FIN 526 Private Equity and Venture Capital

Course Catalog Description


This course addresses the fundamentals of private equity (PE) and venture capital (VC), which includes the PE and VC industry, the structure of a PE/VC partnership, the valuation and execution of deals and the exit process of investments. The course covers a variety of valuation methods as well as analysis of company capital structure or “cap tables”. Students are exposed to theoretical argument and required to work on practical cases involving software tools to determine the value of companies, and specific securities. Subjects related to the finance of innovation and the relationship between strategy and venture finance are also covered. Lessons learned are reinforced through case analyses and real examples from the industry.

Prerequisites: MGT 600, MGT 638

Course Objective

The course addresses the financial principles related to the risk and return of private equity and venture capital, the valuation of high growth companies, the deal structuring of venture capital and private equity deals and investment decisions under uncertainty. It provides the student with an understanding of the industry, the management of PE/VC partnerships, the legal agreements and the securities selection and pricing. The course also gives the student a familiarity with the specialized vocabulary of the PE/VC industry.

The first part of the course deals with an overview of the PE/VC industry, a description of how closed-end funds are organized, how profits are split between partners, how and from whom they raise capital, and in what type of firms they typically invest. Additionally, students will get exposure to the structure of a closed- end fund with particular focus on the profit distribution and the investors (LP) – management company (GP) relationships. The topics will be discussed also through the analysis of actual legal documents to familiarize the student with real-world applications.

The second part of the course deals with the sourcing of deals (deal flow) and the success factors in the VC and PE industry and with the crucial topic of valuation in the general private equity context by introducing the student to several valuation techniques such as DCF, comparables analysis, real options.

The third part of the course focuses on venture capital deals by exploring the so-called Venture Capital method and the implications in terms of shares allocation, dilution and multiple rounds financing.

The fourth part provides a detailed analysis of the structuring of a deal with emphasis on the use of different type of securities and the control mechanisms investors put in place.

The fifth part devotes attention to leveraged deals, the mechanics of LBOs, the capital structure of an acquisition and the dividend recapitalization strategies.

The sixth part illustrates the exit process analyzing market evidence and features of : IPOs, trade sales, SBOs and mergers.

The course concludes by showing the return history of PE/VC funds and the different metrics to assess fund returns with emphasis on NAV reporting, IRR and MIRR, and cash-on-cash multiples.

Over the course there will be no less than two guest speakers from the VC and PE industry providing first-hand experience on the practical application of the topics covered in class.

With this foundation, students will be better equipped to negotiate with private equity firms at all stages, taking the side of the entrepreneur, or to assume professional investor positions within investment firms. The course should also be of interest to students wishing to pursue careers as valuation advisors working for consultancies, investment banks or public accounting firms. Lastly, the course may provide lawyers or accountants with background necessary to expand their practice areas to include venture and acquisition financing.

Additional learning objectives include the development of

Technology Role in Business: Students will use software tools for valuation of stock, options and special features of preferred stock.

Analytical Problem Solving Skills: Students will be able to analyze and assess private equity term sheets and contracts. They will learn how to perform valuations of high growth companies using the VC method, DCF analysis and comparable analysis in early stage and leveraged deals.

The course will be taught by blending standard lectures with case discussions,guest speaker talks,and the introduction to advanced valuation tools.


Professor Email Office
Stefano Bonini, PhD Babbio Center Room:425

More Information

Course Outcomes

After successfully completing this course students will be better able to:

  1. Understand the venture capital and private equity industry and the management of closed-end private equity funds.
  2. Analyze and assess LP agreements, term sheets and contracts. their life goals.
  3. Understand the deal process in private equity.
  4. Perform valuations of high growth companies using the VC method, DCF analysis, comparable analysis and other methods.
  5. Value convertible debt and specialized preferred stock rights.
  6. Model and price real options using option pricing models.

Course Resources

Required Text(s)

  • (LLH) Josh Lerner, Ann Leamon, Felda Hardymon, Venture Capital, Private Equity, and the Financing of Entrepreneurship, 1st Edition, J.W. Wiley & Sons, 2012. The book is available in e-book format via or
  • Instructor slides
  • Additional Materials: Topical reports to be provided during the semester

Required Readings

  • (These readings will be provided by the instructor on Canvas)
  • Private Equity Fund Formation, Practice Note, Scott Naidech.
  • Note on Valuation and the Mechanics of LBOs. Said Business School teaching note. Tim Jenkinson, Ruediger Stucke. Data Correction by Stefano Bonini.

Additional Readings

  • TBA by the instructor


Grading Policies

1 Pitch Presentations 30%
2 Class Participation 20%
3 Homeworks (2x) 20%
4 LBO Pricing Contest 30%
Total 100%

Lecture Outline

Topic Covered Readings
Week 1 - 9/2 Course overview
The Private Equity and Venture Capital Industry
• Introduction to Private Equity, Venture capital and entrepreneurial finance: history, market participants, trends, domestic and international market data, government sponsored programs.
• Investors and LPs
• LLH Chapter 1,2,8
Week 2 - 9/9 Closed-end fund structure
• General principles
• International regulation
• Compensation schemes: management fees,
carried interest, waterfall, catch-up clause, clawback clause
• The LP agreement
• LLH Chapter 2
• Reading (1)
Week 3 - 9/16 Sourcing the deal
• Deal flow sources
• Attracting investors (a.k.a: what VCs look for)
• Due diligence
• LLH Chapter 3
Week 4 - 9/23 Pitch presentations
Week 5 - 9/30 Deal Valuation:
• DCF Analysis of Growth Companies
• Comparables
Stochastic models
• LLH Chapter 4
Week 6 - 10/7 The VC method
• Minimum return
• Pre-money and post-money
• Dilution and shares
Multiple rounds financing
• LLH Chapter 4
Week 7 - 10/14 Deal structuring
Share classes: preferred, redeemable, convertible.
• Homework 1 due
• LLH Chapter 5
Week 8 - 10/21 Deal structuring
• Control rights
• Protective clauses: anti-dilution, exit, Liquidation preference
Term sheet agreement
• LLH Chapter 5,6
Week 9 - 10/28 PE and Leveraged buyouts
The LBO mechanics
• LLH Chapter 5
• Reading (2)
Week 10 - 11/4 PE and Leveraged buyouts
The LBO mechanics: capital structure, debt instruments, and dividend recapitalizations.
• LLH Chapter 5
• Reading (2)
Week 11 - 11/11 In-class case
Week 12 - 11/18 PE and VC Exits:
• Trade sale, SBO,IPO, and Direct Sale

Measuring fun return:
• NAV,IRR,MIRR,Cash-on-cash, PME
• LLH Chapter 7,9
• Kaplan and Schoar,Jaganatthan and Sorensen Readings
Week 13 - 12/2 LBO Pricing Contest
Week 14 - 12/9 Guest Speaker