Reference no: EM132601036

Assignment: Venture Capital valuation Method

1. A venture capitalist wants to estimate the value of a new venture. The venture is not expected to produce net income or earnings until the end of year 5 when the net income is estimated at $1,600,000. A publicly-traded competitor or "comparable firm" has current earnings of $1,000,000 and a market capitalization value of $10,000,000.

A. Estimate the value of the new venture at the end of year 5. What assumption are you making when using the current price-to-earning relationship for the comparable firm?

B. Estimate the present value of the venture at the end of year 0 if the venture capitalist wants a 40 percent annual rate of return on the investment.

2. Suppose you are considering a venture conducting a current financing round involving an issue of 100,000 new shares at $3. The existing number of shares outstanding is 200,000. What are the related pre-money and post-money valuations?

3. Ratchets.com anticipates that it will need $15,000,000 in venture capital to achieve a terminal value of $300,000,000 in five years.

A. Suppose the founder wants to have a venture investor inject $15,000,000 in three rounds of $5,000,000 at time 0, 1 and 2 with time 5 exit value of $300,000,000. If the founder anticipates returns of 70%, 50% and 30% for round 1, 2 and 3, respectively, what percent of ownership is sold during the first round? During the second round? During the third round? What is the founders' year-five ownership percentage?

B. Assuming the founder will have 10,000 shares, how many shares will be issued in rounds 1, 2 and 3 (at times 0, 1 and 2)?

C. What is the second round share price derived from the answers in Parts A and B?

D. How does the answer to part C change if 10% of the year-five firm is set aside for incentive compensation? How many total shares are outstanding (including incentive shares) by year 5?