Using company cost of debt as discount rate

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Reference no: EM132058653

1. There is a potential conflict of interest if a Venture capital company manages multiple funds and each fund invests in a different series issued by the same company. The conflict arises because Fund X may invest in series A of company 1 and Fund Y may then invest in series B of company 1. If Fund Y places to high a pre-money value on the company it is essentially supporting investors in Fund X. The opposite is also a risk, if the pre-money valuation prior to the B series is set too low then the Venture Capital company is shifting value from Fund X investors to Fund Y investors.

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2. According to Berkery the most efficient way of valuing a new venture is to discount future profits back to the present using the company’s cost of debt as the discount rate.

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3. There is a potential conflict of interest if a Venture capital company manages multiple funds and each fund invests in a different series issued by the same company. The conflict arises because Fund X may invest in series A of company 1 and Fund Y may then invest in series B of company 1. If Fund Y places to high a pre-money value on the company it is essentially supporting investors in Fund X. The opposite is also a risk, if the pre-money valuation prior to the B series is set too low then the Venture Capital company is shifting value from Fund X investors to Fund Y investors.

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4. The limited partners in a VC fund are responsible for selecting the fund’s investments.

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Reference no: EM132058653

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