A potential investor is seeking to invest $1,500,000 in a venture, which current

Question

A potential investor is seeking to invest $1,500,000 in a venture, which currently has 2,000,000 shares held by its founders, and is targeting a 40% return four years from now. The venture is expected to produce $2,000,000 in income per year at year 5. It is known that a similar venture recently produced $1,000,000 in income and sold shares to the public for $15,000,000. Suppose that the first round investor believes that the venture cannot reach the E4 projection without an additional $1,000,000 infusion at the end of year two from a second round investor expecting a 25 percent compounded annual rate of return on the money contributed at that time. Assume that the first round investor cannot have his percentage share reduced in the transaction.

7) What ownership percentage of our firm must be sold in order to provide the second round investor with their targeted return? (round to 5 decimal places)
8) What is the founder’s remaining ownership share %? (round to 5 decimal places)
9) What is the total number of shares after the second round financing? (round up to whole shares)
10) What is the new number of shares for the first round investor? (round up to whole shares)
11) What is the new price per share for the first round investor? (round to 5 decimal places)
12) What is the pre-money valuation for the first round investor? (whole $’s)
13) What is the post-money valuation for the first round investor? (whole $’s)
14) What is the number of shares issued to the second round investor? (whole shares)

15) What is the new price per share for the second round investor? (round to 5 decimal places)

16) What is the pre-money valuation for the second round investor? (whole $’s)
17) What is the post-money valuation for the first round investor? (whole $’s)

Explanation / Answer

Share sold to second round invstor Firms return               20,00,000.00 Amount invested by second round investor               10,00,000.00 His expected return 25 % on 10,00,000 To get same amount 12.5 % in 20,00,000 Share to be sold 12.50% Founders remaining percentage Investment by Investor First round               15,00,000.00 His expected return (1500000*40/100)                  6,00,000.00 His percentage of holding (600000/2000000) 30% Remaining % by founder 57.50% (100-12.5-30) Similar firm having 50 % earning capcity sold share @ 15 (15000000/1000000) Based on this our market value                              30.00 Let us take face value                              10.00 Number of shares (20000000/10)                  2,00,000.00 Total number of shares after second round financing If 57.5 % = 200,000 then 100 % (200,000/57.5%)                  3,47,826.00 New Number of shares to the first round investor Initially issued 200,000 = 70% therefor 100 % = 200,000/70% = 284714 Shares initially issued                     84,714.00 (284,714-200,000) After second round financing Now required holding: Total shares           347,826 % of holding           30% Required share   347,826*30%                  1,04,348.00 New shares to be issued (104,34-84,741)                     19,607.00 New price per share: First round Investor Amount invested               15,00,000.00 (based on sale of other firm) Number of shares held                  1,04,348.00 Price per share                              14.37 Premoney valuation of first round investor Value of firm            3,00,00,000.00 Number of shares                  2,84,714.00 Market price per share                           105.37 Number of shares held                     84,714.00 Premoney valuation               89,26,220.70 Post money valuation of first round investor Value of firm            3,00,00,000.00 Number of shares                  3,47,826.00 Market price per share                              86.25 Number of shares held                  1,04,348.00 Premoney valuation               90,00,017.25 New price per share: First round Investor Amount invested               10,00,000.00 (based on sale of other firm) Number of shares held                     43,478.00 Price per share                              23.00 Premoney valuation of second round investor Value of firm            3,00,00,000.00 Number of shares                  2,84,714.00 Market price per share                           105.37 Number of shares held                     43,478.00 Premoney valuation               45,81,228.88 Post money valuation of second round investor Value of firm            3,00,00,000.00 Number of shares                  3,47,826.00 Market price per share                              86.25 Number of shares held                     43,478.00 Premoney valuation               37,49,978.44

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