You are seeking $1.5 million from a venture capitalist to finance the launch of your online financial search engine. You and the VC agree that your venture is currently worth$3 million, and when the company goes public in an IPO in five years, it is expected to have a market capitalization of $20 million. Given the company’s stage of development, the VC requires a 50 percent return on investment.
What fraction of the firm will the VC receive in exchange for its $1.5 million investment in your company?
Current VC investment =$1.5 million
Consent valuation = $3 million
Expected valuation after 5 years = $20 million
After 5 years, VC investment value will be:
Let the value of VC be "x"
"x =1.5(1+50\\%)^5 =\\$11.3906"
Fraction of the firm the VC will receive is