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EXAMPLEDONE.xlsx

Series A Only

VC Method Practice Problem Solution
VC Method - Problem 1 (Slide 43 in Lecture 6)
Facts:
Founder Investment
Founder Shares	1,000,000
VC Investment	$3,000,000
VC's required return	50%
Projected Net Income in Yr. 5	3,000,000
Years to discount	4
Comp Stats:
Net Income	$2,000,000
$$ Raised	$18,000,000
Step 1:
Calculate Valuation metric from the Z Corp. Initial Public Offering
Price/Earnings (PE ratio) =	9.00
Step 2:
Calculate Baz Corp’s value at exit	$27,000,000
Step 3: PV of Step 2	$5,333,333
Step 4: Ownership % based on VC's Investment	56.250%
Step 5: Calculate New shares needed:	1,285,714
n = (Existing shares x Acquired %) / (1 – Acquired %)
Step 6: Total Shares post closing	2,285,714
Step 7: Price per Share	$2.33
Price per share
Cap Table
	Shares	%
Founder	1,000,000	43.75%
Series A	1,285,714	56.25%
Total	2,285,714	100.0%

VC Method - Problem 2 - Series B (Slide 44)
Facts:
Founder Investment
Founder Shares	1,000,000
Series A VC Investment	$3,000,000
VC's required return	50%
Series A Years to Exit	4
Series B VC Investment	$2,000,000
Series B Required Return	25%
Series B Years to Exit	2
Projected Net Income in Yr. 5	3,000,000
Comp Stats:
Net Income	$2,000,000
$$ Raised	$18,000,000
Step 1:
Calculate the required Future Value of Series B VC’s investment using the 25% required rate of return:
2,000,000 x (1.25)2	3,125,000.00
Step 2: Calculate Series B Required Ownership %
Series B FV / Exit Valuaion from Problem 1	11.5741%		0.5625	67.8241%
Step 3: Calculate Required Shares to be issued to Series A VC to ensure that it owns 56.25% at exit
n = (Existing shares x Acquired %) / (1 – Acquired %)	2,107,914
Step 4: Total Shares	3,107,914
Step 5: Series A Required Ownership % based on VC's Investment	67.824%
Step 6: Price per Share	$1.42
Cap Table
	Shares	%
Founder	1,000,000	32.2%
Series A	2,107,914	67.8%
Total	3,107,914	100.0%