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Upon its founding, the high-potential firm issued 10 million shares of stock in total, all held...

Upon its founding, the high-potential firm issued 10 million shares of stock in total, all held by the two co-founders after having been granted at $0.05 per share. No additional shares are to be issued. (A decision about issuing new shares would be reconsidered in the event the firm went public at some time in the future). One year after founding a VC invests $3.5 million in startup-stage financing at a share price of $1.25. In an additional round of financing several months later the VC invests an additional $6 million at a share price that places the company's valuation at double that after the first financing round. If the founders were able to liquidate their remaining shares immediately after this second round, what would their shares be worth in total?

a.

$8 mil
b.

$5 mil
c.

$12 mil
d.

$20 mil

Solutions

Expert Solution

Initial Valuation = 10 million share*$0.05 per share = $500000

VC's Invests $3500000 at $1.25 per share. Therefore, Number of shares received by VC = 3500000/1.25 = 2800000 shares

VC's stake in the company after 1st funding = Shares held by VC/Total Shares = 2800000/12800000 = 0.21875 = 21.875%

Company Valuation after VC's 1st Investment = Investment made by VC/VC's stake = 3500000/0.21875 = $16000000

New Investment of $6 million at a share price that will double the valuation.

Say, for example, VC will receive n Number of Shares. Therefore, Total Shares after VC's Investment will be 12800000+n

Therefore, VC's Stake will be n/(12800000+n)

Therefore, New Valuation will be = New Investment made/Stake = 6000000/[n/(12800000+n)]

16000000*2 = 6000000*(12800000+n)/n

[32000000/6000000]*[n] = 12800000+n

5.3333n-n = 12800000

Therefore, Number of Share = n = 12800000/4.3333 = 2953846 shares

VC's stake after new investment = Total VC's shares/Total Company's shares = (2800000+2953846)/15753846 = 36.5234%

Therefore, Founders' Stake = 100-VC's Stake = 100-36.5234 = 63.4766%

Valuation of Founders' Shares = Total Valuation of Company after nmew investment*Founders' Stake = (16000000*2)*63.4766% = $20312512 which is equivalent to $20 Million

jeff jeffy answered 3 years ago
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