Venture Capital (VC) Method

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In 1987, Professor William Sahlman of the Harvard Business School published a fifty-two page case study, “The Venture Capital Method,” HBS Case # 9-288-006. This approach assumes that no more shares in the company will be issued after this round of funding, so the percentage of ownership of the investors will remain constant from investment to harvest. For high-growth companies, this assumption is unrealistic, but it’s useful for illustrating the post-money valuation concept. In practice, such companies will likely require substantial additional cash to fund growth. Both debt (with warrants) and equity sources of cash will dilute founders and early investors alike. Building a management team requires providing option pools that often need to be refreshed.

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