A venture capitalist firm wants to invest $1.5 million in your NYDeli dot.com venture that you started six months ago. You do not expect to make a profit until year four when your net income is expected to be $3 million.
The common stock of BioSystems, a "comparable" firm, currently trades in the over-the-counter market at $30 per share. BioSystems' net income for the most recent year was $300,000 and the firm has 150,000 shares of common stock outstanding.
A. Apply the VC method to determine the value of the NYDeli at the end of four years.
Comparable's price = ?
Comparable's EPS = ?
Comparable's P/E = ?
Venture's earning = ??
Venture's projected value at year 4 = ?
B. If VCs want a 40% compound annual rate of return on similar investments, what is the present value of your NYDeli venture?
Present value = (Value at year 4) / (1 + r)4 = ?
C. What percentage of ownership of the NYDeli dot.com venture will you have to give up to the VC firm for its $1.5 million investment?
Ownership = ?