Question

Starware Software was founded last year to develop software for gaming applications. The founder initially invested $ 1 comma 000 comma 000 and received 12 million shares of stock. Starware now needs to raise a second round of​ capital, and it has identified a venture capitalist who is interested in investing. This venture capitalist will invest $ 1.60 million and wants to own 35 % of the company after the investment is completed. a. How many shares must the venture capitalist receive to end up with 35 % of the​ company? What is the implied price per share of this funding​ round? b. What will the value of the whole firm be after this investment​ (the post-money​ valuation)? a. How many shares must the venture capitalist receive to end up with 35 % of the​ company? What is the implied price per share of this funding​ round

Answer 1

a). Post money valuation = investment amount/share = 1.60/0.35 = 4.57 million

Pre money valuation = post money valuation - investment amount

= 4.57 -1.60 = 2.97 million

Price per share = pre money valuation/existing number of shares = 2.97/12 = 0.2476 per share

The 35% stake will be picked up at this price, so number of shares issued = investment amount/price per share

= 1.60/0.2476 = 6.462 million

b). Implied price per share = 0.2476 per share

c). Post money valuation = 4.57 million