Notes:
1. Projected Net Income at exit date.
2. Investment exit year.
3. The choice of multiple for the valuation is something that will be a matter of discussion during the venture capital negotiations. PE ratios for comparable public companies will be used as a benchmark to select a PE for the company, recognizing that PE ratios for public companies are likely to be higher due to their greater liquidity relative to a private company.
4. The venture capital investor uses the target rate of return to calculate the present value of the projected terminal value. The target rate of return is typically very high (30-70%) in relation to conventional financing alternatives.
5. Here the terminal value is discounted to the present value. The terminal value of the company is estimated at a specified future point in time. That future point in time is the planned exit date of the venture capital investor, typically 4-7 years after the investment is made in the company.
The terminal value is normally estimated by using a multiple such as a price-earnings ratio applied to the projected net income of the company in the projected exit year: Annual Earnings x PE / (1+r) ^ Year"
6. Investment amount Entreprenuer is seeking.
7. VC requires this ownership %. Valuation assuming no future dilution.
Formula: Initial Investment / Value of the Firm"
The company currently has [8] shares outstanding, which are owned by the current owners. If the venture capitalist will own [7]% of the shares after the investment (thus, 1-[7]% owned by the existing owners), the total number of shares outstanding after the investment will be [8]/(1-[7]%) = [9] shares. Therefore the venture capitalist will own [10] of the [9] shares.
8. Since the venture capitalist is investing [6] to acquire [10] shares the price per share is [6]/[10] or [11] per share
9-11. Pre-Money Valuation = New Price x Old Shares: [11] x [8]
12. Post-Money Valuation = New Price x Total Shares: [11] x [9]