Question 6. Venture Capital Valuation Method - Multiple Round Financing George Webb, CEO of Be Inc., sought to raise $5 million in a private placement of equity in his early stage dairy product company. He approached the venture capital firm, Lorsam Capital. George conservatively projected net income of $5 million in year 5, and knew that comparable companies traded at a price earnings ratio of 20X. The company had 1,000,000 shares outstanding before the private placement, Benedicta Jones of Lorsam Capital liked George's plan, but thought that the company will probably need another round of financing in addition to the current $5 million. On further analysis and discussion, George and Benedicta agree to raise additional $3 million in equity at the beginning of year 3. Benedicta felt that while the first round investors would require a 50% return, the second round investors (including herself), in recognition of the progress made between now and then, will probably have a hurdle rate of 30%. She also felt that the company would have to grant generous stock options to recruit a senior management team, in addition to the salaries projected in George's plan. From past experience, she thought that management should have the ability to own at least a 15% of the company by the end of year 5. (1) What percentage of the company's shares and how many shares would the first round investor require today if her required rate of return was 50%? What should be the share price for round 1 investors? (2) What percentage of the company's shares and how many shares would the round 2 investor require if her required rate of return was 30%? What should be the share price for round 2 investors? (3) What are the pre-money and post-money valuation for round 1 and round 2? (4) (You will earn extra bonus points for answering this question correctly.) Suppose it was apparent in the beginning of year 3 that the company would meet its financial targets and generate NI of $5m, but not until the end of year 7, instead of year 5. How would your answers to parts a and b change? Question 6. Venture Capital Valuation Method - Multiple Round Financing George Webb, CEO of Be Inc., sought to raise $5 million in a private placement of equity in his early stage dairy product company. He approached the venture capital firm, Lorsam Capital. George conservatively projected net income of $5 million in year 5, and knew that comparable companies traded at a price earnings ratio of 20X. The company had 1,000,000 shares outstanding before the private placement, Benedicta Jones of Lorsam Capital liked George's plan, but thought that the company will probably need another round of financing in addition to the current $5 million. On further analysis and discussion, George and Benedicta agree to raise additional $3 million in equity at the beginning of year 3. Benedicta felt that while the first round investors would require a 50% return, the second round investors (including herself), in recognition of the progress made between now and then, will probably have a hurdle rate of 30%. She also felt that the company would have to grant generous stock options to recruit a senior management team, in addition to the salaries projected in George's plan. From past experience, she thought that management should have the ability to own at least a 15% of the company by the end of year 5. (1) What percentage of the company's shares and how many shares would the first round investor require today if her required rate of return was 50%? What should be the share price for round 1 investors? (2) What percentage of the company's shares and how many shares would the round 2 investor require if her required rate of return was 30%? What should be the share price for round 2 investors? (3) What are the pre-money and post-money valuation for round 1 and round 2? (4) (You will earn extra bonus points for answering this question correctly.) Suppose it was apparent in the beginning of year 3 that the company would meet its financial targets and generate NI of $5m, but not until the end of year 7, instead of year 5. How would your answers to parts a and b change
