Question

A founder needs for his young company a USD 5,000,000 investment from an outside investor. The...

A founder needs for his young company a USD 5,000,000 investment from an outside investor. The current number of shares outstanding in the hands of the founder is 1,000,000 shares. After a few years of working after your graduation at MSUM, you have become a successful professional and a USD 5 million is nothing to you. You consider the venture attractive since both, you and the founder, think that the venture can reach a level of annual earnings of USD 10,000,000 in 6 years. A comparable company now in the public market has an equity value of USD 7,500,000, with annual earnings of USD 500,000. As an investor, you want to earn a yearly return of 40 percent for the next six years. Answer the following questions:

a) What is the value of the venture in 6 years?

b) What is your minimum proportion of ownership you should negotiate with the founder?

c) What is the number of shares that the company should issue at time zero?

d) What is the price per share at time zero?

e) What are the pre-money and post-money valuation of the company?

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Answer #1

(a) Value of venture in 6 years = 10000000*7500000/500000 = $150,000,000 = $150 million

(e) Post money valuation of the company = $150,000,000/(1+40%)^6 = $19,921,547

Pre-money valuation of the company = 19921547-5000000 = $14,921,547

(b) Minimum Proportion of ownership = 5000000/19921547 = 25.10%

(c) Minimum number of shares the company should issue = ((19921547-14921547)/14921547)*1000000 = 335,086

(d) Price per share at time zero = $19,921,547/(1000000+335086) = $14.92

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