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 10.3. An Overview of Valuation Methods
10.4. Discounted Cash Flow Valuation
10.5. The Relative Value Method
10.6. Valuation by the Venture Capital Method
10.7. Valuation by the First Chicago Method
10.8. Reconciliation with the Pricing of Options
10.9. Required Rates of Return for Investing in New Ventures
10.10. The Entrepreneur’s Opportunity Cost of Capital
10.11. Matching Cash Flows and Discount Rates
10.12. Summary
Review Questions
Notes
References and Additional Reading
Chapter 11: New Venture Valuation in Practice
11.1. Criteria for Selecting a New Venture Valuation Method
11.2. Implementing the Continuing Value Concept
11.3. Implementing DCF Valuation Methods
11.4. New Venture Valuation: An Illustration
11.5. The Cost of Capital for Non-U.S. Investors
11.6. Some Practical Caveats on Implementation
11.7. Summary
Review Questions
Notes
References and Additional Reading
Chapter 11 Appendix: The Entrepreneur’s Perspective on
Value
11A.1 Estimating the Entrepreneur’s Commitment to a Venture
11A.2 Valuing Partial-Commitment Investments
11A.3 Implementation: Partial Commitment
11A.4 Shortcuts and Extensions
11A.5 Summary
References and Additional Reading
Chapter 12: Designing and Valuing Staged Investment with
Real Options

7
 12.1. Staged Investment: The Venture Capital Method
12.2. Staged Investment: CAPM Valuation with Discrete
Scenarios
12.3. Using Simulation to Design Financial Contracts
12.4. Valuing Different Types of Financial Claims
12.5. Summary
Review Questions
Notes
References and Additional Reading
PART 6: Harvesting and Beyond
Chapter 13: Harvesting
13.1. Going Public
13.2. Acquisition
13.3. Valuing Private Transactions
13.4. Management Buyout
13.5. Employee Stock Ownership Plans
13.6. Roll-Up IPO
13.7. The Choice of Harvesting Method
13.8. Harvesting Choices of VC-Backed Firms
13.9. Summary
Review Questions
Notes
References and Additional Reading
Chapter 14: The Future of Entrepreneurial Finance
14.1. Completing the Circle
14.2. Public Policy and Entrepreneurial Activity: An International
Comparison
14.3. Breaking New Ground
Notes
References and Additional Reading
Index

8
ILLUSTRATIONS

FIGURES
1.1. Survival rates of new ventures
1.2. Private sector establishment births and deaths
1.3. Entrepreneurial involvement and motivation by country
1.4. Global differences in supportiveness for starting and doing
business
1.5. Stages of new venture development
1.6. Financial performance and stages of new venture
development
2.1. Sources of new venture financing
2.2. New VC investments by sector
2.3. Top 10 states for VC investing: 2016
2.4. Number of independent VC deals and deals with CVC
involvement
3.1. New commitments of VC in the U.S.: 1969–2017
3.2. VC investments in the U.S.: 1970–2017
3.3. European new VC commitments: 2008–2017
3.4. New VC investments in Europe as percentages of country
GDP
3.5. U.S. VC investments by stage of development: 1980–2017
3.6. Corporate VC involvement in U.S. VC deals: 2007–2017
3.7. Organizational structure of VC funds
3.8. The VC investment process
3.9. Net returns by quarter to limited partners of VC funds: 1981–
2016
3.10. Depiction of a VC waterfall provision
4.1. Liquidation preference: $1MM investment with a 3X
preference or convertible to 20% of common equity
4.2. Liquidation preference: $1MM investment with a 3X
preference or convertible to 20% of common stock, versus an
alternative contract of 25% of common stock

9
4.3. Comparison of four alternative terms for $1MM investment:
3X liquidation preference or convertible to 20% of common stock;
1X preference and full participation with 20% ownership; 2X
liquidation preference with 20% participation up to a 4X cap; and
25% of common stock
5.1. Financial implications of product-market and organizational
strategic choices
5.2. Expiration date values of call and put options on Spacely.com
stock
5.3. Decision tree for accept/reject decision to invest in the
venture
5.4. Decision tree for investing in a venture, with the option to
delay investing until uncertainty about market demand is resolved
5.5. Decision tree for investing in a facility, with the option to
expand the initial investment
5.6. Entry decision game tree
6.1. Venture NPV estimated based on the expected value of each
input
6.2. Venture NPV estimated by simulation using the distribution of
each input
6.3. Simulation model of stock price and put and call option
expiration values
6.4. Simulation of 12 months of stock price performance
6.5. Illustrations of @RISK statistical distributions
6.6. Assumptions and statistical processes of the large-facility
model
6.7. Unconditional simulation results
6.8. Distribution of market size estimates generated by simulation
6.9. Histogram of unit sales simulation results
6.10. Convergence of the entrepreneur’s average NPV
6.11. Small facility: NPV to entrepreneur
6.12. Large facility overlaid with small: NPV to entrepreneur
6.13. Subtree for venture learning option with simulated
uncertainty
6.14. Subtree for venture expansion option with simulated
uncertainty

10
7.1. NewCo revenue assumptions
7.2. NewCo revenue forecast
7.3. NewCo revenue simulation assumptions
7.4. Discrete probability approach to simulating development
timing
7.5. NewCo simulated distribution of the start of revenue
generation
7.6. NewCo revenue forecast: Sample trial results
8.1. Working capital policy template
8.2. Morebucks simulation of profitability and surplus cash
8.3. NewCo integrated financial model assumptions
8.4. NewCo expected financial performance
9.1. Net income and cash flow breakeven point, cash needs
assessment, and investment value
9.2. Sustainable growth model template
9.3. Dynamic sustainable growth for an early-stage venture
9.4. iFree scenario analysis
9.5. NewCo total cash need as of quarter end
9.6. NewCo NPV results from simulation
9.7. NewCo simulation results for development completion timing
(based on 1,000 trials)
10.1. Distribution of VC fund average annual IRRs (vintage years
1969–2013)
10.2. VC returns to limited partners by vintage year
10.3. How portfolio risk depends on the number of assets in the
portfolio
10.4. The Capital Asset Pricing Model (CAPM)
11.1. Using continuing value to estimate the value of a new
venture
11.2. Historical price/earnings ratios of the S&P 500 Index
11.3. Using arithmetic or geometric average returns
12.1. Staged investment decision model
13.1. IPO issue pricing process for a firm commitment
underwriting

11
13.2. Average IPO underpricing by year (measured as initial
return)
13.3. Average IPO underwriter spread by year
13.4. Structure of a private leveraged ESOP
13.5. Roll-up IPO
13.6. Numbers of exits of VC-backed firms via IPO and M&A and
the NASDAQ Index by quarter
14.1. Early-stage entrepreneurial activity and GDP per capita
14.2. Gross expenditures on R&D by country (percentage of GDP)
14.3. Early-stage entrepreneurial activity for factor-driven,
efficiency-driven, and innovation-driven countries

TABLES
2.1. U.S. angel and VC investments: 2006–2016
2.2. Key U.S. securities market regulations for entrepreneurs and
investors
3.1. Summary of terms in a VC limited partnership private
placement memorandum (PPM)
3.2. Key covenants in a VC limited partnership agreement (LPA)
4.1. Standard provisions of a VC term sheet for convertible
preferred investment
4.2. Simple capitalization table
4.3. Comparison of antidilution provisions: Full ratchet and
weighted average ratchet
5.1. Examples of real options
7.1. Yardstick company data
8.1. Income statement (year ended 12/31/2018)
8.2. Balance sheet (year ended 12/31/2018)
8.3. Cash flow statement (year ended 12/31/2018)
8.4. Key business ratios for eating and drinking establishments
8.5. Coffee People, Inc. financials prior to IPO
8.6. Coffee People, Inc. common size statements
8.7. Coffee People, Inc. financial ratios
8.8. Step 1 of pro forma financial model for Morebucks: Income
statement assumptions

12
8.9. Step 2 of pro forma financial model for Morebucks: Balance
sheet assumptions
8.10. Step 3 of pro forma financial model for Morebucks:
Investment assumption
8.11. Pro forma financial model for Morebucks with simulation
8.12. Morebucks: Summary of simulation results (based on 1,000
trials)
8.13. NewCo pro forma financial statements
8.14. NewCo simulation assumptions
9.1. NewCo cumulative NPV by first quarter of revenue generation
9.2. NewCo cumulative NPV by first quarter of revenue and
revenue growth rate
10.1. Measures of expected cash flow
10.2. Matching cash flows to discount rates for various financial
claims
11.1. Historical stock and bond returns
11.2. Average beta estimates for selected sectors
11.3. Beta estimates and market correlations for newly public, VC-
backed firms
11.4. Standard deviation of market returns (S&P 500)
11.5. Valuation Template 1: Valuation by the RADR method based
on discrete scenario cash flow forecast
11.6. Valuation Template 2: Valuation by the CEQ method based
on discrete scenario cash flow forecast
11.7. Valuation at various discount rates by the Venture Capital
Method
11A.1. Valuation Template 3: Present value of the entrepreneur’s
wealth and commitment
11A.2. New venture simulation model ($000)
11A.3. Valuation Template 4: Partial commitment of the
entrepreneur
11A.4. Valuation Template 5: Entrepreneur’s cost of capital
11A.5 Underdiversification premium to required rate of return
12.1. Valuation Template 6: Single-stage investment—Venture
Capital Method

13
12.2. Valuation Template 7: Multi-stage investment—Venture
Capital Method
12.3. Investment and payoff assumptions
12.4. Venture Capital Method single-stage valuation
12.5. Valuation of unstaged investment: VC investor
12.6. Valuation of staged investment: VC investor
12.7. Valuation-based contracting model of VC ownership shares
12.8. New venture simulation with conditional second-stage
investment
12.9. New venture simulation: Incremental effects of conditional
second-stage investment
12.10. Summary of simulation investment and return results
12.11. Valuing the investor’s second-stage real option
12.12. Valuing the investor’s financial claim by discounting all
expected cash flows
13.1. IPO direct costs and underwriter spread by issue size
13.2. Private placement discounts compared to equity market
value

14
ABBREVIATIONS

A assets
AP accounts payable
AR accounts receivable
BDC business development company
BEP breakeven point
BS balance sheet
BV book value
CAPM Capital Asset Pricing Model
CEQ certainty equivalent
CF cash flow
CML capital market line
COC cash on cash (net multiple)
COGS cost of goods sold
D debt or dividend per share (depending on context)
D&A depreciation and amortization
DCF discounted cash flow
D/E debt to equity ratio
D/V debt to value ratio
DPO direct public offering
E equity
E/V equity to value ratio
EBIT earnings before interest and taxes
EBITDA earnings before interest, taxes, depreciation, and
amortization
EBT earnings before tax
ERISA Employee Retirement Income Security Act
ESOP employee stock ownership plan
FDA Food and Drug Administration
FY fiscal year

15
g* sustainable growth rate
GAAP generally accepted accounting principles
GDP gross domestic product
GEM Global Entrepreneurship Monitor
GP general partner/partnership
ICA Investment Company Act of 1940
ICO Initial coin offering
IFRS International Financial Reporting Standards
INT interest expense
IPO initial public offering
IRR internal rate of return
IS income statement
IT information technology
JOBS Jump Start Our Business Startups Act of 2012
LBO leveraged buyout
LP limited partner/partnership
M&A merger and acquisition
MBO management buyout
MV market value
NAICS North American Industry Classification System
NAV net asset value
NI net income
NPV net present value
NVCA National Venture Capital Association
NWC net working capital
NYSE New York Stock Exchange
OCF operating cash flow
OECD Organization for Economic Cooperation and
Development
OEM original equipment manufacturer
OPM Black-Scholes Option Pricing Model
OTC over-the-counter
P price per share

16
P&L profit and loss
P/E price to earnings ratio
PEG price earnings to growth
PP&E property, plant, and equipment
PV present value
R retention ratio (1 − dividend payout ratio)
R&D research and development
RADR risk-adjusted discount rate
ROA return on assets
ROR rate of return
ROS return on sales
RP risk premium
RV relative value
SAFE simple agreement for future equity
SAFT simple agreement for future tokens
SBA Small Business Administration
SBIC Small Business Investment Company
SBIR Small Business Innovation Research
SEC Securities and Exchange Commission
SEO seasoned equity offering
SG&A selling, general, and administrative expenses
SIC Standard Industrial Classification
SME small and medium-size enterprise
SML security market line
TY tax year
VC venture capital/capitalist
WACC weighted average cost of capital

17
PREFACE

HISTORY ABOUNDS WITH examples of extraordinary

entrepreneurs whose new ideas and products have changed the
world. Many people are enamored with the idea of creating new
products and starting businesses. Accompanying the interest in
venture creation, there is broad interest in venture capital,
investment banking, and careers related to new venture financing,
deal structuring, and harvesting.
Our primary motivation for writing this book is to empower
students and practitioners to be more successful in developing
and financing their ideas. Our overriding orientation is to apply the
theory and methods of finance and economics to the rapidly
evolving field of entrepreneurial finance.
This book is unique in several ways. First, it builds on and
significantly extends the tools and methods of corporate finance
and financial economics to approach the difficult and important
financial problems associated with starting and growing new
ventures. Building on the foundations of financial economics
makes the lessons more general and memorable and the
applications easier to implement in varied settings. Mastery of the
framework facilitates clearer and more defensible evaluation of
opportunities and choices than is possible based on heuristics and
intuition. With reliable and rigorous tools, you can be more
confident that the decisions you make will be the right ones.
Second, while many books address aspects of
entrepreneurship (writing business plans, leading and managing
new ventures, etc.), this book has a unique and direct focus on
the question of how new venture financing choices can add value
and turn marginal opportunities into valuable ones. We emphasize
value creation as the objective of each financial choice that an
entrepreneur or investor makes—including recent developments
in new venture contracting, staging, deal structuring, real options,
risk, diversification, and exit. Understanding the effects of each
choice has the potential to add tremendous value to ideas and
innovations.

18
 Third, in contrast to other books on entrepreneurial finance, we
specifically address the influences of risk and uncertainty on new
venture success, with particular attention to risky ventures with
significant upside potential. We use discrete scenario and
simulation analysis throughout the book to evaluate alternative
strategies, assess financial needs, assess risk and expected cash
flows as elements of valuation, and compare different deal
structures and contract terms.
Fourth, because both valuation and assessment of cash needs
depend on projections of cash flow, we devote significant attention
to methods of forecasting the pro forma financial statements of
new ventures in an integrated fashion. Integrated financial
modeling enables the entrepreneur or investor to use financial
forecasting to conduct scenario analysis and to simulate such
things as how growth rates that are faster or slower than expected
affect cash needs.
Fifth, we provide a comprehensive survey of approaches to new
venture valuation with an emphasis on applications. Our approach
to valuation is more comprehensive than most because we
approach valuation from a contracting perspective that is affected
by the different assessments of the entrepreneur and the investor.
We recognize that the entrepreneur’s unique circumstances can
lead to value conclusions that are different from those of a well-
diversified investor.

WHY STUDY ENTREPRENEURIAL FINANCE?

Whether you see yourself as an entrepreneur, a corporate
financial manager dealing with new projects, an asset manager,
an investor, or a social entrepreneur, a solid understanding of
entrepreneurial finance can help you make better decisions.
Couple this with the estimate that over 50% of new businesses fail
within a few years, and the value of understanding new venture
finance becomes clear. Perhaps more telling is that even if a
business survives, the entrepreneur may not. In a majority of
venture capital-backed start-ups, non-founders are appointed
CEO within a few years of the start of operation.
How can the hazards and pitfalls of forming new ventures be
avoided or mitigated? The answer is to understand the financial
economic foundations and use the best available decision-making

19
tools and methods. A new venture should not be undertaken
unless the expected reward is high enough to compensate for the
value of forgone opportunities. Investing personal resources and
time in a venture that should never have been pursued is just as
serious an error as failing to invest in a good venture. Throughout
the book, we reiterate and demonstrate through examples that
this trade-off of risk and return is not easy to assess intuitively.
Rather, this is an area where analytical rigor can add considerable
value.
Even the best initial projections, however, can prove to be
overly optimistic as the future unfolds. It is important to base the
decision to continue or abandon a venture on the same kind of
rigorous analysis that was used in making the original decision. It
is all too easy to continue investing time and resources in a
venture that is destined for mediocre long-run performance or to
give up on a venture that has experienced a temporary setback
but still offers the potential for substantial gain.
It is a rare individual who is good at both recognizing an
opportunity and managing the venture to capitalize on that
opportunity. Careful design of the organization at the outset helps
ensure that a venture does not fail just because the visionary was
not well suited to manage the day-to-day operations. Careful
design also can help ensure that the entrepreneur does not lose
control of the venture unnecessarily.

WHAT’S NEW ABOUT THIS BOOK?

This book builds on our previous books, Entrepreneurial Finance
(2000, 2004) and Entrepreneurial Finance: Strategy, Valuation
and Deal Structure (2011). Like the earlier books, it ties the
applications to the underlying disciplines of finance and
economics and makes clear in what ways the study of
entrepreneurial finance is distinct from corporate finance. In
contrast to other books, this book focuses less on small business
entrepreneurship and focuses more on issues facing high-risk
ventures that have significant growth potential and are candidates
for external equity capital such as angel and venture capital
investing. We emphasize key considerations such as new
developments in financial contracting and negotiation, hypothesis-
driven entrepreneurship, adding value through deal structuring

20
and staging of investment, the choice and timing of financing, and
valuation of risky ventures, including valuation of real options.
Coming on the heels of the JOBS Act of 2012, there have been
a number of innovations in the ways new ventures are financed
and the contract terms that are used. Worldwide, there has been
considerable growth in both angel and venture capital investing.
There is more variety in the sources of financing available to
entrepreneurs, ranging, as examples, from crowdfunding, to initial
coin offerings (ICOs), to mini-IPOs. Technological changes have
resulted in reduced costs of experimenting with new venture
ideas, leading to an explosion of start-ups seeking early-stage
funding. The result has been an increase in the prevalence of
early-stage “nonpriced” financing in the form of sophisticated
convertible notes and an increase in the number of funding
rounds.
We emphasize the usefulness of hypothesis-driven
entrepreneurship by tying it to an intuitive discussion, using
decision trees, of how real options can be created and exploited.
The chapter on venture deals (Chapter 4) reflects the centrality of
understanding how financial contacts can mitigate information
costs and align incentives of the entrepreneur and investor. We
examine venture contracting terms in detail (such as liquidation
preferences, conversion rights, and antidilution terms) and
analyze the terms of new-style convertible notes that now are
commonly used by angels and some VCs in early stages. We
reflect uncertainty of the real option values by combining decision
trees and simulation (Chapter 5). The analysis is step-by-step in
the context of specific examples. We devote significant attention
to financial forecasting and the construction of integrated pro
forma financial statements, as both are key to valuation,
contracting, and assessment of cash needs.
We break new ground in several areas by presenting material
and analytical approaches that extend the frontier of academic
research related to entrepreneurial finance. The book focuses on
U.S. institutions but also provides international perspective by
illustrating, throughout, the many similarities and the differences in
analysis for U.S. ventures versus international ventures.
The book concludes with a summary of major themes and a
discussion of international differences in institutions and public
policies aimed at encouraging innovation and entrepreneurship.

21
We also identify open questions regarding the future of
entrepreneurial finance. A number of technological changes have
the potential to dramatically change the landscape for finance,
including, as examples, blockchain and cryptocurrency,
crowdfunding, artificial intelligence and machine learning, and
internet connectivity (IoT).

INTENDED AUDIENCE
This book can be used as a text in an advanced finance or
entrepreneurship course and by scholars who are interested in
research related to entrepreneurial finance. However, its intended
audience is broader. The book is appropriate for students,
entrepreneurs, practitioners involved with new ventures, and
corporate financial managers looking for ways to encourage
corporate venturing. We have designed the book for readers who
are familiar with the basic concepts and tools of corporate finance,
accounting, economics, and statistics, and who seek a rigorous
and systematic approach to adding value to new ventures through
financing and deal structuring. On the companion website, we
provide brief reviews for those who feel the need for a refresher
on some key background concepts.
The book is appropriate for graduate students, advanced
undergraduates in business and economics, and executive MBA
students. In our own teaching, we use the book and related
materials with students at all levels. Because entrepreneurial
finance builds on and integrates all areas of management, a
course developed around the book can serve as a capstone
integrative experience to the MBA or an undergraduate business
degree.
The book can be used effectively in an entrepreneurial finance
course or in a course on venture capital and private equity. It is
designed to be used either as a stand-alone resource or in
conjunction with cases or a business planning exercise. Each
chapter includes end-of-chapter review questions. The book’s
website has end-of-chapter problems that are designed to give
hands-on opportunities to apply the lessons of each chapter.
The book can be used in a variety of different course formats:
Some users like our use of simulation throughout the book. For
those, we rely on readily available software (@RISK) and also

22
provide files on the website that contain examples and problem
solutions that are prepared using @RISK and also Oracle Crystal
Ball, another popular software package.
For those who are oriented to case method teaching, we have
provided a series of our own interactive cases that correspond to
the book chapters and have developed a list of commercially
available cases that work well with the book.
For those who see value in linking the coverage of
entrepreneurial finance to a business planning exercise, the
organization of the book follows the normal organization of the
thought processes and financial contents of a business plan.

A NOTE ABOUT THE WEBSITE AND INTERNET

RESOURCES
The book is designed to be used most effectively in conjunction
with resources we provide on the book’s website,
https://www.sup.org/entrepreneurialfinance. Much of the book
relates to software, spreadsheets, templates, simulation
applications, and interactive cases and tutorials that are available
for download. For those teaching from the book, we also provide
PowerPoint presentations by chapter. Instructor-specific resources
are password protected. Instructors can gain access to teaching
materials that accompany the book by contacting Stanford
University Press at info@www.sup.org.
The website contains problems and interactive cases, along
with solutions, that complement the book material. All Excel
figures in the book, including charts, are available as
downloadable files so that the user can review the spreadsheet
structure and cell formulas. When we use quantitative examples in
discussion, the website normally includes a file that contains the
backup spreadsheet analysis.

SIMULATION
Because of the usefulness of simulation to evaluate risk and
uncertainty, both prominent features of new venture development,
we incorporate it into the book. Many readers will be familiar with
commercial simulation packages such as @RISK and Oracle
Crystal Ball. We primarily rely on @RISK in the book examples

23
but provide both @RISK and Oracle Crystal Ball versions of the
simulation analysis on the book’s website. When an Excel syntax
is used in a simulated cell in a spreadsheet, we use the @RISK
syntax. If you are a user of another commercial package you can
study the parallel syntax by opening and modifying our example
files.

SPREADSHEETS AND TEMPLATES

The website contains soft copies of the figures and tables in the
book, including several templates that you can use to study your
own new venture valuation questions (i.e., you can easily edit the
template to study and value your own cash flow projections). We
have provided copies of spreadsheets that are imbedded with
simulation formulae as well as versions that do not require
simulation.

24
Another random document with
no related content on Scribd:
See brudder’s funny face, baby?
Slim
[Coming out, and speaking with boundless contempt.]
Dat’s de last time I tackle a job along wit’ a fambly man!
Bessie
Bill, yuh promised us a Christmas tree!
Pete
An’ we knowed yuh’d get us one!
Annie
Yuh said yuh was gonna get one, didn’t yuh, Bill?
Maggie
So we folleyed yuh all de way—
Pete
Yuh couldn’t lose us, Bill!
Annie
Not on yer life!
Pete
We wanted dat tree!
T’eodore
[A grand climax.]
An’ here it is!
[There is a chorus of delighted screams as the children
surround the tree.]
Bessie
Bill, what a peach of a tree!
Pete
Some tree!
Annie
Lookit de presents!
T’eodore
Golly, lookit de presents!
Maggie
See de boo-ful tree, baby?
[She makes the baby clap its hands.]
David
[Puzzled, as the children, shrilling their delight, descend
upon the gifts.]
Say, Santa Claus, I didn’t know you had a family.
Slim
[With infinite disgust.]
Kid, yuh said a mout’ful!
David
Are they all related to you?
Bill
[Not too modestly.]
Me eight brudders an’ sisters—count ’em. Bessie—an’ Pete—dey’re
twins. An’ Maggie—dat’s her holdin’ de baby—an’ T’eodore—an’
Annie—an’ Grover—an’ Woodrow—an’ Calvin—dat’s de baby.
David
Do they all come from the North Pole?
Bessie
[With injured American pride.]
W’at do yuh t’ink? We’re a lot of Polanders?
 Bill
De Nort’ Pole? De Nort’ Pole’s warm next to w’ere dey come from.
My paw ain’t woikin’, an’ de landlord toined off de heat w’en I didn’t
pay de rent.
David
Rent? What’s rent?
Slim
[As Bill gazes appealingly at him.]
Yuh started dis. Yuh tell him.
Bill
Rent? Rent’s somethin’ yuh pay w’en yuh get money.
David
And when you don’t get it?
Bill
Yuh don’t.
Slim
[Becoming impatient.]
Say, what I wanna know is dis: is dis a kidnapin’ party, or is dis a kid
party?
David
What’s a kidnaping party, Santa Claus?
Bill
I’ll show yuh.
[He calls to the children.]
Hey, fellers, we’re gonna beat it.
Pete
Naw!
 Bessie
We don’t wanna go, Bill.
Annie
We wanna play wit’ de presents!
T’eodore
Lookit de sleds!
Pete
An’ de boxin’ gloves!
Annie
An’ de railroad trains!
Bessie
An’ de trumpets!
Maggie
See de pretty flowers, baby?
Pete
[Parceling out the musical instruments.]
Yuh take dis—and yuh take dis—an’ w’en I say “Ready,” yuh all blow
to onct.
Slim
[Anxiously.]
Nuttin’ doin’!
Pete
Ready!
[The din is terrific.]
David
 [Indicating the instruments with some anxiety, and pulling
Bill’s sleeve.]
Santa Claus, they haven’t been boiled!
Slim
W’at?
David
They haven’t been boiled, Mr. Slim!
Slim
[And you know he means the children—not the toys.]
Dey oughta be!
Pete
All ready? Go!
[The uproar is repeated.]
Slim
[To Bill.]
An’ I told yuh not to make a sound!
Bill
Say, kid, dere ain’t nobody else on dis floor, is dere?
David
No—nobody but us.
Bill
[Drawing a sigh of relief.]
Dat’s good. Now, fellers, we’re gonna go—
Slim
[Interrupting.]
An’ we’re gonna take him—
 [He indicates David.]
along with us.
Bessie
W’at’s de hurry, Bill?
Pete
We don’t wanna go!
T’eodore
Not now!
Bessie
Bill, dere’s no place fer us to go to.
Bill
W’at do yuh mean?
Pete
De landlord, he come along w’ile we was leavin’, an’ he says we
needn’t come back—none of us—never.
Bessie
[Rather pleased with her news.]
He says he’ll put de furniture on de sidewalk, an’ yuh can git it
w’enever yuh like.
Pete
De sooner de better, he says.
Bessie
Yea—an’ dat wasn’t all he says!
Bill
[Aghast.]
He trun yuh out de moment my back was toined?
 Bessie
Yuh bet he did!
Bill
He trun yuh out? He trun yuh out?
Bessie
Dat’s w’at I’m tellin’ yuh.
Bill
An’ what did paw say?
Bessie
Paw says ef yuh can’t support him in better style den dat, he’s gonna
quit yuh cold.
Bill
W’at do yuh t’ink of dat, Slim? Ain’t it de limit? Ain’t dat de absoloot
limit?
David
[Seizing Bill’s hand.]
What’s the matter, Santa Claus?
Bill
[Angrily.]
Aw, nuttin’!
David
Why don’t you tell me, Santa Claus?
Bill
[Bitterly.]
Dere’s nuttin’ de matter—on’y de kids ain’t gonna have a roof over
deir heads to-night!
David
Because you didn’t get money?
Bill
Dat’s w’y.
David
And because you didn’t pay the rent?
Bill
Yuh said it, kid.
David
But why do you want a roof over their heads? Can’t we take them
along with us?
Bill
W’at’s dat?
David
They can come to the North Pole too, can’t they? Of course it will be
a little crowded in the sleigh, but there’ll be room for all of us if we sit
close. And we’ll have lots of fun!
Slim
[Meaningly.]
Do yuh hear dat, Bill?
David
[Eagerly.]
The reindeer are waiting outside!
Slim
Aroun’ de corner.
David
Dancer and Prancer, and Blixen and Vixen—
Bill
 [Interrupting.]
De reindeer’s name is Lizzie—an’ her radiator’s froze.
Slim
[Crossing to him earnestly.]
But it’s gonna get us away from here, Bill! We get outa de city—we
go somew’eres in de Bronx—an’ den we give Millman a ring on de
telephone—
David
Don’t telephone daddy; he’s always busy.
Slim
He won’t be busy dis time.
[He argues with Bill.]
David
You don’t know my daddy! My daddy is the busiest man in the world!
When he comes to see me, he says, “Exactly ten”—and that means
exactly ten. When I want to see him I have to ask his secretary—and
sometimes he can’t see me at all.
Bessie
Do yuh like dat?
David
I don’t like it—but I guess daddy has to work.
Bessie
Your daddy woik? W’at fer?
David
I guess he wants his money—so that he can pay his rent.
[Bessie snickers. David bridles indignantly.]
Don’t make fun of him! I won’t let anybody do that! I don’t think
anybody works as hard as he works! Why, he starts in the morning
before I get up, and sometimes when I wake in the middle of the
night, I tiptoe to the door of my room, and I can see the light burning
in his study downstairs! Daddy works hard—and he looks so tired!
He’s so tired sometimes that he won’t let me sit in his lap.
Bessie
My daddy lets me sit in his lap all I like!
David
[Eagerly.]
Does everybody call him a fine man?
Bessie
[A bit dubiously.]
Dey calls him all sorts of t’ings—but he don’t mind dat.
David
Do the policemen stop and speak to him?
Bessie
Not ef he sees dem foist.
David
Do they send men to his house to take his picture?
Bessie
[With pardonable pride.]
Dey don’t have ter: dey got his pitcher at headquarters.
Bill
[Who has been arguing with Slim in undertones during the
preceding dialogue, now turns abruptly.]
Come on, fellers! We’re gonna go!
[Slim takes David’s hand.]
A Chorus
Naw, Bill!... We wanna play wit’ de presents!... We don’t wanna leave
de presents!... We want de presents!
Bill
[Angrily.]
Come on, I say!
Maggie
[Appealingly.]
Baby don’t wanna leave de presents!
David
Santa Claus, let them take the presents with them!
[As Slim releases him in astonishment, he runs to the
children.]
Here: you take this, and here’s something for you; and you take one
of the railroad trains—don’t forget the tracks—and you take the other
one.
Bill
[Dumbfounded.]
Yuh’re givin’ away yer toys?
David
[Busy distributing gifts.]
They want them more than I do!
[He turns again to the children.]
Here: you can carry more than that!
[Annie’s arms are full already, but he piles toys on the
heap.]
Put these on top. Take them along.
[To Pete.]
Do they let you ride a bicycle?
Pete
Sure t’ing!
David
Then take this one.
[To Bessie.]
Do they let you go coasting on a sled?
Bessie
All I want—ef I gotta sled.
David
Here’s one for you.
[To T’eodore, holding up a pair of boxing gloves.]
Can you use them?
T’eodore
Kin a duck swim?
David
Take them.
Pete
[To Bill.]
Hey, Bill, can I have de tennis racket?
Bill
[To David.]
How about it?
David
[And you see it hurts—and besides Pete’s arms are full.]
He wants it more than I do.
 Maggie
[With a cry of delight.]
Gee, look w’at I found! Ice skates! See de ice skates, baby?
David
Ice skates!
[He pauses; takes them in his hand; caresses them. This
time it hurts very much indeed.]
Bill
[Almost savagely.]
W’at are yuh gonna do, kid?
David
[Smiling at Bill.]
I’m going to give them to her.
[He places them in Maggie’s hands.]
Take good care of them—and look out for the baby—they’re sharp.
[He turns to Bill.]
And now, Santa Claus, what’s a kidnaping party?
Bill
Yuh wanna know dat?
David
Yes, Santa Claus!
Bill
Yuh really wanna know?
[David takes his hand and nods eagerly. Bill hesitates.
Then he glares defiantly at Slim, and turns to David.]
Kid, yuh ain’t never gonna loin dat from me!
 Slim
[With hostility.]
W’at did yuh say?
David
[Apologetically.]
I didn’t mean to forget your present, Mr. Slim.
[He runs to the tree and fetches the candy.]
Here you are! And Merry Christmas!
[He gives Slim the box.]
Slim
De candy! Dat’s my idee of one fine present!
David
And now, Santa Claus?
Bill
[Shaking his head.]
Kid, it’s gonna cost me a lotta coin—an’ gee, w’at wouldn’t I do wit’
just a coupla dollars?—but youse a little gen’leman—see?—an’ ef
anybody lays a finger on yuh, I’ll moider him!
[He casts a defiant glance at Slim, and claps his arm upon
David’s shoulders in a rough accolade.]
Kid, youse a good sport—
[He bows grotesquely.]
—an’ I take me hat off to yuh! Yours truly, John W. Santa.
Slim
[Gasping.]
Youse gonna leave him here?
Bill
Yuh hoid me.
Slim
But we come here to—
Bill
[Interrupting.]
I changed my mind—see? A guy dat’s a he-man can do dat little t’ing
—an’ John W. Santa’s a he-man!
[He indicates David.]
I’m gonna leave him here—an’ me an’ de kids is gonna beat it—an’
youse is comin’ along, too; don’t yuh forget dat!
Slim
Bill! Yuh said yuh was hard-boiled!
Bill
[Crossing to him menacingly.]
Ef yuh don’t believe it, now’s de time to try me!
[He pauses.]
Well?
[There is a sudden loud knocking at the locked door at the
right.]
Halligan
[Outside.]
Let me in! Let me in or I’ll break down the door!
Slim
Beat it!
[There is a rush for the windows, but it stops short as the
door at the left, which has been ajar for some
moments, suddenly opens, and Millman stands on
the threshold.]
 Bill
[Rising nobly to the occasion.]
A-choo!
David
God bless you!
Slim
We’re pinched!
Millman
[Quietly.]
Just that.
Slim
[Jerking his thumb toward the window.]
Cops outside?
Millman
[Nodding.]
They saw you come in. They’ve been waiting for you to come out.
Annie
[Beginning to cry.]
I want my presents!
Halligan
[Hammering at the door again.]
Let me in!
Millman
Let him in.
[Bill crosses to the door and unlocks it. Halligan and
Vicky, both wabbly, but on their feet again, come into
 the room.]
Vicky
Master David! Master David! They haven’t hurt you, have they?
[She rushes to him.]
David
Santa Claus wouldn’t hurt anybody. He was going to give me a
kidnaping party, that was all.
[He pats Bill’s hand.]
Vicky
[Horrified.]
Master David!
Halligan
[Producing a whistle.]
Shall I whistle for the police, sir?
Millman
Wait, Halligan.
[He turns to the intruders.]
The house is surrounded. There is no way you can get out.
Bill
[Most unhappily.]
Yes, sir.
[He takes off his mask. For the first time we see his face:
the face of a half-starved lad with big eyes.]
Millman
Bear that in mind.
[Most unaccountably, most leisurely, he turns his back on
Bill, and draws up a chair.]
Davy, how would you like to sit in my lap?
David
I’d love it, Daddy!
Millman
So would I.
[David rushes to him. Millman settles him comfortably,
quite oblivious of the others.]
There. There. David, where were you going with this man?
David
Not “this man,” Daddy: it’s Santa Claus.
Millman
I meant Santa Claus.
David
I was just going to the North Pole.
Millman
Were you going to leave me alone?
David
I would have come back to-morrow or the next day, Daddy—if you
wanted me.
Millman
[Eloquently.]
If I wanted you!
[He pauses.]
Are you sure you would have come back, Davy?
David
Well, pretty sure.
 [He hesitates.]
I wouldn’t want to bother you if you were busy.
Millman
[Wincing.]
I’m not so busy as you think, Davy.
David
No?
Millman
No.
[He pauses.]
Sometimes, when a man’s lonely—when he misses somebody who’s
gone terribly, terribly much—he tries to make himself busy. Do you
understand that, Davy?
David
I think I do. You mean—Mummy.
Millman
I mean—Mummy.
[His voice lightens.]
But now that my little boy is growing older, I don’t expect to be nearly
so busy any more.
David
[Ecstatically.]
Really, Daddy?
Millman
Honest and truly!
David
[Turning to Bill.]
Did you hear that, Santa Claus?
[Bill shuffles his feet and does not answer.]
Millman
[Sharply.]
Did you hear that, Santa Claus?
Bill
Yes, sir. I hoid him.
Millman
[Trying to speak lightly.]
And now, if you still want to go to the North Pole with Santa Claus—
you may go.
[He pauses.]
Do you want to go?
David
[Hesitates; rises; looks at his father; looks at Bill—and
then, to his father’s unutterable horror, runs to Bill.]
You won’t mind, will you, Santa Claus?
[Bill is silent.]
Millman
[In a tone like that of a whiplash.]
Answer him!
Bill
[Addressing David, and exceedingly gruff.]
W’at do yuh mean, kid?
David
You won’t mind if I stay here, will you? I don’t care so much about
that old North Pole.