John Thompson, CEO of WVU, Inc., wants to raise $5 million in a private equity in his early stage venture. Thompson projects net income of $5 million in year five (five years from now) and knows that comparable companies trade at a price to earnings ratio of 49. On further analysis and discussion, Samantha and John agree that the company will probably need another round of financing in addition to the current $5 million. Samantha believes that NewVenture will need an additional $3 million in equity at the beginning of year 3. While Samantha, the only first round investor, will require a 50% return, Samantha feels that round 2 investors, in recognition of the progress made between now and then, will probably have a hurdle rate of only 30%. As before, a professional management team should have the ability to own a 14% share of the company by the end of year 5.
A. Based on this new information, what percent of the company should Samantha seek today (as percent with two decimal places (EX:12.34%))?
B. What price per share should she be willing to pay?
C. What percent of the company will the Round 2 investors seek?
D. What price per share will they be willing to pay? How would the price per share change if you assume that the 14% for the professional management is allocated at the beginning of the first period (before anyone invests) and the management group gets diluted as new shares are issued in the second period rather than being protected from dilution. Assume there are 1,000,000 shares outstanding at the end of Year 0 are already divided between John and the firm's management when the firm is negotiating with Samantha for this Series A funding.
E. Based on this new information, what percent of the company should Samantha seek today (as percent with two decimal places (EX:12.34%))