A. Assuming it is a seed-stage firm with no existing investors, what annualized return is embedded in its anticipation? B. Suppose the founder wants to have a venture investor inject $18 million in three rounds of $6 million at times 0, 1, and 2 with a time 5 exit value of $500 million. If the founder anticipates returns of 70 percent, 50 percent, and 30 percent for rounds 1, 2, and 3, respectively, what percentage of ownership is sold during the first round? During the second round? During the third round? What is the founder's Year 5 ownership percentage? C. Assuming the founder will have 10,000 shares, how many shares will be issued in rounds 1, 2, and 3 (at times 0, 1, and 2)? | D. What is the second-round share price derived from the answers in Parts B and C? E. How does the answer to Part D change if 10 percent of total equity in Year 5 is set aside for incentive compensation? How many total shares are outstanding (including incentive shares) by Year 5?
A. Assuming it is a seed-stage firm with no existing investors, what annualized return is embedded in its anticipation? B. Suppose the founder wants to have a venture investor inject $18 million in three rounds of $6 million at times 0, 1, and 2 with a time 5 exit value of $500 million. If the founder anticipates returns of 70 percent, 50 percent, and 30 percent for rounds 1, 2, and 3, respectively, what percentage of ownership is sold during the first round? During the second round? During the third round? What is the founder's Year 5 ownership percentage? C. Assuming the founder will have 10,000 shares, how many shares will be issued in rounds 1, 2, and 3 (at times 0, 1, and 2)? | D. What is the second-round share price derived from the answers in Parts B and C? E. How does the answer to Part D change if 10 percent of total equity in Year 5 is set aside for incentive compensation? How many total shares are outstanding (including incentive shares) by Year 5?
Chapter11: Venture Capital Valuation Methods
Section: Chapter Questions
Problem 4EP
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Transcribed Image Text:Question 1
Ratchets.com anticipates that it will need $18 million in venture capital to achieve a terminal value of
$500 million in five years.
A. Assuming it is a seed-stage firm with no existing investors, what annualized return is embedded in
its anticipation?
B. Suppose the founder wants to have a venture investor inject $18 million in three rounds of $6
million at times 0, 1, and 2 with a time 5 exit value of $500 million. If the founder anticipates returns
of 70 percent, 50 percent, and 30 percent for rounds 1, 2, and 3, respectively, what percentage of
ownership is sold during the first round? During the second round? During the third round? What is
the founder's Year 5 ownership percentage?
C. Assuming the founder will have 10,000 shares, how many shares will be issued in rounds 1, 2, and
3 (at times 0, 1, and 2)? |
D. What is the second-round share price derived from the answers in Parts B and C?
E. How does the answer to Part D change if 10 percent of total equity in Year 5 is set aside for
incentive compensation? How many total shares are outstanding (including incentive shares) by Year
5?
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