Hey there, I need help with the two questions f. and g.

John Thompson, CEO of NewVenture Inc., seeks to raise $5 million in equity for his

early stage venture in January 2016. NewVenture is a subscription-based software

company that has experienced 75% revenue growth over the last year. The company

generated $2.5 million of revenue in 2015, with operating loss of ($450,000).

Thompson projects that NewVenture will achieve $30 million in revenue by 2020,

followed by 5 years of 35% revenue growth and 3% growth thereafter. He also

estimates that the company will become profitable in 2017, with EBIAT margins of

about 1% on average over the next 5 years, growing over time to an average of 5% in

years 6-10 and 10% thereafter. Asset intensity is projected to remain at its current -

20%.

a. Samantha Jones of Gorsuch Capital is considering an investment in January

2016. Her experience with comparable 'Software as a Service' (SaaS) startups

suggests that NewVenture could exit in December 2020 with a 4X to 6X Priceto-

Sales multiple. Given this, what is her projected exit value for NewVenture in

2020?

b. Use the 3 stage model to estimate the value of NewVenture in 2020, assuming

that the startup meets the projections made by Thompson. Does the multiple

range assumed by Samantha Jones make sense given the projected cash flows

from NewVenture?

c. How should a forecast of lower growth or higher asset intensity relative to other

firms in the same industry impact her projected multiple?

d. What share of the company will she require in January 2016 if her annual

required rate of return is 50% and she anticipates an exit in December 2020 of

$150 million? What is the implied pre- and post-money valuation if she invests

on those terms?

e. The company has 1,000,000 shares outstanding before the investment. How

many new shares should she purchase, and at what share price? Assume the

investment is in standard convertible preferred stock with no dividends and a

conversion rate to common of 1:1.

Samantha Jones believes Thompson will have to grant generous stock options in

addition to the salaries projected in his business plan. From experience, she thinks

management should have the ability to own at least 15% share of the company in the

form of options by the end of year 5.

f. What share of the company should Samantha insist on today if an option pool is

created after her investment and her rate of return is 50%?

g. What share of the company should she insist on if the option pool is allocated

before her investment?