Suppose a venture needs financing from a VC in amount of $3.5M. The VC requires

50% rate of return. The expected PE ratio for such businesses is 15x. Ventures estimated

earnings in year of exit, year 5, are $2.5M. Founders have 1,000,000 shares outstanding

prior to VC investment.

a) What is the size of the pie at exit?

b) What percentage ownership will the founders have?

c) What is the number of new shares issued?

c) What is the share price after the investment?

e) What is the wealth of the VC? Of the founders (i.e., pre-money)? What is post-money

value?

Suppose that the VC more realistically decides to stage the financing so that in year 0,

she pays $1.5M, in second round in year 2 for $1M and in third round in year 4 $1M in

funding occurs. Given that the investment is less risky with time, the discount rate

demanded in year 3 is 40% and for year 4, discount rate is 25%.

f) What is the % ownership of VC after first round? What is % VC ownership right after

second round? After third round? Take into account the dilution effect

g) What is the % ownership of VC after three rounds? Why is this different than

ownership of VC in part (A) of the question?

h) What are the numbers of shares after each round?

i) What is the share price after each round?