Question

Starware Software was founded last year to develop software for gaming applications. The founder initially invested $ 800,000 and received 8 million shares of stock. Starware now needs to raise a second round of​ capital, and it has identified a venture capitalist who is interested in investing. This venture capitalist will invest $ 1.00 million and wants to own 20 % of the company after the investment is completed.

a. How many shares must the venture capitalist receive to end up with 20 % of the​ company? What is the implied price per share of this funding​ round?

b. What will the value of the whole firm be after this investment​ (the post-money​ valuation)?

a. How many shares must the venture capitalist receive to end up with 20 % of the​ company? What is the implied price per share of this funding​ round?

The venture capitalist will receive _____ million shares. ​ (Round to three decimal​ places.)

The implied price per share is ​$____per share.  ​(Round to the nearest​ cent.)

b. What will the value of the whole firm be after this investment​ (the post-money​ valuation)? The value of the firm will be ​$____million. ​ (Round to three decimal​ places.)

Answer 1

Answer (a):

The founder initially invested $ 800,000 and received 8 million shares of stock.

This venture capitalist will invest $ 1.00 million and wants to own 20 % of the company after the investment is completed.

If venture capitalist wants to own 20 % of the company after the investment is completed, the founder must account for 80% ownership with 8 million shares.

Hence total shares after the investment is completed will be = 8 million / 80% =10 million shares

Number of shares the venture capitalist will receive = Total shares * 20% = 10 million * 20% = 2 million shares

Venture capitalist invests $1 million for 20% ownership i.e. 2 million shares

Hence implied price per share is = $1 million / 2 million shares = $0.50 per share

Hence:

The venture capitalist will receive 2.000 million shares. ​ (Round to three decimal​ places)

The implied price per share is $0.50 per share.

Answer (b):

Value of the whole firm be after this investment​ (the post-money​ valuation) = Total shares outstanding * Price per share

= 10 million * $0.50

= $5 million

Hence:

The value of the firm will be $5.000 million. ​ (Round to three decimal places)