 # Multiple rounds of VC and LBO valuations?

These appear in appendices of Alt Investments…do you think they are fair game?

Yes.

Frank Stalla says it takes 20 minutes to do a multiple round VC calculation. I"m still not clear on the exact process, but that is going to be one of my “guess B” questions.

I don’t think it’s that hard. Example: Let’s say VC thinks firm will be worth \$50MM at termination in year 5 and wants to invest \$5MM now. Also, in year 3, a second round of financing will come in for \$2MM. The discount rate for the first 3 years is 40%, and 30% for the last two years. What is the post investment valuation after both rounds, and what % and how many shares do they own after each round? Oh and owner wants to have 1,000,000 shares. To get post investment after 2nd round= \$50/(1.30)^2 = 29.58 Preinvestment at year 3 = 29.58 - 2 = 27.58 Post investment Year = = 27.58/(1.40)^3 = 10.05 % owned by first round VC investor = \$5 / \$10.05 = 49.76% Shares owned by first investor = 1,000,000 * (1/1-.4976) -1,000,000 = 990,445 Price per share = \$5,000,000 / 990,445 = \$5.05 Now for 2nd round stuff: % owned by 2nd round investor = \$2,000,000 / \$29,580,000 = 6.76% Total shares at this point = Original Total Shares / (1 - 2nd Round Ownership) = 1,990,445 / (1-.0676) = 2,134,785 shares Price per share = \$29,580,000 / 2,134,785 = \$13.86 % owned by first round = (1 - 2nd round ownership)*(original ownership) = (1-.0676)*.4976 = 46.39% Took me 5 minutes and I was making the example up as I was going

job71188 Wrote: ------------------------------------------------------- > I don’t think it’s that hard. Example: > > Let’s say VC thinks firm will be worth \$50MM at > termination in year 5 and wants to invest \$5MM > now. Also, in year 3, a second round of financing > will come in for \$2MM. The discount rate for the > first 3 years is 40%, and 30% for the last two > years. What is the post investment valuation after > both rounds, and what % and how many shares do > they own after each round? > > Oh and owner wants to have 1,000,000 shares. > > To get post investment after 2nd round= > \$50/(1.30)^2 = 29.58 > Preinvestment at year 3 = 29.58 - 2 = 27.58 > Post investment Year = = 27.58/(1.40)^3 = 10.05 > > % owned by first round VC investor = \$5 / \$10.05 = > 49.76% > > Shares owned by first investor = 1,000,000 * > (1/1-.4976) -1,000,000 = 990,445 > Price per share = \$5,000,000 / 990,445 = \$5.05 > > Now for 2nd round stuff: > % owned by 2nd round investor = \$2,000,000 / > \$29,580,000 = 6.76% > Total shares at this point = Original Total Shares > / (1 - 2nd Round Ownership) = 1,990,445 / > (1-.0676) = 2,134,785 shares > > Price per share = \$29,580,000 / 2,134,785 = > \$13.86 > > % owned by first round = (1 - 2nd round > ownership)*(original ownership) = (1-.0676)*.4976 > = 46.39% > > > Took me 5 minutes and I was making the example up > as I was going After looking through this, it seems doable. Probably would save it for the end though.

It is a little calculator intensive but not too bad. It does give lots of chances to make one little mistake. Also if they give you this type of question they may supply half the answer in the question like give the PV figure of the Post money for the second round of financing. Or give the ownership # of the VC and Management in round 1 then let us do the rest.

guys dont skip these ones. they are very intutive and sure points and easy and no way will it take 20 minutes (for the kind of questions you will see on the exam) . i would say read it once properly and solve some problems and then its a cake walk. i solve these problems using a timeline. helps a lot job711, good example, but to clarify the second part from above: ------------------- --------------- Now for 2nd round stuff: % owned by 2nd round investor = \$2,000,000 / \$29,580,000 = 6.76% Total shares at this point = Original Total Shares / (1 - 2nd Round Ownership) = 1,990,445 / (1-.0676) = 2,134,785 shares Price per share = \$29,580,000 / 2,134,785 = \$13.86 % owned by first round = (1 - 2nd round ownership)*(original ownership) = (1-.0676)*.4976 = 46.39% ------------------- ----------------- It’s good to think of second round as being financed by another VC, so that shares don’t get messed up. First round investors will continue to own 990,445 shares even after 2nd round guys come in. 2nd guys round get 6.76% of “new” company, while founders retain their 1M shares: 6.76% Total_Shares + 990,445 shares + 1,000,000 shares = Total_shares Solve for Total_Shares, you get 2,134,785 shares, split into: Founders = 1,000,000 shares 1st round VC =990,445 shares 2nd round guys = 0.0676*2,134,785= 144,311 shares Now you can easily find price per share for each: Founders = \$0/share 1st round VC =\$5M/990,445 shares = \$5.05 2nd round guys = \$2M/ 144,311 shares = \$13.86

Another tip: If there is a probability of failure of 0.10 in any one year, then simply adjust the discount rate before you do your calculations: r_adj = r+p/(1-p). In above instead of 40% discount rte, it becomes 55.56%.

How about LB valuations…have you seen questions on previous exams relating to calculation of LBO using CAPM and equity cash flow method? Or in the mocks?

LBO stuff was new material that made its way into the curriculum only last year. So not a peep in mocks, or CFA thus far.