Question

Company A raises £300k of seed funding from a VC firm in exchange for a 20% stake. The agreed share price for the round is £1 and the VC firm has an exist horizon of 10 years.

At the ended of year 3, Company A needs to raise an additional £4m of funding. The new VC investor in round 2 expects to make a return of 30%. If the exit horizon is still 10 years, what is the share price for round 2 if the VC investor from the first round is to achieve an annual return of 30% at exit.

Make the capitalisation tables, showing the 1) pre-and post-money valuations, 2) the shares and 3) stakes owned by the founders and the two VC firms.

Answer 1

Step 1: Find Pre Money Valuation:

Value of seed funding = £300,000

Share price of the round 1 = £1

Number of shares held by VC firm 1 = 300,000

Exchange for % stake =20%

Thus, shares held by founders = 300000/20%*(1-20%) = 1,200,000

Value of shares held by founders = 1,200,000 shares * £1 = £1,200,000

Total Pre Money valuation before round 2 funding = £1,200,000+£300,000 = £1,500,000

Step 2: Find Post Money Valuation of round 2 funding

Annual return required for VC firm 1 = 30%

Thus, required share price after 3 years = £1*(1+30%)^3 = £2.197 per share

Round 2 funding value = £4,000,000

Thus, number of shares given for round 2 to VC firm 2 = £4,000,000 / £2.197 per share = 1,820,665 shares

Value of shares held by promoters after round 2 = 1,200,000* £2.197 per share = £2636,400

Value of shares held by VC firm 2 after round 2 = 300,000* £2.197 per share = £659,100

Total Post money valuation after round 2 funding = £4,000,000+£2636,400+£659,100 = £7,295,500

Answers:

1. Share Price required for round 2 = £2.197

2) Pre-and Post-money valuations = Pre money valuation = £1,500,000; Post money valuation = £7,295,500

3) the shares

Pre money = VC Firm 1 = 300,000 shares; Promoter = 1,200,000 shares

Post money = VC Firm 1 = 300,000 shares; Promoter = 1,200,000 shares; VC Firm 2 = 1,820,665

4. Stake:

Pre money = VC Firm 1 = 20%; Promoter = 80%

Post money = VC Firm 1 = 9%; Promoter = 36.1%; VC Firm 2 = 54.8%

Workings: