Suppose a company needs $3 million to expand and expects yearly revenues of $25 million by year 5, growing at 5% per year thereafter. The industry exit multiple is 5X.

Questions:

Suppose investors expect that the company will exit in 7 years. Use the VC method to determine the equity stake needed by Series A investors to achieve a 40% target rate of return.

Suppose the Series A investors expect two more rounds of financing before an exit event. They predict that 20% of equity will be sold in the Series B round and 10% will be sold in the Series C round. With the expected dilution, how much equity does the Series A investors need to own today (assuming no follow-on investment) to get achieve the 40% target rate of return?

How does the equity stake demanded by the Series A investor change as the target ROR change?