In the venture capital method we use the formula Post = Pre + Inv. i am finding in some cases we are discounting the post. Is this just the case in two round financing? Also, how would we know when to use the venture capital method vs IRR? Will they just provide us with the discount rate? In one round financing, we don’t need to discount right? Could someone explain?

I think you always need to discount. For example, the founders believe they can sell the company for 50 Mio in 5 years. They need 2 Mio now as an investment. Discount rate 30%. How much is the PRE money value? POST money value is 50 Mio % / (1.3)^5 = 13.5 Mio . PRE money value is therefore 11.5 Mio .

From the problems and examples I’ve seen, you only need PRE for a multistage financing. But then again, you never know what CFAI has up their sleeve. They can just straight out give you the PRE and you would have to find the POST and work from there.

Thats that I thought, but here is an example when you don’t need to $10 million investment in a portfolio company. The founders of a portfolio company currently hold 300,000 shares and the pre-money valuation is $6 million. The number of shares to be held by the private equity firm, and the appropriate share price, respectively The answer does not include a discount and no rate was given?

if it’s 500k and $20 i’ll jump up and down excited. if not, it reinforces the fact that i need to study alts again before d-day. i am weak right now in PE. this is the formula with the f… but i can’t remember it. i tried to fake it til i make it. tell me i’m right. just lie to me.

POST = $16 million, is that what you are trying to clear up?

what i just faked was post = 16, inv/post = .625… think the formula is something like .625/1-.625 = 1.666667 x 300k shrs = 500k shrs needed by PE firm. i then bs’d and pretended like 500k + 300k shrs = 800k shrs, total investment is 16 mil so 16mm/800k = 20. again, if this is right, f’n get me to a test center and fast. if not, it’s something close to this process. i just need to tighten up my formulas.

POST = 16 million F = I / POST = 10 / 16 = .625 y = x*[(F/(1-F))] = 300,00*1.67 = 501,000 P = I / y = $19.96 ?

More intuitive for me: PRE money: 6 million, 300k shares -> 20$ per share Obviously, if you invest in this, you want 20$ per share, too, so if you invest 10 million, then that’s gonna be 500k shares. Or stated another way: 6 million : 300k shares = 10 million : ? shares