Anouier vvaluation problem: Nic Erhardt is a partner in a very successful Boston-based venture firm. He plans to invest $5 million in a start-up biotechnology venture and must decide what share of the company he should demand for his investment. Projections he developed with company management show net income in year 7 of $20 million. The few profitable biotechnology companies are trading at an average price-earnings ratio of 15. The company currently has 500,000 shares outstanding. Nic believes a 50% required rate of return is required for a venture of this risk. What percentage of the firm should he demand? How many new shares must Erhardt demand? What is the price per share? That's the easier set-up. Now let's make it more complicated. Assume all is as above, but Erhardt realizes that a second round of financing will be necessary. At t-3 the biotech firm will need another $2 million. f the firm is still progressing and raising money, clearly it must be less risky than at t-0, so those investors will need only a 25% target return. Now What portion of the firm does Erhardt require at t-7. How about at t-0? (The answers are not the same.) How many shares must Erhardt demand now? What is the price per share? How many shares will the round 2 investors demand? What is the price per share? Create a table showing the per share price, post-money and pre-money valuations at each investment round (including the end date-the hoped for IPO) Here's one more term. "Step-up" - new round share price/old round share price. Calculate the "step-up" at round 2 and at the IPO