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Valuation Question

April 20th, 2010 · 7 Comments

Here is a question for the mathematically inclined.

Consider a company that is planning to raise money. A VC offers it $13 million in 3 tranches:

  • Tranche 1: Pre-money of $5 million, VC invests $5 million
  • Tranche 2: Pre-money of $12 million, VC invests $4 million
  • Tranche 3: Pre-money of $20 million, VC invests $4 million

What is the effective (blended) pre-money valuation of the company after the $13 million has been invested?

I ask this question because it requires some calculations and understanding of how investing works. Even VCs who are supposed to know investing got the calculation wrong in this case!

Answer tomorrow.

Tags: Uncategorized

7 responses so far ↓

  • 1 Siddharth // Apr 20, 2010 at 10:16 am

    I think the valuation of the company after it has taken the last tranche is $24 million with the initial stake holders owning about 26.67% of company which is about $6.4 million.

    Looking forward for your answer tomorrow.

    Siddharth

  • 2 raymond chenon // Apr 20, 2010 at 10:52 am

    I may not be a VC, just interested in the calculations.
    Here is a definition of pre-money
    http://en.wikipedia.org/wiki/Pre-money_valuation

    Tranche 1 :
    Pre-money = Post-money – Investment = Investment (TotalShares/SharesIssued – 1)
    = Investment (1/Ownership – 1)
    5 = 5 (2-1)
    New Ownership = 1/2 = 50%

    Tranche 2:
    12 = 4*(4-1)
    New Ownership = 14 = 25%

    Tranche 3:
    20 = 4 (6-1)
    New Ownership = 1/6 = 17% (not sure to get anywhere with this new found ownership )

    Now I’m not sure to understand the meaning of “Effective Pre-money” but according to this
    http://www.docstoc.com/docs/13153/Venture-Hacks-Cap-Table-Example/
    Effective Pre-Money is the value of the Common Stock and Pre-Money Options, i.e. it does not include the Debt and Post-Money Options.
    Effective Pre-money = Pre-money options + value of the common stock

    Glad to see the answer tomorrow.

    disclaimer: I’m not a finance person.

  • 3 Hari // Apr 20, 2010 at 1:02 pm

    $ 1.18 million?

    p.s: must be a true indian startup scenario;)

  • 4 GP // Apr 20, 2010 at 1:53 pm

    Right after the 3rd round, the post-money valuation is $24M.

    Pre-money after the last tranche of investment could be anything (higher or lower than $24M), depending on when the next round of investment is and how the business is performing, and the general market environment.

  • 5 kasi // Apr 20, 2010 at 4:44 pm

    Just after 3rd round the pre-money valuation will be 24M (or is it 36M??)….i am not sure.

    The investor will own ~71% and founders will own 29% …that part i think i am right!!

    Kasi

  • 6 Talll.com // Apr 21, 2010 at 12:33 am

    $18.9 M.

  • 7 Mayur // Apr 21, 2010 at 2:30 am

    After 3rd round –
    Valuation : $24M
    VC’s stake: 69%

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