Question

Starware Software was founded last year to develop software for gaming applications. The founder initially invested

$ 800 comma 000$800,000

and received

88

million shares of stock. Starware now needs to raise a second round of​ capital, and it has identified a venture capitalist who is interested in investing. This venture capitalist will invest

$ 1.60$1.60

million and wants to own

31 %31%

of the company after the investment is completed.

a. How many shares must the venture capitalist receive to end up with

31 %31%

of the​ company? What is the implied price per share of this funding​ round?

b. What will the value of the whole firm be after this investment​ (the post-money​ valuation)?

Answer 1

=> It is given that founder invested $ 800,000 initially and received 8,000,000 shares of stocks, also it is given that the venture capitalist will invest $ 1,600,000 for owning 31% of the company.

a. How many shares must the venture capitalist receive to end up with 31 % ?

=> we know that 31% of the company is owned by the venture capitalist after the investment and, the rest of the company that is, (100 - 31 = 69%) is owned by the founder.

=> Initially the founder was having 8,000,000 shares (which was 100% of the company) , but after the investment it is only 69% of the company

(8,000,000/69)*100 = 11,594,203 , That means there are a total of 11,594,203 shares after investment and the venture capitalist owns, 1,15,94,203 - 8,000,000 = 35,94,203 shares.

b. What will the value of the whole firm be after this investment​ (the post-money​ valuation) ?

=> The venture capitalist invested $ 1,600,000 for 31% of the company and received 35,94,203 shares of the company

1,600,000 / 35,94,203 = 0.44516 , that means each share worth $ 0.44516 after the investment

=> We know that the total number shares is 11,594,203, so the value of the firm after the investment is:

0.44516*11,594,203 = $ 5,161,275 or 5.16 million