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It's important to note that these things are common in the private equity world, not the angel investment or venture capital world. The VC world has totally dif
by lacker 15y ago
It's important to note that these things are common in the private equity world, not the angel investment or venture capital world. The VC world has totally different tricks, like 3x participating preferred, "independent" board members, collusion, and option pools.
Also, if the PE firm is using a 20% discount rate to evaluate the merits of vendor finance, they are likely fooling themselves more than they are fooling the founders.
- todsul 15y agoThere are a few ways you can look at this 20% discount rate: * Cost of capital for the fund * Cost of capital for investors in the fund * Cost of capital for the business If you can't earn 15-20% on a business, you really should invest the capital in a less risky investment. Additionally, most PE funds look to double their investments in 5 years. So using a 20% discount rate is somewhat conservative with this in mind. However, I tend to agree that you wouldn't want to be throwing a 20% discount rate around against yourself in deal. It's certainly not outrageous though. Think of it as opportunity cost too.
- lacker 15y agoAdditionally, most PE funds look to double their investments in 5 years. So using a 20% discount rate is somewhat conservative with this in mind. PE funds tell themselves they can achieve a 20% return, but in reality they are on average no better than index funds. See: http://www.google.com/search?sourceid=chrome&ie=UTF-8&q=average+pe+fund+return http://www.google.com/search?sourceid=chrome&ie=UTF-8... I stand by my claim that in assuming 20% returns for vendor finance, PE funds are tricking themselves by a greater magnitude than they are tricking founders.
- LiveTheDream 15y agoHere is a very good explanation of the option pool "shuffle": http://venturehacks.com/articles/option-pool-shuffle http://venturehacks.com/articles/option-pool-shuffle