Question

Roger harkel, ceo of bestafer inc., sought to raise $5 million in a private placement of equity in his early stage dairy products company. harkel conservatively projected net income of $5 million in year five, and knew that comparable companies traded at a price earnings ratio of 20x.
a. what share of the company would a venture capitalist require today if her required rate of return was 50%? what if her required rate of return was only 30%?

Answer 1

$12 m Ă— (1.5)5= $91.13 m What is the value of the company in 5 years? It is still $100 m. How much does Roger need to give up? $91.13 m$100 m= 91.13%This explains why Roger does not raise all the money in this round. He hopes he can raise some of the money at a higher valuation later as the company makes progress.