Question

AngelCorp anticipates that it will need $15,000,000 in venture capital to achieve a terminal value of $300,000,000 in five years. Suppose the founder wants to have a venture investor inject $15,000,000 in three rounds of $5,000,000 at time 0, 1 and 2 with time 5 exit value of $300,000,000. If the founder anticipates returns of 60%, 40% and 30% for round 1, 2 and 3, respectively, what percent of ownership is sold during the first round? During the second round? During the third round? What is the founders’ year-five ownership percentage?

Answer 1

Solution:-

Calculation of first round of FV:

Given,

P.V = $5,000,000

rate = 60%

period = 5

First round of FV = $5,000,000 * (1+0.6)⁵

= $5,000,000 * 1.6⁵

= $5,000,000 * 10.48576

= $52,428,800

First round % of Total FV = $52,428,800 / $300,000,000

= 0.1747 or 17.47%

Calculation of Second round of FV:

Given,

PV = $5,000,000

RATE = 40%

period = 4

Second round of FV = $5,000,000 * (1+0.4)⁴

= $5,000,000 * 1.4⁴

= $5,000,000 * 3.8416

= $19,208,000

Second round % of Total FV = $19,208,000 / $300,000,000

= 0.06402 or 6.402%

Calculation of third round of FV:

Given,

PV = $5,000,000

rate = 30%

period = 3

Third round of FV = $5,000,000 * (1+0.3)³

= $5,000,000 * 1.3³

= $5,000,000 * 2.197

= $10,985,000

Third round % of Total FV = $10,985,000 / $300,000,000

= 0.036616 or 3.66%

Founder final ownership percentage = 1-17.47%-6.402%-3.6616%

= 72.46%