Venture Capital Method.
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Venture Capital Methodvcmethod.com(?)
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Discount the Terminal Value to Present Value
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Annual Earnings(Projected NI)1$2,500,000.00(at exit date)
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In Year25(at exit date)
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PE(multiple)315
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Required Rate of Return450%
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Value of firm5$4,938,271.60
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Calculate the Required Ownership Percentage
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Initial Investment6$3,500,000.00
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Equity Stake770.88%
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Current Outstanding Shares81,000,000(pre)
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Total Outstanding Shares93,433,476(post)
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VC Owns # Shares102,433,476
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Share Price11$1.44
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Pre-Money Valuation12$1,438,271.60
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Post-Money Valuation13$4,938,271.60
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Notes:
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1Projected Net Income at exit date.
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2Investment exit year.
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3The choice of multiple for the valuation is something that will be a matter of discussion during the venture capital negotiations. PE ratios for comparable public companies will be used as a benchmark to select a PE for the company, recognizing that PE ratios for public companies are likely to be higher due to their greater liquidity relative to a private company.
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4The venture capital investor uses the target rate of return to calculate the present value of the projected terminal value. The target rate of return is typically very high (30-70%) in relation to conventional financing alternatives.
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5Here the terminal value is discounted to the present value. The terminal value of the company is estimated at a specified future point in time. That future point in time is the planned exit date of the venture capital investor, typically 4-7 years after the investment is made in the company.

The terminal value is normally estimated by using a multiple such as a price-earnings ratio applied to the projected net income of the company in the projected exit year: Annual Earnings x PE / (1+r) ^ Year
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6Investment amount Entreprenuer is seeking.
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7VC requires this ownership %. Valuation assuming no future dilution.
Formula: Initial Investment / Value of the Firm
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8The company currently has [8] shares outstanding, which are owned by the current owners. If the venture capitalist will own [7]% of the shares after the investment (thus, 1-[7]% owned by the existing owners), the total number of shares outstanding after the investment will be [8]/(1-[7]%) = [9] shares. Therefore the venture capitalist will own [10] of the [9] shares.
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9-11Since the venture capitalist is investing [6] to acquire [10] shares the price per share is [6]/[10] or [11] per share
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12Pre-Money Valuation = New Price x Old Shares: [11] x [8]
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13Post-Money Valuation = New Price x Total Shares: [11] x [9]
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