Table 13.3Panel (a)Entrepreneur's Assumptions - Financial Model Based on Business PlanConditionalScenarioRoundRoundCash FlowsProbabilitiesOneTwoHarvest Value ForecastSuccess with Both Groups$35,000,00040%$14,000,000$21,538,4620.62Success with First Group$15,000,00025%$3,750,000$5,769,2310.3846153846Failure$035%$0Expected Cash Flow at Harvest$17,750,000$27,307,692Standard Deviation of Cash Flows$15,204,851$9,730,085InvestmentBurn Rate per Year$2,000,000$3,000,000Years10.5Total Investment$3,500,000Present Value of Unconditional Total Investment$3,442,308Present Value of Expected Investment$2,937,500Panel (b)Investor's Assumptions - Financial Model Based on Business PlanConditionalScenarioRoundRoundCash FlowsProbabilitiesOneTwoHarvest Value ForecastSuccess with Both Groups$28,000,00032%$8,960,000$17,230,769Success with First Group$13,500,00020%$2,700,000$5,192,308Failure$048%$0Expected Cash Flow at Harvest$11,660,000$22,423,077Standard Deviation of Cash Flows$12,303,430$7,054,312InvestmentBurn Rate per Year$1,800,000$2,500,000Years1.251Total Investment$4,750,000Present Value of Unconditional Total Investment$4,630,391Present Value of Expected Investment$3,487,803

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Table 13.4Panel (a)Venture Capital Method (Single Round Financing)Entrepreneur's Assumptions3Number of years until your projected harvest date$35,000,000Harvest-date value of the venture assuming success18.00%annual hurdle rate Customary discount rates for Seed to Start-up ventures are 50-100% per year. Discount rates are lower for more established ventures, declining gradually to tares of 20-30% for expansion-stage financing. The discount rate for turnaround financing is comparable to that of a start-up.$21,302,081Post-money valuation of the venture$3,442,308Amount of financing required16.16%Fraction of harvest-date equity needed to justify the financing.Panel (b)Venture Capital Method (Single Round Financing)Investor's Assumptions4Number of years until your projected harvest date$28,000,000Harvest-date value of the venture assuming success40.00%annual hurdle rate Customary discount rates for Seed to Start-up ventures are 50-100% per year. Discount rates are lower for more established ventures, declining gradually to tares of 20-30% for expansion-stage financing. The discount rate for turnaround financing is comparable to that of a start-up.$7,288,630Post-money valuation of the venture$4,360,391Amount of financing required59.82%Fraction of harvest-date equity needed to justify the financing.

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Figure 13.1Staged Investment Decision ModelSuccessSuccess with Both GroupsSuccessFund Stage 2: Aircraft OwnersFund Stage 1: Avionics OEMFailureSuccess with One GroupFailureAbandonFailureFinancing:Round 1Round 2Exit

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Table 13.5Valuation of Unstaged Investment - Venture Capital InvestorEntrepreneur's AssumptionsInvestor's Assumptions1. Market and Contract DataAnnual Risk-free Rate4.0%4.0%Annual Market Rate10.0%10.0%Standard Deviation of Market20.0%20.0%General Partner's Annual Fee2.5%2.5%General Partner's Carried Interest20.0%20.0%Correlation of Venture with Market0.250.252. Single-Stage Investment and TimingTotal Investment Committed$3,442,308$4,630,391Years to Harvest3.004.003. Investor Valuation of Harvest Cash FlowsExpected Harvest Value$17,750,000$11,660,000Standard Deviation of Harvest Cash Flows$15,204,851$12,303,430Value of Venture at Time of Investment$10,257,406$5,843,8454. Investor's Required Rate of ReturnAnnualized VC Cost of Capital20.06%18.85%Investor Ownership Requirement5. Ownership RequirementRound 1 Investment$3,442,308$4,630,391Value at Round 1$10,257,406$5,843,845Share of Incremental Value Required33.56%79.24%Valuation of Entrepreneur's Interest in Venture6. Entrepreneur's WealthEntrepreneur's Wealth in Market$1,700,000$1,600,0007. Valuation of Harvest Cash FlowsVenture (Entrepreneur's Financial Claim)Expected Harvest Value$11,793,235$2,421,159Standard Deviation of Venture Cash Flows$10,102,219$2,554,765MarketExpected Harvest Value$2,262,700$2,342,560Standard Deviation of Market Cash Flows$588,897$640,000PortfolioExpected Portfolio Value$14,055,935$4,763,719Standard Deviation of Portfolio Cash Flows$10,265,291$2,784,591Value of Entrepreneur's Portfolio$7,065,242$2,321,104Value to Investment in Market$1,700,000$1,600,000Value of Entrepreneur's Interest in Venture$5,365,242$721,1048. Entrepreneur's Required Rate of ReturnAnnualized Portfolio Cost of Capital25.77%19.69%Annualized Venture Cost of Capital30.02%35.36%

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Table 13.6Valuation of Staged Investment - Venture Capital Investor1. Market and Contract DataEntrepreneur's AssumptionsInvestor's AssumptionsAnnual Risk-free Rate4.0%4.0%Annual Market Rate10.0%10.0%Standard Deviation of Market20.0%20.0%General Partner's Annual Fee2.5%2.5%General Partner's Carried Interest20.0%20.0%Correlation of Venture with Market0.250.25Time from first investment to harvest (years)3.004.002. Staged Investment Timing and Burn RatesRound 1 - Aircraft OEMBurn Rate per Year$2,000,000$1,800,000Years to Complete1.001.25Round 2 - Aircraft OwnersProbability of Stage 1 Success65%52%Burn Rate per Year$3,000,000$2,500,000Years to Complete0.501.003. Valuation of Harvest Cash FlowsRound 2Expected Harvest Value$27,307,692$22,423,077Standard Deviation of Harvest Cash Flows$9,730,085$7,054,312Value to Investor at Time of Investment$18,481,990$14,421,393Round 1Expected Harvest Value$17,750,000$11,660,000Standard Deviation of Harvest Cash Flows$15,204,851$12,303,430Value of Round 1 at Time of Investment$10,257,406$5,843,8454. Investor's Implicit Cost of Capital at Each RoundRound 120.06%18.85%Round 221.55%17.41%

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Table 13.7Valuation-based Contracting Model of Ownership SharesOwnership RequirementEntrepreneur's AssumptionsInvestor's AssumptionsInvestor's Round 2 Investment$1,500,000$2,500,000Venture Value at Round 2$18,481,990$14,421,393Incremental Equity Required8.12%17.34%Investor's Value from Round 1$3,603,638$5,552,531Investor's Value Required With Investing$5,103,638$8,052,531Investor's Required Ownership after Investing27.61%55.84%Investor's Round 1 Investment$2,000,000$2,250,000Venture Value at Round 1$10,257,406$5,843,845Investor's Required Ownership after Investing19.50%38.50%Required Percentage Increases in Investor's Shares if New Shares are IssuedRound 2 - New Shares to Investor (percent of shares owned)57.50%101.95%

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Table 13.8Risk and Return of Entrepreneur's Financial ClaimBased on Entrepreneur's ProjectionsOwnership by RoundInvestor ShareEntrep. ShareRound 227.61%72.39%Round 119.50%80.50%Harvest Value ForecastVenture Conditional Cash FlowsScenario ProbabilitiesEntrepreneur's Conditional Cash FlowsProbability Weighted Cash FlowsSuccess with OEMs$35,000,00040%$25,335,059$10,134,024Success with Both Groups$15,000,00025%$10,857,883$2,714,471Failure$035%$0$0Expected Cash Flow of Entrepreneur's Claim$12,848,494Standard Deviation of Entrepreneur's Claim$11,006,166Based on Investor's ProjectionsOwnership by RoundInvestor ShareEntrep. ShareRound 255.84%44.16%Round 138.50%61.50%Harvest Value ForecastConditional Cash FlowsScenario ProbabilitiesEntrepreneur's Conditional Cash FlowsProbability Weighted Cash FlowsSuccess with OEMs$28,000,00032%$12,365,527$3,956,969Success with Both Groups$13,500,00020%$5,961,951$1,192,390Failure$048%$0$0Expected Cash Flow of Entrepreneur's Claim$5,149,359Standard Deviation of Entrepreneur's Claim$5,433,515

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Table 13.9Valuation of Entrepreneur's Interest in VentureMarket Data and Entrepreneur's WealthEntrepreneur's AssumptionsInvestor's AssumptionsAnnual Risk-free Rate4.0%4.0%Annual Market Rate10.0%10.0%Standard Deviation of Market20.0%20.0%Correlation of Venture with Market0.250.25Time from first investment to harvest (years)3.004.00Entrepreneur's Wealth in Market$1,700,000$1,600,000Timing of Staged InvestmentsRound 1 - Aircraft OEMYears to Complete1.001.25Round 2 - Aircraft OwnersYears to Complete0.501.00Valuation of Harvest Cash FlowsVenture (Entrepreneur's Financial Claim)Expected Harvest Value$12,848,494$5,149,359Standard Deviation of Venture Cash Flows$11,006,166$5,433,515MarketExpected Harvest Value$2,262,700$2,342,560Standard Deviation of Market Cash Flows$588,897$640,000PortfolioExpected Portfolio Value$15,111,194$7,491,919Standard Deviation of Portfolio Cash Flows$11,167,956$5,627,735Value of Entrepreneur's Portfolio$7,525,846$2,865,420Value to Investment in Market$1,700,000$1,600,000Value of Entrepreneur's Interest in Venture$5,825,846$1,265,420

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Backup for 13-xPanel (a)Entrepreneur's Assumptions - Financial Model Based on Business PlanConditional Net Cash FlowsScenario ProbabilitiesRound OneRound TwoHarvest Value ForecastSuccess with Two Groups$35,000,00040%$14,000,000$21,538,462Success with One Group$15,000,00025%$3,750,000$5,769,231Failure$035%$0Expected Cash Flow at Harvest$17,750,000$27,307,692Standard Deviation of Cash Flows$15,204,851$9,730,085InvestmentBurn Rate per Year$2,000,000$3,000,000Years10.5Total Investment$3,500,000Present Value of Unconditional Total Investment$3,442,308Present Value of Expected Investment$2,937,500Panel (b)Investor's Assumptions - Financial Model Based on Business PlanConditional Net Cash FlowsScenario ProbabilitiesRound OneRound TwoHarvest Value ForecastSuccess with Two Groups$28,000,00032%$8,960,000$13,784,615Success with One Group$13,500,00020%$2,700,000$4,153,846Failure$048%$0Expected Cash Flow at Harvest$11,660,000$17,938,462Standard Deviation of Cash Flows$12,303,430$8,359,132InvestmentBurn Rate per Year$1,800,000$2,500,000Years1.251Total Investment$4,750,000Present Value of Unconditional Total Investment$4,630,391Present Value of Expected Investment$3,487,803Panel (a) shows the entrepreneur's expectations of net harvest cash flows conditional on each scenario and the entrepreneur's belief of the probability of each scenario. These inputs are used to compute the expected harvest cash flow and standard deviation of cash flows at the time of each investment round. The lower portion of the panel shows the entrepreneur's assumed burn rate from each stage and the entrepreneur's expectation of the duration of the stage. The information is used to compute the conditional net cash flows and net present value. Panel (b) shows the same information based on the investor's beliefs.

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New Figure 13-x - Not usedValuation of Venture Buy-out - Venture Capital InvestorEntrepreneur's AssumptionsInvestor's AssumptionsMarket and Contract DataAnnual Risk-free Rate4.0%4.0%Annual Market Rate10.0%10.0%Standard Deviation of Market20.0%20.0%General Partner's Annual Fee2.5%2.5%General Partner's Carried Interest20.0%20.0%Correlation of Venture with Market0.250.25Single-Stage Investment and TimingYears to Harvest3.004.00Investor Valuation of Harvest Cash FlowsExpected Net Harvest Value$17,750,000$11,660,000Standard Deviation of Net Harvest Cash Flows$15,204,851$12,303,430PV of Venture at Time of Investment$10,257,406$5,843,845PV of Investment (including Entrepreneur time)$3,237,500$3,887,803NPV of Venture$7,019,906$1,956,042Valuation of Entrepreneur's Wealth after Buy-outEntrepreneur's WealthEntrepreneur's Wealth in Market$9,019,906$3,956,042Calculation of NPV of 100 percent ownership by investor, after providing from conditional investment outlays each round. Entrepreneur's valuation assumes all positive NPV (after investor fees and carried interest are paid to entrepreneur.

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