Valuation Problems. Valuation Problems. Problem #1. Project the future value of this investment? 3/1/17. Investment $2,750,000. ROR 45% Yrs Held 6

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1 Problem #1 Investment $2,750,000 Project the future value of this investment? ROR 45% Yrs Held 6 1

2 Problem #2 Series A Investor in Company XYZ Investment $3,500,000 ROR 33% Yrs held 7 Series B Investors in Company XYZ Investment $15,000,000 ROR 25% Years held 4 Other Facts Expected Exit value of XYZ $150,000,000 Shares (Before Series A) 5,000,000 Problem #2A What is the present value of the Series B deal? 2

3 Problem #2B How much equity will the Series B investor receive? Problem #2C What is the expected future value of the Series A investment? 3

4 Problem #2D What is the Series A present value of XYZ (not taking dilution into account)? Problem #2E How much equity will the Series A investor need at the exit? 4

5 Problem #2F How much equity will the Series A investor need to account for B Dilution? Problem #2G How many shares will the Series A investor own? 5

6 Problem #2G How many shares will the Series B investor own? Problem #2H How many total shares will be outstanding at the exit? 6

7 Problem #2I What is the pre-money valuation of the Series A (taking dilution into account)? Problem #2J What is this pre-money valuation of the Series B Deal? 7

8 Problem #2K What is the share price of the Series A Deal? Problem #2L What is the share price of the Series B Deal? 8

9 Problem #2M What is the share price at the time of the exit? Problem #3 Series A Lead Investor $3,000,000 Series A Follow-on #1 $1,400,000 Series A Follow-on #2 $750,000 Total Series A Raise $5,150,000 Option Pool to be created 8% Total outstanding shares 25,000,000 Pre-Money Valuation $11,000,000 9

10 Problem #3A What is the price per share for this round (before the option pool)? Problem #3B What s the post money valuation of the A Round? 10

11 Problem #3C How much equity with the Series Investment Syndicate receive? Problem #3D Total amount of equity created this round (including option pool)? 11

12 Problem #3E How many new shares will be created? Problem #3F Distribute the shares between the Investor Group and the Option Pool Investor Group Option Pool Total 12

13 Problem #3G Distribute the shares amongst the Series A investment syndicate: Series A Lead Follow-on #1 Follow-on #2 Total Problem #3H Provide a summary of shares for all parties following the A Round: Outstanding Series A Lead Follow-on #1 Follow-on #2 Options Total 41,589, % 13

14 Problem #3I What s the share price after the A round closes? Problem #4 XYZ s Current Revenue $575,000 Projected revenue growth (yrs 1-3) 125% Projected revenue growth (yrs 4-6) 75% Series B Investor ROR 20% Series B holding time (yrs) 6 Series B investment $25,000,000 If the company IPOs (Ini>al Public Offering, its expected to be valued at 10x Yr 6 Revenue If the company gets acquired, it's expected to be valued at 5x Yr 6 Revenue If the company fails, it's expect to be liqudated at.5x Yr 6 Revenue 14

15 Problem #4 If the company IPOs (Initial Public Offering, its expected to be valued at 10x Yr 6 Revenue If the company gets acquired, it's expected to be valued at 5x Yr 6 Revenue If the company fails, it's expect to be liquidated at.5x Yr 6 Revenue Problem #4A Project revenue in year 6: Current $575,000 Yr. 3 Rev. Yr. 6 Rev. 15

16 Problem #4B Best Case Middle Case Worst Case Terminal Value Present Value Probability 40% 50% 10% Rev. Present Values New Present Value Problem #4C How much equity will the Series B investor receive? 16

17 Problem #4C Suppose a C Investor is projected to invest $50,000,000 at $250,000,000 Pre-Money, what % equity will C receive? Problem #4D If B investor accounts for dilution, how much equity will it negotiate for? 17

18 Any questions on Valuation Problems? Build a Financial Model Launching a Marketplace for errands (1 year of assumptions). $750,000 Equity Raise. Technology Investment $250,000 Useful life of the technology 5 Years Employee Wages $350,000 Rent $50,000 Marketing/Promotion $75,000 Estimated Year 1 Revenue $125,000 Cost of Goods (% of Rev) 10% 18

19 Build a Financial Model Beginning Balance Sheet Cash Inventory Technology Short-term Liabilities Long-term Liabilities Equity Retained Earnings Total Assets Liabilities + Equity Build a Financial Model Income Statement (Full Year) Revenue Cost of Goods Gross Profit Wages Rent Marketing Depreciation EBIT Taxes Net Profit 19

20 Build a Financial Model Statement of Cash Flows (Full Year) Net Profit + Depreciation - Technology Cash inflow Beginning Year Cash Ending Year Cash Build a Financial Model Beginning Balance Sheet Cash Inventory Technology Short-term Liabilities Long-term Liabilities Equity Retained Earnings Total Assets Liabilities + Equity 20

21 Any questions on building a financial model? 21