Question

PRE- AND POST-MONEY VALUATION AND ISSUING SHARES

Some additional background:

A few essential definitions:

Pre-money valuation:The valuation of the company immediately before the investment.

Post-money valuation:The valuation of the company immediately after the investment.

Therefore:

When outside investors put money into a young company, the investors often take preferred stock, while the founders continue to hold common stock.  However, in calculating percentages of ownership, it is general practice to count a preferred share as equal to a common share, and for the total of common and preferred shares to equal 100%. Your answer for each question needs to be a number (stock or dollars) or a percentage.

Question 1A:  The founders of a company hold all of the common shares, and there are no stock options outstanding and no option pool for issuing options in the future.  An Angel invests $1.5 million in the company on the basis of a pre-money valuation of $6.5 million.  What is the post-money valuation of the company?

Question 1B:  Under the same facts as in Question 1A, what percent of the company would the investor own after the investment?

Question 1C:  Under the same facts as in Question 1A, with the additional fact that there were 1 million shares outstanding pre-money, how many shares would be issued to the Angel?

Question 1D:  At what price would these shares be issued?

Question 1E:  There is no single standard way of characterizing an investment and its relationship to the valuation of a company.  In Question 1A above, we used one common approach: specifying a pre-money valuation and the amount of the investment. But there are other common approaches. For example, assume an investor offers $3 million dollars in exchange for 25% of a company. Under those facts, what is the implicit pre-money valuation of the company?

Write your responses in numbers, percentages, T/F and $ values only.

Answer 1

1A

Pre-money value = $6.5 million

Invested value = $1.5 million

Post-money valuation = 6.5 + 1.5 = $8 million

1B

Investor will own = Invested value / Post-money valuation

= 1.5 million / 8 million = 18.75%

1C

For $6.5 million there were 1 million shares

for each million = 1 / 6.5 shares

therefore for $1.5 million = (1 / 6.5) * 1.5

= approx 230,769 additional shares will be issued

1D

Price of share = 1 / 6.5

= 0.1538 per share (approx)

1E

If the investor is offering $3 million for 25% of a company, it means the pre-money value is 3 million / 25% = $ 12 million