Step 1: Discount the future value of the company to obtain the post-money valuation (POST).
POST = future value / (1 + r)investment period
POST for Melton = $51 million / (1 + 13.7%)5 = $26.839 million. POST for Apple = $29 million / (1 + 13.7%)10 = $8.031 million.
Step 2: Calculate pre-money valuation.
PRE = POST − investment.
PRE for Melton = $26.839 million − $7 million = $19.839 million. PRE for Apple = $8.031 million − $5 million = $3.031 million.
Step 3: Determine the fractional ownership.
F = INV / POST
F for Melton = $7 million / $26.839 million = 26.08%. F for Apple = $5 million / $8.039 million = 62.26%.
Step 4: Determine the number of shares the firm must buy.
Stake = Entrepreneurs’ shares × [F / (1 − F)].
Stake for Melton = 1.5 million / [26.08% / (1 − 26.08%)] = 529,258 shares. Stake for Apple = 80,000 / [62.26% / (1 − 62.26%)] = 131,951 shares.
Step 5: Calculate stock price per share.
P = INV / Stake
P for Melton = $7 million / 529,258 = $13.23 P for Apple = $5 million / 131,951 = $37.89
I could just memorize the Stake = Entrepreneurs’ shares × [F / (1 − F)]. formula, but I’d much prefer to understand why the calculation is this way? I don’t understand what (F / (1-F) is doing.
Thanks 