1. Barney Finn, CEO of Finnster, Inc., seeks to raise $5 million in a private placement of equity in his early stage agro-technology company. Finn conservatively projects net income of $5 million in Year 5 and knows that comparable companies trade at a price earnings ratio of 20X.

What share of the company would a venture capitalist require today if her required rate of return were 50%? What if her required rate of return were only 30%? If the company had 1,000,000 shares outstanding before the private placement, how many shares should the venture capitalist purchase? What price per share should she agree to pay if her required rate of return is 50%? 30%? Assume the investment is in standard preferred stock with no dividends and 1:1 conversion to common.

Barney feels that he may need as much as $12 million in total outside funding to launch his new product. If he sought to raise the full amount now in a single round, how much of his company would he have to give up? What price per share would the venture capitalist be willing to pay if her required rate of return is 50%? 30%?

2. Penny Galison of N.E.W. Ventures liked Finns plan, but thought it nave in one respect: To recruit a senior management team, she felt Finn would have to grant generous stock options in addition to the salaries projected in the business plan. From past experience, she felt management should have the ability to own at least a 15% share of the company by the end of Year 5. With that in mind, what share of the company should Penny insist on today if her required rate of return is 50%? 30%?

3. On further review, Barney and Penny agree that the company will probably need another round of financing beyond the current $5 million. Penny believes that Finnster will need an additional $3 million in equity at the beginning of Year 3 (i.e., in 2 years time). While the first round investors, including N.E.W. Ventures, will require a 50% return, Penny feels that 2nd round investors will probably have a hurdle rate of only 30%, in view of the progress that that will have been made between now and then. As before management should have the ability to own a 15% share of the company by the end of Year 5.

Based on this new information, what share of the company should Penny seek now for the initial $5 million?

What price per share should she be willing to pay? What share of the company will the Round 2 investors seek? What price per share will they be willing to pay?