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From Concept to Wall Street: A Complete Guide to Entrepreneurship and Venture Capital

Book Description

From Concept to Wall Street is the definitive guide to the new realities of venture capital. Two leading experts in venture-backed entrepreneurship offer start-to-finish coverage of the entire process: planning, teambuilding, protecting intellectual property, identifying and negotiating funding, and managing to - and through - IPOs or M+As. Drawing on immense personal experience - and the lessons of recent years - Dr. Oren Fuerst and Dr. Uri Geiger offer a complete roadmap for entrepreneurs, investors, and advisors in every VC-funded industry.

Table of Contents

  1. Copyright
    1. Dedication
  2. Financial Times Prentice Hall
  3. Financial Times Prentice Hall Books
  4. Foreword
  5. Preface
  6. Acknowledgments
  7. About the Authors
  8. 1. Introduction
    1. Book Structure
      1. Part I—Establishment and Development of Ventures
      2. Part II—Financing the Venture
      3. Part III—Venture Capital Investors
      4. Part IV—Raising Capital from the Public
      5. Part V—Sale of Companies, Restructuring, and Dissolution
    2. Glossary
  9. I. Establishment and Development of Ventures
    1. 2. Beginnings—Establishing a Venture
      1. The Price of Success and Failure
      2. The Idea
      3. The Management Team
      4. External Advisors
        1. Financial Advisors and Management Consultants
        2. Legal Advisors
        3. Incubators
        4. Accelerators
      5. Incorporation
        1. The Objectives of Incorporation
        2. Types of Corporations
        3. Incorporation Documents
        4. The Corporate Organs
        5. Corporate Capital
      6. Incorporation in Delaware
        1. Background
        2. Organizing and Managing a Delaware Corporation
        3. Share Capital and the Shareholders
        4. The Board of Directors
        5. Mergers and Consolidations
          1. Taxation of Partnerships, S Corporations, and Limited Liability Companies (LLCs)
    2. 3. Financial and Business Planning
      1. The Company's Business Cycle
      2. Financial Statements
        1. Balance Sheet
        2. Assets
        3. Liabilities
        4. Income Statement
        5. Cash Flow Statement
        6. The Relationship between the Balance Sheet, the Income Statement, and the Cash Flow Statement
        7. The Difference between Accounting Revenue and Actual Cash Flows
        8. EBITDA and Cash Earnings
        9. Reporting Holdings in Other Companies and Consolidation of Statements
      3. Financial Projections
        1. The Purpose and Importance of Financial Forecasting
        2. General Forecasting Issues
        3. Issues in Forecasting the Business Results of a New Company
        4. Sales Growth and Required Capital
        5. Utilization of Working Capital
        6. Pricing and Credit Policy
        7. Dividend Policy
      4. Cost Structure Analysis and Forecasting
        1. Analyzing the Break-even Point
        2. Forecasting Fixed and Variable Costs
        3. Outsourcing
        4. The Costs of Market Entry and the Network Effect
      5. Cash Flow Forecasting
        1. Cash Break-even Point
        2. The Scale of Investment Required to Reach Profitability
      6. Market Analysis and Strategic Planning
        1. Introduction
        2. The Essence of Strategic Planning
        3. Analyzing Target Markets
        4. Real Options
        5. Using Decision Trees for Strategic Decisions
      7. Strategic Alliances
        1. The Advantages of Strategic Alliances
        2. The Disadvantages of Strategic Alliances
        3. Types of Strategic Alliances
        4. Financial Reporting
        5. Antitrust Considerations
      8. The Business Plan
        1. Introduction
        2. The Structure of a Business Plan
        3. Executive Summary
        4. Business Plan Headers
    3. 4. Employee Recruitment and Compensation
      1. Employee Recruiting
        1. Job Descriptions and Requirements
        2. Finding and Screening Employees
      2. Employee Compensation in the Technology Segments
        1. Introduction
        2. Methods of Employee Compensation
        3. Considerations in Planning Compensation Packages
      3. Granting Options to Employees
        1. Introduction
        2. Stock Options Defined
        3. Advantages and Disadvantages in the Granting of Options
        4. Stock Option Plans
        5. Valuation of Options
        6. Responses to a Fall in Stock Values
        7. Accounting Aspects of the Distribution of Options
        8. Issuance of Options Shortly before an IPO
        9. The Amount of Capital Held by Employees and Other Officers
        10. Options and Shares in Spin-offs
      4. Taxation of Stock Options
        1. Taxation of Incentive Stock Options (ISOs)
        2. Taxation of Non-qualified Stock Options (NSOs)
        3. Taxation of Employee Stock Purchase Plans
      5. Performance-based Compensation
        1. Introduction
        2. The Financial Leverage of Compensation Packages
        3. Performance Evaluation
        4. Types of Performance-based Compensation
        5. Weighing the Relative Performance of the Business Unit
      6. Incentives to Tie Employees to the Company
      7. Considerations in Employment Termination
    4. 5. Intangible Capital and Intellectual Property
      1. Patents
        1. Introduction
        2. Basic Principles
        3. Prerequisites for Obtaining a Patent
        4. Patent Registration
        5. Patents Outside the United States
        6. Patents for Business Processes
        7. Compulsory Licensing
      2. Copyright Law
        1. Principles
        2. Issues in Digital Media
      3. Trademark Law
      4. Trade Secrets
        1. What Is Protected?
        2. Main Elements
        3. The Protection of Trade Secrets
      5. Issues with Employees
      6. NDA—Non-Disclosure Agreements
      7. Considerations in the Granting of Licenses
        1. Licenses Defined
        2. Pricing a License to Utilize a Patent
  10. II. Financing the Venture
    1. 6. Milestones and Sources of Financing the Venture
      1. Financing in Stages
      2. Milestones in Venture Development
        1. The Research and Development Dimension
        2. The Managerial Team Dimension
        3. The Business and Market Penetration Dimension
        4. The Revenue Dimension
      3. Scope of Financing and the Company's Value
        1. Demand—The Company's Capital Needs
        2. Supply—The Company's Ability to Raise Capital
      4. Stages in Raising Venture Capital
        1. Distinguishing among Preliminary Rounds of Investment
        2. Pre-seed Financing
        3. Seed Financing
        4. First-stage Financing
        5. Second- and Third-stage Financing
        6. Pre-IPO Financing
      5. Sources of Capital
        1. Introduction
        2. Family and Friends
        3. Private Investors (Angels)
        4. Venture Capital Funds
        5. Corporate Investors
        6. Other Venture Capitalists
        7. Financing by Debt
    2. 7. Practical Aspects of Raising Venture Capital
      1. Basic Terms
        1. Sale of Shares by Shareholders Versus Investments
        2. Terms for Describing the Value of a Company
      2. Deciding How Much Capital to Raise
      3. Valuing the Company for the Purpose of Raising Capital/Determining According to Which Value Capital Will be Raised
      4. The Process of Raising Venture Capital
        1. What Interests Investors
        2. Preparing to Raise Capital
        3. Choosing the Investors
        4. Contacting and Meeting with Investors
        5. Deciding upon an Investment
        6. Due Diligence
    3. 8. Legal and Contractual Aspects of Raising Venture Capital
      1. Legal Restrictions on Raising Private Capital
        1. Legal Restrictions According to U.S. Law
        2. How to Meet the Legal Requirements
        3. The Term Sheet
        4. Investment Agreements
        5. Main Issues in Investment Agreements
        6. Financial Matters
        7. The Rights Attached to the Securities Allotted to the Investor—Protecting the Value of the Investment
        8. Right to Control and Rights to Information
        9. The Founders and the Managers
        10. Registration Rights Agreements
        11. The Need for a Registration Rights Agreement
        12. Types of Registration Rights
        13. Restrictions on Registration Rights
        14. Other Matters Regulated in Registration Rights Agreements
        15. Other Arrangements
        16. Other Matters Regulated in Investment Agreements
        17. Employment Agreements
        18. Shareholders Agreements
        19. Employee Stock Option Plans
    4. 9. Valuation of Companies
      1. Methods Based on Multiples
        1. Principles
        2. Customary Types of Multiples
      2. Methods for Discounting Cash Flows and Residual Income
        1. Principles
        2. Estimating the Value Component during the Projected Period
        3. Estimating the Value Component after the Projected Period
        4. Example
        5. Valuation According to Discounted Residual Income
      3. The Real Options Method
        1. Introduction
        2. Types of Real Options
        3. Pricing Real Options
      4. Value to Investors or Strategic Investors and Buyers
        1. Introduction
        2. Components in the Value to Strategic Investors and Buyers
        3. The Importance of Potential Strategic Buyers to Financial Investors
      5. The Discount Rate Used by Venture Capital Funds
        1. Introduction
        2. Why VCs Use a Higher Discount Rate
        3. Changes in the Discount Rate over Time
      6. Issuing Stock to Investors
        1. The Number and Price of the Shares Allotted to the Investor
        2. Investment Rounds with a Pool of Employee Stock Options
        3. The Effect of Preemptive Rights
      7. The Venture Capital Method
        1. Introduction
        2. Stage 1: Analyze and Identify the Type and Time of the Exit
          1. Mini-Case Study: Medica—Stage 1
        3. Stage 2: Estimate Terminal Value (TV)
          1. Mini-Case Study: Medica—Stage 2
        4. Stage 3: Determine the Discount Rate (r)
          1. Mini-Case Study: Medica—Stage 3
        5. Stage 4: Estimate Additional Required Investment
          1. Mini-Case Study: Medica—Stage 4
        6. Stage 5: Calculate the Range of Values for Investment
          1. Mini-Case Study: Medica—Stage 5
      8. Appendix—Basic Terms in Measurement
        1. Basic Terms in Returns Measurement
  11. III. Venture Capital Investors
    1. 10. Venture Capital Funds
      1. Private Equity Funds and Venture Capital Funds
        1. Introduction
        2. The Main Types of Private Equity Investments
      2. Venture Capital Investment Characteristics
      3. Venture Capital Funds and Their Investors
      4. Venture Capital Funds and Their Portfolios
        1. The Added Value of Venture Capital Funds
        2. The Means by Which Venture Capital Funds Oversee Their Investments
      5. The Development of the Venture Capital Industry in the United States
        1. Beginnings
        2. The 1980s
        3. The 1990s until the 2000 Crisis
      6. The Venture Capital Industry at the Dawn of the Third Millennium
        1. Introduction
        2. The Impact of the Crisis in the Capital Markets on the Industry
        3. An Analysis of the Phenomenon and an Outlook to the Future
      7. The Structure and Activities of Venture Capital Funds
        1. The Organization of Venture Capital Funds
        2. Raising Capital for Venture Capital Funds
        3. How Venture Capital Funds Work
        4. Distribution of Profits and Compensation of Fund Managers
      8. Exit Strategies of Investments by Venture Capital Funds
      9. The Return on Venture Capital Funds
    2. 11. Other Venture Capital Investors
      1. Private Investors (Angels)
      2. Corporate and Other Investors
        1. Introduction
        2. Direct Investments by Companies in the Field
        3. Corporate In-house Entrepreneurship and Incubators
      3. Financial Institutions Which Invest Directly in Funds
        1. Investment Banks
        2. Holding Companies of Commercial Banks
        3. Pension Funds
        4. Insurance Companies
        5. Not-for-profit Organizations
        6. Mutual Funds
      4. Other Sources of Capital
        1. Credit Companies
        2. Leasing
  12. IV. Raising Capital from the Public
    1. 12. Raising Capital from the Public—Introduction
      1. Deciding to Go Public
        1. Is the Company Ready to Go Public?
        2. The Advantages of Going Public
        3. The Disadvantages of Going Public
      2. Preparing the Company for an IPO
        1. The Managers' Responsibility
        2. Business Plan
        3. Legal Issues
        4. Accounting Issues
        5. Managing Investor Relations
    2. 13. The Public Offering Process
      1. Stock Markets in the United States
        1. Stock Exchanges Versus Over-the-Counter Trading Systems
        2. The New York Stock Exchange (NYSE)
        3. NASDAQ
      2. Forming the IPO Team
        1. The Underwriters
        2. Choosing the Underwriters
        3. The Underwriting Syndicate
        4. Underwriter Compensation
        5. The Legal Counsel
        6. The CPA
        7. The Cost of an IPO
      3. The Process
        1. Signing the Letter of Intent
        2. Quiet Period
        3. Organizational Meeting
        4. Preparing the Preliminary Registration Statement
        5. Due Diligence
        6. Filing the Preliminary Registration Statement with the SEC
        7. The Amended Registration Statement
        8. The Preliminary Prospectus (Red Herring)
        9. Road Show
        10. Due Diligence Meeting
        11. Pricing, Signing the Underwriting Agreement, and Registration Statement Effectiveness
        12. Selling the Shares to the Public and Closing
        13. Trading, Stabilization, and Exercise of the Underwriters' Option (Green Shoe)
      4. The Underwriting Agreement
        1. The Standard Methods
        2. Other Alternatives
      5. The Registration Statement
        1. Disclosure Duties
        2. The Disclosure Particulars
      6. Liability under U.S. Securities Laws
      7. Changes in the Registration Process
      8. Following the IPO
        1. Periodic Reporting Duties
        2. Reporting Material Events and Stock Exchange Rules
        3. Proxy Rules
        4. The Prohibition on Insider Trading
      9. Selling Shares That Are Exempt from Registration
        1. Rule 144
        2. Regulation S
        3. Regulation A
      10. Foreign Companies Raising Capital
        1. Disclosure under International Disclosure Rules
        2. Relief in the IPO Process
        3. Relief in Periodic Reporting Requirements
        4. Other Exemptions
        5. Using ADR
  13. V. Mergers and Acquisitions, Bankruptcies, and Dissolution
    1. 14. Mergers and Acquisitions (M&A)—Introduction
      1. The Scope of the Phenomenon
      2. Types of Corporate Restructuring
      3. Strategic Classification
        1. Horizontal Acquisitions
        2. Vertical Acquisitions
        3. Conglomerate Acquisitions
      4. Why Do Mergers and Acquisitions Occur?
        1. Reducing Development Times and Acquisition of Rapid Growth Options
        2. Operational Synergy
        3. Change in Market Power
        4. Improved Managerial Capabilities
        5. Diversification and Capital Market Synergy
        6. Tax Advantages
      5. Do Mergers and Acquisitions Create Value?
      6. Sales and Mergers Versus IPOs
        1. IPOs
        2. Sales
      7. Case Study—The Sale of Chromatis to Lucent
        1. Beginnings
        2. Building the Company
        3. The Transaction
        4. Analysis and Prologue
    2. 15. Conducting the M&A Transaction
      1. Mergers
        1. Classic Mergers
        2. Triangular Mergers
      2. Sale and Acquisition of Assets
      3. M&A Strategy
        1. Acquirer's M&A Strategy
        2. Target's M&A Strategy
      4. The Consideration in Mergers and Acquisitions
        1. Typical Forms of Payment
        2. Determining the Price
        3. The Advantages of Stock-based Transactions
        4. The Risks in Stock-based Transactions
      5. The Process
      6. Tender Offers
    3. 16. Additional Legal Aspects
      1. Legal Rules Governing Mergers and Acquisitions
        1. Applicable Corporate Laws
        2. Applicable Securities Rules
      2. Merger or Acquisition Agreements
        1. A Description of the Transaction
        2. Price and Terms of Payment
        3. Representations and Warranties
        4. Covenants and Conditions to Closing
      3. Antitrust Issues
      4. Fairness Opinions
    4. 17. Other Restructuring
      1. Other Types of Restructuring: Spin-offs, Split-offs, Carve-outs, and Letter Stocks
      2. Equity Carve-outs (Spin-out IPOs)
      3. Letter Stocks/Targeted Stocks
      4. The Rationale of Separate Listing of Units
    5. 18. Bankruptcy and Dissolution of Companies
      1. Legal Rules Governing Bankruptcy and Dissolution in the United States
        1. Bankruptcy
        2. Dissolution
      2. Additional Issues Concerning Bankruptcy of Startup Companies
  14. Glossary
  15. Further Readings