Question

Shark A offers entrepreneur B to invest $5m in entrepreneur B’s start-up, for 20% in the start-up’s equity. Entrepreneur B, however, believes that the start-up has current premoney valuation of $35m and thus counters by offering Shark A the following: “Shark A would invest the $5m in entrepreneur B’s start-up in exchange for alpha percent in the start-up’s equity”. What pre-money valuation of the start-up does Shark A’s offer reflect? What is alpha (i.e., the percentage in the start-up’s equity that entrepreneur B is willing to offer Shark A based on entrepreneur B’s counter offer)? (a) $20m; 20.0% (b) $25m; 10.5% (c) $20m; 12.5% (d) $25m; 25.0% (e) $20m; 17.5%

Answer 1

Answer: Option:(c) $20m; 12.5%

Shark A's Offer = $5m for 20% in Statup's Equity

Particulars	Amount (in million)
20% of Share in Start up offered by Shark A	$             5
Therefore Total Postmoney valuation of startup	$          25	($ 5m/20%)
Pre money Valuation of Startup	$          20m	($25m - $5m)

Computation of Alpha:
Particulars	Amount (in million)
Premoney Valuation as per B	$          35
Amount brought in by Shark A	$             5
Total Postmoney Valuation	$          40
Startup equity B is willing to exchange	12.5%	($5m/$40m)