Role play of PE and Entrepreneur

Class : section A :
Observations
Good. Overall the Groups played the respective role with concern and back ground
work.
1. Do not look only financial side look at whether I need this money
(strategically) (ORN) or from PE (why I need to invest or enter this
company)
2. Use Relative valuation with care (Cisco needs to be eliminated and only
nearest comparables may be considered)
3. Cost of failure to be incorporated if DCF is used
4. Do not leave the deal for small margin in such cases as valuation exercise,
particularly in this case is not so exact science
5. Check your calculations: how did you get 45%
6. Not many considered subsequent funding
7. Check whether you discussed some of the related clauses of PE Agreement
8. Considerations (most of them have been incorporated)
a. Liquidity
b. Chances of survival
c. Required rate of return
d. Elimination while using multiples
e. Consider the choice between mean and median
f. Intentions, expectations (risk, return, involvement, exit etc) from both
the sides

Section B
1. Issue with spacing out disbursement
2. Check your calculations
3. Many of you have rightly considered:
a. illiquidity discount
b. concern for dilution due to further rounds of funding
c. option pool and ESOP
4. Have you now come across the decision of choosing between mean and
median or - execute the round of elimination
5. From VC perspective:
a. degree of uncertainty reduce significantly when you have tracked the
product and promoter and the opportunity for quite some time
b. If you are convinced about the opportunity and given comfort as
mentioned in (a), it is recommended to settle with promoter
c. Convince promoter that ORN is at critical juncture where Perez has to
take a decision to scale up irrespective of who fund it
d. Once you are in, then contribute in creating value for both, you and
him and ORN (This would perhaps take care of your compromise right
now.
e. It is also not uncommon for VC to go initially with higher stake demand
and low valuation even though he expects to settle at higher valuation
6. Perspective of ORN:
a. To survive and sustain ORN needs to scale at this juncture
b. Timing is the key
c. Everest has track record of mentoring the IT companies and add value
if he is on the board
d. Difficult to expand individually at required growth. You need bandwidth
to expand beyond current level
For both the sections
Following also could have been considered:
1. Lower the equity stake keeping the funding same by use of convertible
financial instrument
2. Think of protecting your interest if business fail though many used 50%
probability of failure but how this failure | liquidation will be managed
3. If ORN is asking for higher valuation, VC may consider with a coveat whether
ORN is committing to buyback at this valuation or in certain range of
valuation if Valuation figure is matter of dispute.
4. What if VC wish to exit before 5 years
5. What if ORN has merger opportunity in interim period - how promoter and VC
decide on exit value