Answer to Question #257690 in Finance for Richard Abiero

Question #257690

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?

Expert's answer

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

"\\frac{x}{20 million}=\\frac{11.3906}{20}=56.953\\%"

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