Skip to main content

How to do valuation of Venture capital in different stages of funding?


Formula of Venture Capital:

Pre-money valuation: It refers valuation of company assets before financing the assets through investors.
Pre-money valuation:
·         Share Method Calculation
·         Percentage Method

Share Method Calculation:
Number of shares outstanding before investment * Price of new share
Percentage Method:
(Investment amount / Percentage of company for sale) – Investment amount
                           OR
Pre- money valuation = Post-money valuation - money raised

Post-money valuation = It refers valuation of company after investors made an investment in that company.

Post money valuation = Pre-money valuation +money raised

Pre-money valuation:

Example: Company XYZ has outstanding shares of Rs.5, 00,000 of Rs.10 each and it want to raise further capital in the form of 10,000 shares of Rs.8 each. Find out the pre-money valuation.

Solution: 
Share method:
Pre-money valuation = Number of shares outstanding before investment * Price of new share
=50,000*8
= Rs.4, 00,000
Post money valuation = Pre- money valuation + money raised
= 4, 00,000 + 80,000
=Rs. 4, 80,000

Percentage method:
If 25% of company for sale and investment amount is Rs.5, 00,000 then what is pre- money valuation?
Pre-money valuation = (Investment amount / Percentage of company for sale) – Investment amount
= (5, 00,000 / 0.25) - 5, 00,000
= Rs.15, 00,000
Post- money valuation = Pre- money valuation + money raised
= 15, 00,000+5, 00,000
=Rs. 20, 00,000

Example: Company ABC has incorporated with 1, 00,000 shares and the annual sale are Rs.3, 00,000. The annual profit is Rs.4, 50,000 and the price earnings multiple is 20. The venture capitalist invested in following stages of a company.
Ø  In 0 year angel investor invest Rs. 6, 00,000 and the estimated rate of return is 40%.
Ø  In 3 year Venture Capitalist invest Rs. 8, 90,000 and the estimated rate of return is 30%.
The exit period of the investment is 6 year and there is no need for series C round. Find out:
Ø  Total Number of shares
Ø  % equity ownership
Ø  Pre-money valuation
Ø  Post money valuation
In a round A and B financing by Venture capitalist and angel investor.

Solution:
Number of shares incorporated: 1, 00,000
Price Earnings : 20
Net Profit: Rs.4, 50,000
Annual Sales: Rs.3, 00,00
  •   Angel investor invests Rs. 6, 00,000 and required return is 40%
Terminal value = Net profit * Price Earnings
= 4, 50,000*20
= 9,000,000
Post money valuation = 8, 000,000 / (1+0.40) 6
= 9, 000,000 / 7.529536
= 1, 195,293
Pre-money valuation = post money valuation - money raised
= 1, 165,293 - 6, 00,000
= 5, 95,293
Ownership in % of an angel investor = Investment / Post money valuation
= 6, 00,000 / 1, 195,293
= 50.19%
New total number of shares = Investment / (1-ownership)
= 1, 00,000 / (1- 0.5019)
= 2, 00,763
New shares issued = Total number of new shares – old number of shares
= 2, 00,763 – 1, 00,000
= 1, 00,763
Price of per share = Post money valuation / Total number of new shares
= 11, 95,000 / 2, 00763
= Rs. 5.95

Ø  Round B: Venture capitalist invest Rs. 8, 90,000 and required return is 30%
Post money valuation = 75, 00,000 / (1+0.30) 3
= 34, 13,746
Pre- money valuation = 34, 13,746 – 8, 90,000
= 25, 23,746
Ownership of venture capitalist in % = 8, 90,000 / 34, 13,746
= 26.07%
Total number of new shares =2, 00,763 / (1-0.2607)
= 2, 71,558
New shares have been issued = 2, 71,558 – 2, 00,763
=70, 795
Price of per share = 34, 13,746 / 2, 71,558
= Rs. 12.57

 Summary of Round A and B

Particulars
Round A (Rs.)
Round B (Rs.)
Investment
 6, 00,000
 8, 90,000
Year of investment
0
3
Required rate of return
40%
30%
Ownership %
50.19%
26.07%
Number ofvOutstanding shares (pre)
1,00,000
2, 00,763
Number of Outstanding shares (post)
2,  00,763
2,71,558
Shares own by investors
1, 00,763
70,795
Price of per share
5.95
12.57
Pre-money valuation
5, 95,293
25, 23,746
Post money valuation
11, 95,293
34, 13,746

Venture Capital Dilution:
Founder's dilution:
·         After round A founder’s ownership decreases from 100% to 49.81% (100-50.19).
·         After round B founder’s ownership decreases from 49.81% to 36.82% (100 / 2, 71,558).
Investors dilution:
·         After round A Angel investor gets 50.19% ownership in a company.
·         After round B Angel’s ownership decreases from 50.19% to 37.10% (1, 00,763 / 2, 71,558).
·         After round B Venture capitalist gets 26.07% (70,795 / 2, 71,558) ownership in a company.





Comments

  1. Phani KumarJuly 02, 2020 3:51 pm

    Hey, thanks for the information. your posts are informative and useful. I am regularly following your posts.
    Alphalogic Techsys IPO

    ReplyDelete

Post a Comment

Popular posts from this blog

How to calculate Cost of Preference Share Capital?

Cost of Preference Share Capital:  An amount paid by company as dividend to preference shareholder is known as Cost of Preference Share Capital. Preference share is a small unit of a company’s capital which bears fixed rate of dividend and holder of it gets dividend when company earn profit. Dividend payable is not a tax deductible amount. So, there is no tax adjustments required for comparing with cost of debt. Formula for Cost of Preference Share: Irredeemable Preference Share Redeemable Preference Share K p  = Dp/NP K p  = D p +((RV-NP)/n )/ (RV+NP)/2 Where, K p  = Cost of Preference Share D p  = Dividend on preference share NP = Net proceeds from issue of preference share (Issue price – Flotation cost) RV = Redemption Value N = Period of preference share Example:  A company issues 20,000 irredeemable preference share at 8% whose face value is Rs.50 each at 4% discount. Find out the Cost of ...
88 comments
Read more

What is the difference between Cheque book and Pass book?

 Cheque book is issued by bank in customers / account holder request. With the help of this book account holder can withdraw cash from his/her account. Bank does not charge any fee to issued cheque book to its customer. But afterward bank charges some amount for using bank facility like cheque book, Debit card etc.So, Automatic some definite amount deducted from customer bank account. Pass book is  also issued by bank to its customer. It helps to record all the bank related activity according to date that is withdrawal and deposit. It is recorded by bank but the book is kept by customer to know the current balance of  his /her account.  Point of difference Pass book Cheque book What is the meaning of pass book and cheque book? Passbook is a book in which all withdrawal and deposit against customer account is recorded.   Cheque book is a book of cheques which are used to withdrawal the money to b...
Post a Comment
Read more

Numericals with solutions of Net income Approach

Net income approach questions and answers:   Questions:  Find out the value of the firm with the help of given information: Particulars Amount Earnings before interest and tax 3, 50, 000 Cost of equity 10% Cost of debt 7.2% Debenture 1,00,000 Find out the overall cost of capital with the help of net income approach. (Assume tax rate-10%) Solution: Particulars Amount Earnings before interest and tax 3, 50, 000 Less: Interest @7.2% 7, 200 Earnings before tax 3, 42, 800 Less: Tax@10% 34, 280 Net income 3, 08, 520 Cost of equity 10% Market value of equity (S =net income/ cost of equity) 30, 85, 200 Market value of debt (B) 1, 00, 000 Value of the firm (S+B) 31, 85, 200 Questions:  Find out the overall cost of capital if the equity capitalisation rate is 12...
Post a Comment
Read more