Financing of startups and small corporations (MSB310B)

Content

This course looks at the financing of start-ups and small corporations, with a focus on private equity and venture capital. A prime concern is the contracting between a firm and its source of financing (private equity firm, venture capital firm.) Additionally, the course covers the listing of firms on exchanges (the IPO).

The course starts out by teaching the students valuation methods for start-ups and contrasts them with those used for mature firms. The goal here is to help the students gain critical insight into what makes start-up valuation much more demanding relative to what they have learned so far.

The course then looks at the contracts the founders have with their financiers and investigates how these contracts structure the relationship between the contracting parties. The students will learn how these contracts:

- set incentives for founders and investors

- reduce asymmetric information

- affect the valuation of the firm

- change the relative value of the stakes of the contracting parties

In a second step the students will understand the incentives for investors (mostly venture capital funds) to finance start-ups and the consequences of these incentives:

- the need to exit investments, and the difficulties of doing so through an IPO

- how investors in start-ups (called VCs) structure the contracts with their investors (called LPs)

- how the performance of VC funds can be evaluated.

Learning outcome

Knowledge:

Upon completion of the course students will have:

• an understanding of start-up financing and the venture capital (VC) industry in general
• an understanding of how financial contracts should be designed in the VC industry
• an understanding of how firms are listed on the stock exchange

Skills:

Upon completion of the course students will have the ability to:

• use the discounted cash flow (DCF) method for start-ups
• use the VC method and other valuation methods
• value advanced security structures such as convertible securities using Black-Scholes
• evaluate the performance of VC funds

Required prerequisite knowledge

Exam

Open for

Course assessment

Literature