Lynda Chen founded a new venture last year with $10,000 in equity capital for which she received 2,000,000 shares of common stock. The venture is now moving into its startup stage and needs an additional $1,000,000 to carry out the business plan. If Lynda had $1,000,000 to invest, she could retain 100 percent ownership of the venture. However, because Lynda does not have additional equity funds to in- vest, she is negotiating with a venture investor who is willing to invest $1,000,000 for an ownership position in the firm in the form of newly issued shares of common stock. The investor and the founder agree that the horizon (time to exit) for the investment should be five years. The investor expects a 50 percent compound annual rate of return for the entire five years.

• $10,000 in equity capital = 2,000,000 shares
• Additional investment of $1 million = ? Ownership
• The investor's expected rate of return = 50%
• Expected earning in year 5 (E) = $1 million
• A similar venture with E = $2 million, sold at $20 million (P)

Based on the above-mentioned information, the following were calculated: