ENTREPRENEURIAL FINANCE
ENTREPRENEURIAL FINANCE
Strategy, Valuation, and Deal Structure
Janet Kiholm Smith
Richard L. Smith
Richard T. Bliss
Stanford Economics and Finance
An Imprint of Stanford University Press
Stanford, California
Stanford University Press
Stanford, California
2011 by the Board of Trustees of the Leland Stanford Junior University. All rights reserved.
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Printed in the United States of America on acid-free, archival-quality paper
Library of Congress Cataloging-in-Publication Data
Smith, Janet Kiholm.
Entrepreneurial finance : strategy, valuation, and deal structure / Janet Kiholm
Smith, Richard L. Smith, and Richard T. Bliss.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-8047-7091-0 (cloth : alk. paper)
1. Venture capital. 2. New business enterprisesFinance. 3. Entrepreneurship.
I. Smith, Richard L. (Richard Lester) II. Bliss, Richard T. (Richard Thomas), 1958- III. Title.
HG4751.S594 2011
658.15224dc22
2010026481
For Kelly and Erin.
J.K.S.
R.L.S.
For my family, and especially Christine and Dylan.
R.T.B.
CONTENTS
ILLUSTRATIONS
ABBREVIATIONS
A | assets |
A/P | accounts payable |
A/R | accounts receivable |
BDC | business development company |
BEP | breakeven point |
BRIC | Brazil, Russia, India, and China |
BS | balance sheet |
BV | book value |
CAPM | Capital Asset Pricing Model |
CEQ | certainty equivalent |
CF | cash flow |
CML | capital market line |
COGS | cost of goods sold |
D | debt or dividend per share (depending on context) |
D&A | depreciation and amortization |
D/E | debt to equity ratio |
D/V | debt to value ratio |
DCF | discounted cash flow |
DPO | direct public offering |
E | equity |
E/V | equity to value ratio |
EBIT | earnings before interest and taxes |
EBITDA | earnings before interest, taxes, depreciation, and amortization |
EBT | earnings before tax |
ERISA | Employee Retirement Income Security Act |
ESOP | employee stock ownership plan |
FDA | Food and Drug Administration |
FY | fiscal year |
g* | sustainable growth rate |
GAAP | Generally Accepted Accounting Principles |
GDP | gross domestic product |
GEM | Global Entrepreneurship Monitor |
GP | general partner |
ICA | Investment Company Act of 1940 |
IFRS | International Financial Reporting Standards |
INT | interest expense |
IPO | initial public offering |
IRR | internal rate of return |
IS | income statement |
IT | information technology |
LBO | leveraged buyout |
LP | limited partner |
M&A | merger and acquisition |
MBO | management buyout |
MV | market value |
NAICS | North American Industry Classification System |
NAV | net asset value |
NI | net income |
NPV | net present value |
NVCA | National Venture Capital Association |
NWC | net working capital |
NYSE | New York Stock Exchange |
OCF | operating cash flow |
OECD | Organization for Economic Cooperation and Development |
OEM | original equipment manufacturer |
OPM | Black-Scholes Option Pricing Model |
OTC | over-the-counter |
P | price per share |
P&L | profit and loss |
P/E | price to earnings ratio |
PEG | price earnings to growth |
PP&E | property, plant, and equipment |
PV | present value |
R | retention ratio (1 dividend payout ratio) |
R&D | research and development |
RADR | risk-adjusted discount rate |
ROA | return on assets |
ROR | rate of return |
ROS | return on sales |
RP | risk premium |
RV | relative value |
SBA | Small Business Administration |
SBIC | Small Business Investment Company |
SBIR | Small Business Innovation Research |
SEC | Securities and Exchange Commission |
SEO | seasoned equity offering |
SG&A | selling, general, and administrative expenses |
SIC | Standard Industrial Classification |
SME | small and medium-size enterprise |
SML | security market line |
TY | tax year |
VC | venture capital/capitalist |
WACC | weighted average cost of capital |
PREFACE
History abounds with examples of extraordinary entrepreneurs whose new ideas and products have changed the world. Many people are enamored with the idea of creating new products and starting businesses. Accompanying the interest in venture creation, there is broad interest in venture capital, in investment banking, and in careers related to new venture financing, deal structuring, and harvesting.