BUSINESS SCHOOL Schloß Reichartshausen (78))

Jil C. Onimus makes a contribution to the nascent research line on the economic value of venture capital contracts which lies at the intersection of venture capital contract design and real option pricing. She identifies the baskets of real options embedded in model venture capital contracts as published by the National Venture Capital Association (NVCA) and shows how they can be priced in interaction using Lease Squares Monte Carlo simulation. The pricing model is calibrated by means of a dataset of deal terms in Silicon Valley as well as industry statistics from the NVCA. By applying the model to standard investment scenarios (multiple financing rounds with multiple investors), the author obtains estimates of option values for individual terms and for full contracts with interaction effects. Cover......Page 1 EBS Forschung 78......Page 3 Assessing the Economic Value of Venture Capital Contracts......Page 4 ISBN 9783834928122......Page 5 Acknowledgments......Page 6 Contents......Page 10 List of Figures......Page 14 List of Tables......Page 15 1.1 Problem De.nition......Page 17 1.2 Research Objectives......Page 21 1.3 De.nitions......Page 22 1.3.1.1 Venture Capital Investors......Page 23 1.3.1.2 Venture Capital Financing......Page 24 1.3.1.3 Venture Capital Financing Rounds......Page 26 1.3.2.1 Incorporation Documents......Page 28 1.3.2.2 Venture Capital Investment Contracts......Page 29 1.3.2.3 Parties of Venture Capital Transactions......Page 31 1.3.2.4 Financial Instruments......Page 32 1.3.2.5 Price Terms of Venture Capital Transactions......Page 35 1.3.3 Option Pricing Terms......Page 37 1.4 Course of the Investigation......Page 40 2.1.1 Scope of Analysis......Page 43 2.1.2 Model Legal Documents......Page 45 2.2.1 Speci.cities of Options Embedded in Venture Capital Contracts......Page 47 2.2.3 Choice of the Option Pricing Technique......Page 50 2.3.1 Data Sources......Page 53 2.3.2 Underlying Asset Path......Page 54 2.3.3 Value Process of Embedded Options......Page 63 2.3.4 Dependent Variables......Page 65 2.3.5.1 Pricing Events......Page 66 2.3.5.2 Share Transfers......Page 72 3.1 Provisions De.ning the Payoff Functions......Page 75 3.1.1 Mandatory Conversion and Piggyback Registration......Page 76 3.1.2 Liquidation Preference......Page 81 3.1.2.1 No participation......Page 85 3.1.2.2 Full participation......Page 87 3.1.2.3 Capped participation......Page 89 3.1.3 Optional Conversion Rights......Page 91 3.1.4 Interaction of Optional Conversion and Liquidation......Page 93 3.2 Provisions In.uencing the Number of Shares......Page 98 3.2.1 Preemption Rights......Page 99 3.2.2 Anti-dilution Rights......Page 100 3.2.3 Pay-to-play Penalties and Interaction Effects......Page 106 3.3.1.1 Board Voting Rights......Page 111 3.3.1.2 Stockholder Voting Rights......Page 114 3.3.2.1 Redemption Rights......Page 124 3.3.2.2 Demand Registration......Page 126 3.3.2.3 Drag-along Rights......Page 127 3.3.2.4 Synthesis for Initiatory Exit Rights......Page 129 3.4.1 Exit Type and Timing......Page 132 3.4.2 Evolution of the Numbers of Shares......Page 133 3.4.3 Combined Payoff Functions......Page 135 4.1.1 Speci.cation of Price Terms......Page 137 4.1.2.1 Basic Terms......Page 139 4.1.2.2 Negotiable Terms......Page 140 4.3 Simulation Results and Interpretation......Page 144 5.1 Summary of the Findings......Page 155 5.2 Directions for Further Scienti.c Research......Page 157 A.1 Chi-squared Goodness-of-Fit Test Applied to Distribution of Upward Jump Amplitudes......Page 159 A.2 Chi-squared Goodness-of-Fit Test Applied to Distribution of Downward Jump Amplitudes......Page 160 References......Page 163 Jil C. Onimus makes a contribution to the nascent research line on the economic value of venture capital contracts which lies at the intersection of venture capital contract design and real option pricing. She identifies the baskets of real options embedded in model venture capital contracts as published by the National Venture Capital Association (NVCA) and shows how they can be priced in interaction using Least Squares Monte Carlo simulation. The pricing model is calibrated by means of a dataset of deal terms in Silicon Valley as well as industry statistics from the NVCA. By applying the model to standard investment scenarios (multiple financing rounds with multiple investors), the author obtains estimates of option values for individual terms and for full contracts with interaction effects. Dr. Jil Caroline Onimus identifies the baskets of real options embedded in model venture capital contracts as published by the National Venture Capital Association (NVCA) and shows how they can be priced in interaction using Least Squares Monte Carlo simulation.