10.4 Assume you are Hotmail’s VC pondering whether to invest $300,000 in the first-stage of the venture. At this point in the negotiation, Mr. Bathia is offering 15% of the equity that, after successive rounds of financing, would be diluted to about one-third or 5% by the time the IPO becomes a possibility in 5 years. Furthermore, assume that for this type of transaction, taking into account the risk, lack of marketability of your stake, and the high value that you expect to add to the start-up, you require a 50% IRR on your investment.

You estimate the IPO valuation would be made at five times revenue at least, with no debt outstanding. What is the value of the pre-money IPO required to provide your required return? The pre-money IPO is the value of the equity of the company before the IPO proceeds.