Question

Starware Software was founded last year to develop software for gaming applications. The founder initially invested $800,000 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 $1.20 million and wants to own 20% of the company after the investment is completed.

a. How many shares must the venture capitalist receive to end up with 20% 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)?

Answer 1

a)After the investment by venture capitalist 80% of shares will be owned by Starware software
80% 0f shares value = 12,000,000
So 100% of share value = 12,000,000 * 100%/80% = 15,000,000 shares
So the venture capitalist will get 20% of total shares = 20% * 1,500,000 = 3,000,000 shares
So venture capitalist will give 1.2 million for 300,000 shares
so implied price = 1,200,000/ 3,000,000 = 0.4/share

b) Value of whole firm after merger = Total outstanding shares * implied price = 15,000,000 * 0.4 = 6,000,000
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