A founder, F, develops a product in his/her garage. F and some family and friend

Question

A founder, F, develops a product in his/her garage. F and some family and friends money (call the total FFF) have invested $1MM of their money in this startup (SU). They award themselves 1MM shares of stock for this investment. After two years, an angel investor (call it A) invests $2MM for 25% of the company in the form of Series A preferred stock. Two years later, a venture capitalist (call it VC) invests $4MM for 20% of the company. 3. Provide the following: Capitalization tables for initial case (post FFF), the post-A investment, and the post-VC investment What are the share prices after the A and VC investment? What is the earnings multiple (final value divided by initial investment for FFF, and A after the VC investment? a. b. c. Now assume that two years later a large corporation (C) buys 100% of the SU for $30 per share. What are the receipts for FFF, A and VC? What was the earnings multiple for each after the acquisition by C?

Explanation / Answer

Answer:

1. Initial Investment: $ 1 MM.

No. of Shares: 1 MM.

Stock Price: $ 1/Share.

2. Round A series investment: $ 2 MM

Total ownership %: 25%

Total Valuation: $ 8 MM.

Stock Price: $ 8 per share.

3. VC Investment: $ 4 MM.

Total Ownership: 20%

Total Valuation: $ 20 MM.

Stock Price: $ 20 per share.

Common Stocks Outsatnding:

S.No. FFF A -Series VC 1 Initially 1,000,000 Capitalization $1,000,000 2.
   After First Round A -Series 750,000 250,000 Capitalization $6,000,000 $2,000,000 3. After VC Investment 550,000 250,000 200,000 Capitalization $11,000,000 $5,000,000 $4,000,000 4. Earnings Multiple 11x 2.5x Assume the offer price by large corporation (C) as $ 30 per share. 5. Receipts $16,500,000 $7,500,000 $6,000,000 Earnings Multiple 16.5x 3.5x 1.5x

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