1. Finance: Review of Ch.1 1.1 What is Finance? 1.2 The Role of the Financial Manager 1.3 Who is the Financial Manager 1.4 Goal of the Firm ? 1.5 Agency Problem

2. 1.1 What is Finance? 1.2 The Role of the Financial Manager Two Basic Questions 1 Investment Decision 2 Financing Decision

3. 1.3 Who is the Financial Manager Financial Manager Firm's Operations Financial Markets (1) Cash raised from investors (2) Cash invested in firm (3) Cash generated by operations (4a) Cash reinvested (4b) Cash returned to investors (1)(2) (3) (4a) (4b)

4. Overview of Venture Capital Limited Partners Venture Fund Entrepreneurs IPO/Acquisition Market $ $ and time stock $ $

5. The Ideal VC Investment Large, demonstrated market Proven technology No competition Experienced entrepreneurial team Early exit opportunities Huge Return, No Risk

6. Is the product a vitamin or a painkiller? Vitamins are nice to have Painkillers are essential What are your insights into the problem? How does your technology provide a compelling solution? How big is the market? Will customers seek you out for your solution?

7. Silicon Valley Ventures’ Investment Criteria--General Differentiated product/technology Huge market Strong competitive position Experienced management Multiple exit opportunities

8. Example: Mayfield--Specific Founded in 1969 Mayfield XI raised $1B in March 2000 11 GPs, 4 venture partners, 2 associates 30% communications--voice & data 30% e-commerce infrastructure 30% B2B, B2G, and I2I 10% healthcare--biotech, devices http://www.mayfield.com

9. “Typical” VC Deal The Company –eighteen months old –initial product in beta –ten employees eight technical (including CEO and two other founders) one marketing one administration –funded to date with $750K from friends and family

10. “Typical” VC Deal $4 million needed for product launch and continued development $4 million “pre money” valuation Equity split: –33% to venture investors (Preferred B) –25% employee stock option pool (Common) –20% to founders (Common) –22% to original investors (Preferred A)

11. “Typical” VC Deal New CEO with industry experience Board of Directors: –One founder –New CEO –Two VC representatives –Two industry experts All employee/founder shares subject to four year vesting

12. Potential returns and related risks

13. 1.4 Goal of the Firm ? B. How to Maximize Shareholders’ Wealth? Do all positive NPV project! A. Maximization of Shareholders’ Wealth MV of common stock All financial decisions 1 2

14. 1.5 Agency Problem Monitoring by board of directors 1 Compensation package 2 Active outside takeover market 5 Efficient outside managerial labor market 4 Monitoring by outside large blockholders (Bank, insurance Co., pension, mutual fund) 3 B. How to solve agency problem? A. Separation between Ownership and Management