On the Valuation of Venture Capital Securities

50 Pages Posted: 25 Mar 2008

See all articles by Klaas Baks

Klaas Baks

Emory University - Department of Finance

Gabriel D Carroll

Massachusetts Institute of Technology (MIT)

Andrew Metrick

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Date Written: March 18, 2008

Abstract

Venture capitalists typically receive preferred stock when they invest. This preferred stock comes in many flavors and can include many different features. The resulting securities can be modeled as a portfolio of options with unknown expiration dates, with these expiration dates possibly correlated to underlying firm value. These securities can provide a significant premium to plain common stock, but past solutions for this premium are either unwieldy or require unrealistic assumptions. In this paper, we derive closed-form solutions for the value of VC securities using a flexible functional form that allows for a wide variety of realistic assumptions for the key parameter values. We then take this solution to the data and estimate the expected premium above common stock for typical VC securities. We find that this premium can be substantial, with estimates between 20 percent and 60 percent for the most common types of transactions.

Keywords: venture capital, valuation

Suggested Citation

Baks, Klaas and Carroll, Gabriel D and Metrick, Andrew, On the Valuation of Venture Capital Securities (March 18, 2008). AFA 2009 San Francisco Meetings Paper, Available at SSRN: https://ssrn.com/abstract=1108840 or http://dx.doi.org/10.2139/ssrn.1108840

Klaas Baks (Contact Author)

Emory University - Department of Finance ( email )

Atlanta, GA 30322-2710
United States

Gabriel D Carroll

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Andrew Metrick

Yale School of Management ( email )

165 Whitney Avenue
New Haven, CT 06511
United States
(203)-432-3069 (Phone)

HOME PAGE: http://faculty.som.yale.edu/andrewmetrick/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

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