As Founder of NEC, you initially own 100% of the 4.0 million shares of commons s

ID: 2783359 • Letter: A

Question

As Founder of NEC, you initially own 100% of the 4.0 million shares of commons stock issued by the company.

A VC offers to invest $12.0 million in your company at a premoney valuation of $20.0 million.

Assume that the VC and you (the Founder) agree to set aside 20% of the company for the employee option pool.

1. What percentage of the company will you own after this financing is completed? (Correct answer: 42.5%)

2. How many shares will be outstanding (of course, include preferred shares as if they were converted into common stock) after the financing?

Correct Answer: 9.412 Mn

3. How many shares will the VC own after this financing? Correct Answer: 3.529 Mn

What are step-by-step solutions to get to these answers?

Pre-money Valuation = 20 million

Investment Amount = 12 million

So, post money valuation = 20 + 12 = 32 million

Out of 32 million, employee option pool = 32 * 20% = 6.4 million and VC's investment = 12 million

So, owner's equity = 32 - 12 - 6.4 = 13.6 million

So, owner's percentage in company = (13.6/32) * 100% = 42.50%

Owner's shares outstanding = 4 million

Owner's equity post financing = 42.5%

So, at 42.5%, owner holds 4 million share.

So, total number of shares outstanding post financing = (4 / 42.5%) * 100% = 9.4118 million

VC's equity = 12/32 = 0.375 or 37.5%

Number of shares post financing = 9.4118 million

So, Number of shares owned by VC = 9.4118 * 37.5% = 3.5294 million

* Hope it helps

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