Estragon makes its Series A financing investment of EUR2.5 million in a startup venture with a post-money valuation at the time of financing of EUR18.75 million. One year later, the startup seeks another EUR5 million in Series B financing and Estragon is willing to contribute an additional EUR2.5 million. The updated post-money valuation is EUR50 million.
Which of the following is closest to Estragon’s fractional ownership if it participates in the Series B financing?
A. 10.0%
B. 17.7%
C. 62.5%
(CFA Curriculum PRIVATE MARKETS PATHWAY • VOLUME 1, Page 143, Question #8)
Shouldn’t this be 17% instead of 17.7%? Here are the rationales:
Post-Series A ownership = 2.5/18.75 = 13.33%.
Pre-Series B valuation = 50 - 5 = €45M.
Diluted ownership = 13.33% × (45/50) = 12%.
New investment adds 2.5/50 = 5%.
Fractional Ownership = 12%+5% = 17%
Based on the answer provided by the CFA curriculum:
But I think the 17.7% incorrectly calculates Estragon’s ownership after Series B by using an inaccurate pre-money valuation (€47.5M instead of €45M). It only subtracts Estragon’s €2.5M investment from the post-money valuation (€50M), ignoring the full €5M Series B round. This leads to a flawed dilution factor (47.5/50 instead of 45/50). Am I missing anything?