ASSIGNMENT SUBMISSION FORM

Course Name: INPE

Assignment Title: IGT Case Term sheet Exercise

Name PGID
Question 1a) Derive the valuation using an earnings multiple method.
As per earning multiple method the valuation is given below. Detailed calculation given in
appendix-1
PV(TV) 20557918
VC investment 3184871
Pre-money valuation 17373046.68
VC shareholding 15.5%

Question 1b) Derive the valuation using a sales multiple method

As per the sales multiple method valuation is given below. Detailed calculation given in
appendix-2
PV(TV) 8799161
VC investment 3184871
Pre-money valuation 5614289.58
VC shareholding 36.2%

Question 1c) What exit value would Trident have to assume to generate a price per
share of $0.83, as suggested by the proposed deal?
As per the share price of $0.83 exit value is determined and given in the below table. Detailed
calculation given in appendix-3

Total number of entrepreneur’s share as per exhibit 5176082

15b
Target IRR 70.00%
PV(TV) 7481019
VC investment 3184871
Pre-money valuation 4296148
VC shareholding 42.6%

Year 2001 2002 2003 2004 2005 Exit Value as per 0.83 share
price 2006
Cash flow -3184871 0 0 0 0 106219773
Question 2a) Using the same assumptions as before, and focusing on the sales
multiple method, determine the valuation of the tranched deal. Why is it different from
the single round deal? Who benefits from tranching? Why?

The valuation of the tranched deal is given below. Detail calculation is given in appendix -4

Price per share at year 0 1.24

Pre-money value at year 0 6437819
Total shares at end of year 1 7074628
Price at the end of year 1 2.11

In tranched deal pre-money value increased from $3.18M to $6.44M. In both cases the exit
value remained same. This is because same exit value was obtained in either situation.
Alternatively, in two round investments present value of total investment was lower than one
round of investment. As we considered same exit value for either investment, later investment
the pre-money valuation naturally becomes higher.

Depending on the performance of the firm either party can be benefited from tranching. If firm
fails to perform before second round of investment investor saves his investment. On the other
hand, if the firm performs well it gets better valuation. For investor tranching is a mechanism
to reduce the risk of its investment particularly in early stage funding.

Question 2b) Suppose that Trident considered the first year particularly risky, and
wanted to apply a discount rate of 90% for that first year. How would this affect the
valuation? Why?
Valuation based on 90% discount rate for first year calculated and given below and detail
calculation is given in appendix-5.

Price per share at year 0 1.09

Pre-money value at year 0 5635431
Total shares at end of year 1 7231204
Price at the end of year 1 2.07

As we increase the discounting or expected IRR the valuation decreases. Higher rate of
discounting indicates higher risk of cash flow and similar investment demands higher return.
Consequently, the valuation gets decreased.

Question 2c) Suppose that after one year, IGT would need more money, namely
$6M (instead of $2M). How would that influence the valuation? Why?
Valuation based on $6M investment in second round was done and given below and a detail
calculation given in appendix-6. As expected, due high VC investment and similar exit value
the valuation is decreased.

Price per share at year 0 0.79

Pre-money value at year 0 4084878
Total shares at end of year 1 11149704
Price at the end of year 1 1.34
Question 3a) Calculate the cash flow claims of the preferred shareholders if the
acquisition price is $16M, $20M, $24M and $28M, using the above three types of
preferred shares

The cash flow claim calculated and given below. A detail calculation is given in appendix-7.

Acquisition price ($) 16000000 20000000 24000000 28000000

Simple preferred stock Converted 6400000 8000000 9600000 11200000
Not converted 9554613 9554613 9554613 9554613
IGT's Claim on cash flow ($) 6445387 10445387 14400000 16800000
IGT's Claim on cash flow 40% 52% 60% 60%
Participating preferred stock Converted 9346316 10546316 11746316 12946316
Not converted 9554613 9554613 9554613 9554613
IGT's Claim on cash flow ($) 6445387 9453684 12253684 15053684
IGT's Claim on cash flow 40% 47% 51% 54%
Hybrid Converted 6915495 8515495 10115495 11715495
Not converted 9554613 9554613 9554613 9554613
IGT's Claim on cash flow ($) 6445387 10445387 13884505 16284505
IGT's Claim on cash flow 40% 52% 58% 58%

Question 3b) Which type of preferred stock is most favourable to IGT? For what
acquisition prices is the type irrelevant?
As per the observed data first type of preferred stock, i.e., simple preferred stock is
favourable to IGT as IGT share would be maximum. In the 16M acquisition prices the type
of preferred stock is irrelevant, and Trident will not convert the share in any case.
Appendix-1: Valuation as per earning multiple method

Earning in 2005 7171819

Earning multiple 40.7
Exit value in 2006 291893033
Total VC
investment 3184871

Target IRR 70.00%

PV(TV) 20557918
VC investment 3184871
Pre-money
valuation 17373046.68
VC shareholding 15.5%
Alternatively:
Year 2001 2002 2003 2004 2005 2006
Cash flow -3184871 0 0 0 0 291893033

Appendix-2: Valuation as per earning multiple method

Sales in 2005 21540603

Sales multiple 6
Exit value in 2006 124935497
Total VC investment 3184871

Target IRR 70.00%

PV(TV) 8799161
VC investment 3184871
Pre-money valuation 5614289.58
VC shareholding 36.2%
Alternatively:
Year 2001 2002 2003 2004 2005 2006
Cash flow -3184871 0 0 0 0 124935497
Appendix-3: Valuation as per share price $ 0.83

Sales in 2005 21540603

Sales multiple 5.8
Exit value in 2006 124935497
Total VC investment 3184871

Total number of IGT’s share

as per exhibit 15b 5176082
Target IRR 70.00%
PV(TV) 8799161
VC investment 3184871
Pre-money valuation 5614289.58
VC shareholding 36.2%

Year 2001 2002 2003 2004 2005 2006

Cash flow -3184871 0 0 0 0 124935497

Share price based on sales

multiple method 1.085
Exit Value Based on $0.83 share price

Total number of
enterpreneur's share as per
exhibit 15b 5176082
Target IRR 70.00%
PV(TV) 7481019
VC investment 3184871
Pre-money valuation 4296148
VC shareholding 42.6%

Exit Value as
per 0.83 share
Year 2001 2002 2003 2004 2005 price 2006
Cash flow -3184871 0 0 0 0 106219773
Appendix-4: Valuation as per tranched deal.
Sales in 2005 21540603
Sales multiple 5.8
Exit value in 2006 124935497

Second round financing

Initial investment by VC 1184871
Investment in second round 2000000
Second round in 1 year
Exit value 124935497
Exit time 5 year
Discount rate chosen 70%
Post value at second round 14958573
Share of second round finance 13.37%
Premoney value at year 1 12958573
Post money at year 0 7622690
VC share at time 0 15.54%
VC share premoney at year 1 13.47%
SC share at the end of year 0 84.46%
No. of shares with Entrepreneurs 5176082
No. of total shares 6128732
No. of shares with VC 952650
Price per share at year 0 1.24
Premoney value at year 0 6437819
Total shares at end of year 1 7074628
Price at the end of year 1 2.11
Appendix -5: Valuation as per tranched deal applying 90% discounting at 1st year

Sales in 2005 21540603

Sales multiple 5.8
Exit value in 2006 124935497
Second round financing
Initial investment by VC 1184871
Investment in second round 2000000
Second round in 1yr
Exit value 124935497
Exit time 5yr
Discount rate chosen 70%
Post value at second round 14958573
Share of second round finance 13.37%
Premoney value at year 1 12958573
Post money at year 0 6820302
VC share at time 0 17.37%
VC share premoney at year 1 15.05%
SC share at the end of year 0 82.63%
No. of shares with Entrepreneurs 5176082
No. of total shares 6264373
No. of shares with VC 1088291
Price per share at year 0 1.09
Premoney value at year 0 5635431
Total shares at end of year 1 7231204
Price at the end of year 1 2.07
Appendix -6: Valuation as per tranched deal with $6M investment in second round

Sales in 2005 21540603

Sales multiple 5.8
Exit value in 2006 124935497
Initial investment by VC 1184871
Investment in second round 6000000
Second round in 1
Exit value 124935497
Exit time 5
Discount rate chosen 70%
Post value at second round 14958573
Share of second round finance 40.11%
Pre-money value at year 1 8958573
Post money at year 0 5269749
VC share at time 0 22.48%
VC share pre-money at year 1 13.47%
SC share at the end of year 0 77.52%
No. of shares with Entrepreneurs 5176082
No. of total shares 6677471
No. of shares with VC 1501389
Price per share at year 0 0.79
Pre-money value at year 0 4084878
Total shares at end of year 1 11149704
Price at the end of year 1 1.34
Appendix -7: Cash flow claim based on the different acquisition prices:

Preferred A1 investment 1184871

Preferred A2 investment 2000000
% of total equity (A1+A2) 40%
Dividend flow 1 2 3 4 5
Dividend claim of A1 94789.68 94789.68 94789.68 94789.68 NA
Dividend claim of A2 160000 160000 160000 NA

Cumulative value of dividend at

year 5 859158.7

Acquisition price ($) 16000000 20000000 24000000 28000000

Converted 6400000 8000000 9600000 11200000
Simple preferred stock
Not converted 9554613 9554613 9554613 9554613
IGT's Claim on cash flow ($) 6445387 10445387 14400000 16800000
IGT's Claim on cash flow 40% 52% 60% 60%
Converted 9346316 10546316 11746316 12946316
Participating preferred stock
Not converted 9554613 9554613 9554613 9554613
IGT's Claim on cash flow ($) 6445387 9453684 12253684 15053684
IGT's Claim on cash flow 40% 47% 51% 54%
Converted 6915495 8515495 10115495 11715495
Hybrid
Not converted 9554613 9554613 9554613 9554613
IGT's Claim on cash flow ($) 6445387 10445387 13884505 16284505
IGT's Claim on cash flow 40% 52% 58% 58%