Venture Capital Method vcmethod.

com

Discount the Terminal Value to Present Value

Annual Earnings(Projected NI) 1 $2,500,000.00 (at exit date)

In Year 2 5 (at exit date)
PE(multiple) 3 15
Required Rate of Return 4 50%
Value of firm 5 $4,938,271.60

Calculate the Required Ownership Percentage

Initial Investment 6 $3,500,000.00

Equity Stake 7 70.88%

Current Outstanding Shares 8 1,000,000 (pre)

Total Outstanding Shares 9 3,433,476 (post)
VC Owns # Shares 10 2,433,476
Share Price 11 $1.44

Pre-Money Valuation 12 $1,438,271.60

Post-Money Valuation 13 $4,938,271.60

Notes:
1 Projected Net Income at exit date.
2 Investment exit year.
3 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.
4 The venture capital investor uses the target rate of return to calculate the present value of the projected terminal
value. The target rate of return is typically very high (30-70%) in relation to conventional financing alternatives.
5 Here the terminal value is discounted to the present value. The terminal value of the company is estimated at a
specified future point in time. That future point in time is the planned exit date of the venture capital investor,
typically 4-7 years after the investment is made in the company.

The terminal value is normally estimated by using a multiple such as a price-earnings ratio applied to the
6 projected
Investmentnet incomeEntreprenuer
amount of the company in the projected exit year: Annual Earnings x PE / (1+r) ^ Year
is seeking.
7 VC requires this ownership %. Valuation assuming no future dilution.
8 Formula:
The Initialcurrently
company Investment
has/ [8]
Value of the
shares Firm
outstanding, which are owned by the current owners. If the venture
capitalist will own [7]% of the shares after the investment (thus, 1-[7]% owned by the existing owners), the total
number of shares outstanding after the investment will be [8]/(1-[7]%) = [9] shares. Therefore the venture
capitalist will own [10] of the [9] shares.
9-11 Since the venture capitalist is investing [6] to acquire [10] shares the price per share is [6]/[10] or [11] per share

12 Pre-Money Valuation = New Price x Old Shares: [11] x [8]

13 Post-Money Valuation = New Price x Total Shares: [11] x [9]

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