QUESTION ONE [30 MARKS]

A VC has a target rate of 70% per annum, makes an investment of $2.0 million today, and foresees an exit of $60 million in five years. The exit value includes the $2.0 million investment. There are currently 250,000 shares.

c. The probability of success (exit at $60 million) is 15% and the probability of failure (exit at $0) is 85%. What is the expected IRR?

d. Suppose an option pool of 40,000 shares is created. To maintain the same ownership percentage as in part a), how many new shares does the VC require?