5. SKI Co.s founders have 1.2 million in shares. They need financing in the amount of $700,000. VC1s required IRR is 40% for first 2 years and 30% for last two years. The VC believes that exit will happen in 4 years at $5M. What is percent ownership required by VC? What is ownership of founders after financing round? What is post money and pre money? What is the share price? What is the number of shares issued to VC1? Unexpectedly, a second investment of $500,000 is needed at end of year 2 and a second VC makes that investment.

Additional Info:

i) We need to find the pre-money value of the firm i.e. value of the firm before VC1's investment of $700,000 and the post-money value of the firm in year 0 (now).

Post Money Value = 5,000,000 / [(1+30%)^2 x (1+ 40%)^2 ] = $1509479.53

Pre Money Value = 1509479.53 - 700,000 = $809479.53

Now, of $1509479.53 value of the firm. $700,000 is attributable to VC1. So,

Ownership of the VC1 = 809479.53 / 1509479.53 = 53.62%

ii) Ownership of founders after financing round = 1 - 53.62% = 46.37%

iii) Post Money = $1509479.53 , Pre Money = $809479.53

iv) Founders have 1,200,000 shares which makes up for 46.37% of the total shares or ownership. So total shares of the firm = 1,200,000 / 0.4637 = 2587679

Share Price = Post Money / Total No. of Shares = 1509479 / 2587679 = 0.58

v) No. of shares issued to VC1 = 2587679 - 1200000 = 1387679

e) Value at the end of year 2 = 5,000,000 / (1+30%)^2 = 2958580

$2958580 is post-money value after VC2 put in $500,000

Pre-Money Value at end of Year 2 = 2958580 - 500,000 = $2458580

Proportion of Ownership of VC2 = 500000 / 2958580 = 16.9%

f) Ownership of VC1 and Founders = 1 - 0.169 = 83.10%

g) Founders and VC1 have 2587679 shares (from part (i)) which makes 83.10% . So

Total no. shares at end of stage = 2587679 / 0.831 = 3113934

No. of shares of VC2 = 3113934 x 16.9% = 526255

h) Total no. shares at end of stage = 2587679 / 0.831 = 3113934

i) Price per share after 2nd round = Post Money Value after 2nd round / Total No. of shares after 2nd round = 2958580 / 3113934 = $0.95

It is up because the inital investment has grown at 40% over the 1st 2 years

j) VC1 would want to keep at least 53.62% of the total ownership. After the 2nd round his ownership is reduced to = 83.1% x 53.62% = 44.56%

Let us assume VC1 demanded P percent ownership to keep his target 53.62% ownership. So,

83.1% x P = 53.62%

=> P = 0.5362 / 0.831 = 64.52%

Ownership of Founder after round 1 = 1 - 0.6452 = 35.47%

Ownership of Founder after round 2 = 83.1% x 35.47% = 29.48%