Please help. Thank You. 1) The pre-money valuation of a company is $15,000,000,
ID: 2795164 • Letter: P
Question
Please help. Thank You.
1) The pre-money valuation of a company is $15,000,000, they are raising $3,000,000 and have 400,000 shares issued and outstanding as well as an option pool of 200,000.
A. What is the post money valuation of the company?
B. What % of the total shares will the venture capitalist own?
2) Using the figures in #2 above if the liquidation preference is 2x and the participation is 20% how much will be available for the common shareholders if the company is sold for $20 million?
Explanation / Answer
1) A. Post Money Valuation of a company is simply the value of a company after the venture capital financing. So, in this case -
Post Money Valuation = Pre Money Valuation($15,000,000) + Amount Raised($3,000,000)
Post Money Valuation = $18,000,000
B. % of the total shares owned by venture capitalist is the total amount invested by Venture Capitalist as a percentage of Post Money Valuation.
% of the total shares owned by venture capitalist = $3,000,000/$18,000,000 = 16.67 %
2) Money available for common shareholders = Total Amount for which company is sold - Amount Given to Venture Capitalist.
In this case Liquidation preference is 2x. It implies the amount an investor must be paid back before any proceeds are given to common shareholders. As the multiple given is 2x, venture capitalist will be paids back atleast $6,000,000 (2*Venture Capitalist Investment of $3,000,000).
Also, Participation is 20% which means after the investor has been paid back Liquidation Prefernce amount, another 20% of the remaining amount must be paid to investors.
Participation Amount = 20% of (Amount company sold for - Liquidation Prefernce Amount)
= 20% of ($20 million - $6 million)
= 20% of ($14 million)
= $2.8 million
Amount given to venture capitalist = Liquidation Prefernece + Participation Amount
= $6 million + $2.8 million
= $8.8 million
Money available for common shareholders = Total Amount for which company is sold - Amount Given to Venture Capitalist
Money available for common shareholders = $20 million - $8.8 million = $11.2 million
Hope my first answer helps !