NPV venture capital method

NPV venture capital method

Year	Capital invested ($ million)	Selling price ($ million)	Discount rate	Pre-money valuation	Post-money valuation
0	-20 (*)				(3) 1/(1+40%)^4*(+400/(1+30%)^2 - 40) = 51.1991
1			40%
2			40%
3			40%
4	-40		40%	(2) +400/(1+30%)^2 - 40	(1) +400/(1+30%)^2
5			30%
6		+400	30%

(*) capital investment today by the first-round investors


Fractional ownership for first-round investors:
f₁ = INV₀/POST₀ = 20/51.1991 = 39.06%

S_pe: number of shares owned by the private equity LPs (first-round investors)
S_e: number of shares owned by a company(investee;investment target)'s founders = 5 million shares

(S_pe+S_e)*f₁ = S_pe
S_e*f₁ = S_pe * (1-f₁)
S_pe = S_e*f₁/(1-f₁)
= 5,000,000*39.06%/(1-39.06%) = 3,204,792 shares


Stock price after the first round of financing
P₁
= POST₀/(S_pe+S_e)
= 51.1991*10^6/(3,204,792+5,000,000)
= INV₀/S_pe
= 20*10^6/3,204,792
= $6.24