| A | B | C | D | E | F | G | H | I | J | K | L | M | N | O | P | Q | R | S | T | U | V | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
1 | Venture Capital Method (w/ Dilution) | (?) | |||||||||||||||||||||
2 | vcmethod.com | ||||||||||||||||||||||
3 | |||||||||||||||||||||||
4 | Net Income at Exit Year | 1 | $2,500,000 | (at exit date) | |||||||||||||||||||
5 | Term | 2 | 5 | (at exit date) | |||||||||||||||||||
6 | PE(multiple) | 3 | 15 | ||||||||||||||||||||
7 | Shares Outstanding Before Investment | 4 | 1,000,000 | ||||||||||||||||||||
8 | |||||||||||||||||||||||
9 | Company Value at Exit | 5 | $37,500,000 | ||||||||||||||||||||
10 | Shares Outstanding After Final Round | 6 | 1,695,653 | ||||||||||||||||||||
11 | Terminal Share Price | 7 | $22.12 | ||||||||||||||||||||
12 | |||||||||||||||||||||||
13 | Dilution Calculation | ||||||||||||||||||||||
14 | Investment Amount | Investment Year | Required Return | Future Value | Required Ownership | Outstanding Shares (Pre) | Outstanding Shares (Post) | Investor Owns No. Shares | Share Price | Pre-Money Valuation | Post-Money Valuation | Retention % | Required Ownership | Outstanding Shares (Pre) | Outstanding Shares (Post) | Investor Owns No. Shares | Share Price | Pre-Money Valuation | Post-Money Valuation | Check | |||
15 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | ||||||||
16 | Investor/Round A | $1,500,000 | 0 | 50% | $11,390,625.00 | 30.38% | 1,000,000 | 1,436,266 | 436,266 | $3.44 | $3,438,271.60 | $4,938,271.60 | 89.35% | 34.00% | 1,000,000 | 1,515,055 | 515,055 | $2.91 | $2,912,312.76 | $4,412,312.76 | $22.12 | ||
17 | Investor/Round B | $1,000,000 | 2 | 40% | $2,744,000.00 | 7.32% | 1,436,266 | 1,549,659 | 113,394 | $8.82 | $12,666,180.76 | $13,666,180.76 | 96.67% | 7.57% | 1,515,055 | 1,639,131 | 124,077 | $8.06 | $12,210,641.40 | $13,210,641.40 | $22.12 | ||
18 | Investor/Round C | $1,000,000 | 4 | 25% | $1,250,000.00 | 3.33% | 1,549,659 | 1,603,096 | 53,437 | $18.71 | $29,000,000.00 | $30,000,000.00 | 100.00% | 3.33% | 1,639,131 | 1,695,653 | 56,522 | $17.69 | $29,000,000.00 | $30,000,000.00 | $22.12 | ||
19 | |||||||||||||||||||||||
20 | TOTAL | $3,500,000 | |||||||||||||||||||||
21 | |||||||||||||||||||||||
22 | |||||||||||||||||||||||
23 | Notes: | ||||||||||||||||||||||
24 | 1 | Projected Net Income at exit date. | |||||||||||||||||||||
25 | 2 | Investment exit year. | |||||||||||||||||||||
26 | 3 | The terminal Price-Earnings Ratio (PER). The 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. | |||||||||||||||||||||
27 | 4 | The company currently has this number of shares outstanding, which are owned by the current owners. | |||||||||||||||||||||
28 | 5 | Total terminal value at exit date. (Future Value) | |||||||||||||||||||||
29 | 6 | Number of shares outstanding after the final round of financing. | |||||||||||||||||||||
30 | 7 | Share price at exit date. | |||||||||||||||||||||
31 | 8 | As new stock is issued to later-round investors, the early-round investors can expect to suffer dilution, a loss of ownership due to the issuing of additional shares. | |||||||||||||||||||||
32 | 9 | Investment amount per Investor or Round. | |||||||||||||||||||||
33 | 10 | The projected year the investment is made. Initial investment in year one is at t=0. | |||||||||||||||||||||
34 | 11 | In addition to estimating the appropriate discount rate for the current round, the first round VC must now estimate the discount rates that are most likely to be applied in the following rounds. | |||||||||||||||||||||
35 | 12 | Future Value of the investors shares. Investment x (1 + IRR)^years | |||||||||||||||||||||
36 | 13 | The final, or terminal, ownership shares that each investor requires. Because they are calculated from terminal value, current investment amount, and discount rate, they are not affected by the amount or pricing of future investments. That is, each investor's required final ownership stake is not influenced by the other investors' final ownership percentages. However, because the early-round investor must purchase enough shares now to make up for the dilution that will be caused by the future financings, it is in the conversion from future to current ownership shares that the effect of future financings will be felt. | |||||||||||||||||||||
37 | 14 | Shares Outstanding pre-financing | |||||||||||||||||||||
38 | 15 | Shares Outstanding post-financing | |||||||||||||||||||||
39 | 16 | Investment Amount / Number of Shares | |||||||||||||||||||||
40 | 17 | Pre-Money Valuation = New Price x Old Shares | |||||||||||||||||||||
41 | 18 | Post-Money Valuation = New Price x Total Shares | |||||||||||||||||||||
42 | 19 | The ratio of the percent ownership a given investor will hold as of the terminal year of a project (the final ownership share) to the percent ownership he holds as of his investment (the current ownership share) is that investor's retention ratio: Retention % = Final % Ownership / Current % Ownership The reduction in ownership over time is caused by the sale of new shares to new investors. The retention percent can also be thought of as that portion of the final ownership available to the current investor. | |||||||||||||||||||||
43 | 20 | The percent ownership each investor should purchase at the time of the financing to obtain their desired final ownership share. | |||||||||||||||||||||
44 | 21 | The number of shares that each investor must purchase to obtain the desired final ownership share. | |||||||||||||||||||||
45 | V1.0 | 22 | The terminal (or final-year) price can also be calculated. To check that this pricing is consistent with the assumed discount rates, multiply each round's share price by the expected IRR. The numbers should match the Terminal Share Price calculated in [7], thus this pricing schedule will yield the returns that are expected. | ||||||||||||||||||||