Question

In: Finance

John Thompson, CEO of NewVenture, Inc., seeks to raise $5 million in equity for his early...

John Thompson, CEO of NewVenture, Inc., seeks to raise $5 million in equity for his early
stage venture in January 2016. NewVenture is a subscription-based software company that has
experienced 75% revenue growth over the last year. The company generated $2.5 million of
revenue in 2015, with an operating loss of ($450,000). Thompson projects that NewVenture
will achieve $30 million in revenue by 2020. Samantha Jones of Gorsuch Capital is considering
an investment in January 2016, offering pre-money valuation of $14.75 million.
a. What is the post-money valuation of NewVenture?
b. What share of the company will Samantha Jones require?
c. The company has 1,000,000 shares outstanding before the investment. How many new
shares should she purchase, and at what price per share?


Samantha Jones believes Thompson will have to grant generous stock options in addition to
the salaries projected in his business plan. From experience, she thinks management should
have the ability to own at least a 15% share of the company in the form of options by the end
of year 5.


f. What share of the company should Samantha insist on getting today if an option pool is
created after her investment? (in order to ensure that she will still maintain the same
ownership level noted above)
g. How many shares are allocated to Jones and the option pool in this case?

Solutions

Expert Solution

(a) Post money valuation = Pre money value + fund infused = 14.75 + 5 = 19.75

(b) share of the company Samantha Jones will require = Fund infused / post money valuation = 5 / 19.75 = 25.32%

(c) New shares to be purchased, N should be such that N / (pre money shares + N) = 25.32%

Or, N / (N + 1,000,000) = 25.32%

Hence, N = 25.32% x 1,000,000 / (1 - 25.32%) = 338,983

And the per share price = Fund infused / N = 5,000,000 / 338,983 = $ 14.75

There is no mention of (d) & (e) in the question. Question straightway jumps to (f) - I could not figure out the reason behind it.

(f) Share of the company Samantha should insist on getting today if an option pool is created after her investment = Proportion before ESOP x (1 + ESOP %age) = 25.32% x (1 + 15%) = 29.11%

Part (g)

Let N* be the number now.

Hence, N* / (1,000,000 + N*) = 29.11%

Hence, shares that are allocated to Jones = N* = 1,000,000 x 29.11% / (1 - 29.11%) = 410,714

shares that are allocated to option pool = (1,000,000 + N*) x 15% = (1,000,000 + 410,714) x15% = 211,607


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