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Starware Software was founded last year to develop software for gaming applica-tions
Starware Software was founded last year to develop software for gaming applica-tions. The founder initially invested $800,000 and received 8 million shares of stock. Starware now needs to raise a second round of capital, and it has identified a venture capitalist who is interested in investing. This venture capitalist will invest $1 million and wants to own 20% of the company after the investment is completed.
a. How many shares must the venture capitalist receive to end up with 20% of the company? What is the implied price per share of this funding round?
b. What will the value of the whole firm be after this investment (the post-money valuation)?
Expert Solution
a) Computation of Number of shares venture capitalist receive to end up with 20% of the company:
After the investment by venture capitalist, 80% of shares will be owned by Starware software. So,
80% of Shares Value = 8,000,000
So,
100% of share value = 8,000,000 * 100%/80% = 10,000,000 shares
Venture capitalist will get 20% of Total Shares = 20% * 10,000,000 = 2,000,000 shares
Computation of Implied Price per Share of this funding round:
Venture capitalist will give $1 million for 2,000,000 shares
Implied Price = $1,000,000/ 2,000,000 = $0.50 per share
b) Computation of Value of the Whole Firm after this investment (the post-money valuation):
Value of whole firm after merger = Total outstanding shares * Implied Price = 10,000,000 * $0.5 = 5,000,000
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