Venture Capital Method with Dilution.
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Venture Capital Method
(w/ Dilution)
(?)
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vcmethod.com
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Net Income at Exit Year1$2,500,000(at exit date)
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Term25(at exit date)
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PE(multiple)315
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Shares Outstanding Before Investment41,000,000
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Company Value at Exit5$37,500,000
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Shares Outstanding After Final Round61,695,653
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Terminal Share Price7$22.12
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Dilution Calculation
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Investment AmountInvestment YearRequired ReturnFuture ValueRequired OwnershipOutstanding Shares (Pre)Outstanding Shares (Post)Investor Owns No. SharesShare PricePre-Money ValuationPost-Money ValuationRetention %Required OwnershipOutstanding Shares (Pre)Outstanding Shares (Post)Investor Owns No. SharesShare PricePre-Money ValuationPost-Money ValuationCheck
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8910111213141516171819202122
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Investor/Round A$1,500,000050%$11,390,625.0030.38%1,000,0001,436,266436,266$3.44$3,438,271.60$4,938,271.6089.35%34.00%1,000,0001,515,055515,055$2.91$2,912,312.76$4,412,312.76$22.12
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Investor/Round B$1,000,000240%$2,744,000.007.32%1,436,2661,549,659113,394$8.82$12,666,180.76$13,666,180.7696.67%7.57%1,515,0551,639,131124,077$8.06$12,210,641.40$13,210,641.40$22.12
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Investor/Round C$1,000,000425%$1,250,000.003.33%1,549,6591,603,09653,437$18.71$29,000,000.00$30,000,000.00100.00%3.33%1,639,1311,695,65356,522$17.69$29,000,000.00$30,000,000.00$22.12
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TOTAL$3,500,000
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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 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.
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4The company currently has this number of shares outstanding, which are owned by the current owners.
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5Total terminal value at exit date. (Future Value)
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6Number of shares outstanding after the final round of financing.
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7Share price at exit date.
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8As 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.
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9Investment amount per Investor or Round.
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10The projected year the investment is made. Initial investment in year one is at t=0.
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11In 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.
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12Future Value of the investors shares. Investment x (1 + IRR)^years
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13The 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.
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14Shares Outstanding pre-financing
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15Shares Outstanding post-financing
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16Investment Amount / Number of Shares
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17Pre-Money Valuation = New Price x Old Shares
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18Post-Money Valuation = New Price x Total Shares
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19The 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.
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20The percent ownership each investor should purchase at the time of the financing to obtain their desired final ownership share.
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21The number of shares that each investor must purchase to obtain the desired final ownership share.
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V1.022The 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.
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