2. Schwadin’s Shawarma Shops (S3 ) is a new restaurant chain in its early stages

Question

2. Schwadin’s Shawarma Shops (S3 ) is a new restaurant chain in its early stages. The founders have great plans, but need to test their restaurant design, their recipes, and their franchising business model. They need $200,000 to outfit a first, small shop. They do not have the financial resources to take out loans nor the connections to fund it through FFF investments. They believe they have a “million dollar idea,” but potential investors are not so sure. Many are interested, but none will place a valuation on the business above $250,000.

If the founders were to raise money by selling equity, at a $250,000 valuation, how much of the company would they have to sell?

Suppose the founders have issued themselves 100,000 shares in total. How many shares would they have to sell, and at what price, to raise the $200k (assume still a $250k valuation)?

Explanation / Answer

a) They would have to sell 44.44% of the company. [% investment by investors = Amount to be raised/post money valuation = 200000/(200000+250000)]

b) The shares have to be issued at a price of $2.5 (pre-money valuation/no of pre-money shares.

The no of shares to be issued would be 200000/2.5 = 80000 shares.

This would be 80000/180000 = 44.44%

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