Question

An investor offers you $853,457 in exchange for shares of your start-up company. The investor demands an annual rate of return of 69%, and expect that your IPO will be in 5 years. At that time you expect your firm to have annual income of around $1,898,530 dollars. A similar firm was recently acquired for $18,848,156 dollars. At the time of acquisition, their income was $1,994,670 million dollars per year.

What percentage of your equity should you give to the investor?

Enter your answer as a percentage, without decimals. For example, if your answer is 0.76543, that's 76.543%, which rounds to 77%.

Answer 1

Future value required = Investment * (1 + required return)^year

= $853,457 * (1 + 0.69)⁵

= $853,457 * 13.78

= $11,765,629.50

Expected future value = Future income * Recent firm value / Recent firm income

= $1,898,530 * $18,848,156 / $1,994,670

= $17,939,704.10

Equity% to Investor = Future value required / Expected future value

= $11,765,629.50 / $17,939,704.10

= 65.58%