A Valuation Model of Venture Capital-Backed Companies with Multiple Financing Rounds

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See all articles by Will Gornall

Will Gornall

University of British Columbia (UBC) - Sauder School of Business

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Date Written: November 5, 2020

Abstract

This paper develops the first option pricing model of venture capital-backed companies and their security values that incorporates the dilutive future financing rounds prevalent in the industry. Applying our model to 19,000 companies raising 37,000 rounds shows post-money valuations exceed fair values by 39%. Ignoring future rounds overstates the valuation impact of liquidation preferences by more than 100%. Counterintuitively, future “investor-friendly” rounds transfer value from current investors to founders and other common shareholders. Future terms closely resemble current terms, which makes current “investor-friendly” terms much less valuable to investors. Our valuations predict outcomes and the prices reported by specialized venture capital investors but are lower than values reported by mutual funds and dramatically higher than the values companies report for tax purposes.

Keywords: Venture Capital, Valuation, Entrepreneurship, Capital Structure, Renegotiation

JEL Classification: g24, g32

Suggested Citation

Gornall, Will and Strebulaev, Ilya A., A Valuation Model of Venture Capital-Backed Companies with Multiple Financing Rounds (November 5, 2020). Available at SSRN: https://ssrn.com/abstract=

Will Gornall (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

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Vancouver, BC V6T 1Z2
Canada

Ilya A. Strebulaev

Stanford University - Graduate School of Business ( email )

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Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

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Cambridge, MA 02138
United States

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