Multiple Approach

Pre-money valuation

Hyun-Han Shin
Previous Class

We have learned
How to estimate the value of a startup using
1) Discounted Cash Flow Method
2) Multiple Method

Now, we are going to learn how to apply

these methods to a hypothetical startup
Practice Question

Example 1
A startup requires 1 million dollars from VC
Expected to earn 0.5 million dollars in 5years
Comparable to companies with PE ratio of 20
the VCs required rate of return is 50%
Shares outstanding is 1 million
Practice Question

Example 1
A startup requires 1 million dollars from VC
Expected to earn 0.5 million dollars in 5years
Comparable to companies with PE ratio of 20
the VCs required rate of return is 50%
Shares outstanding is 1 million
How much ownership should the startup give
to the VC to persuade the VC to investment
in the startup?
Practice Question

Example 1
(1) New money from VC : 1,000,000 dollars
(2) Net income in 5 years : 500,000 dollars
(3) Comparable companies PER : 20 times
Investment horizon : 5 years
Shares outstanding (ShOut) : 1,000,000 shares
VC required rate of return : 50%
Practice Question

Example 1
To find the VCs required ownership amount,
Need to find the startups future value & the
VCs future value
Practice Question

Example 1
The value of the startup in 5 years
= Comparable companies PE ratio X Expected
Earnings
= 20 X 0.5 million dollars
= 10 million dollars
Practice Question

Example 1
VCs Ownership
= 7,593,750 / 10,000,000
= 75.94%
Practice Question

Example 1
(1) New money from VC : 1,000,000 dollars
FV : 7,593,750 dollars
(2) Net income in 5 years : 500,000 dollars
(3) Comparable companies PER : 20 times
Value of company in 5 years
= (2) X (3)
= 10,000,000 dollars
VCs Ownership: 75.94%
Practice Question

Example 1
How many shares should the startup give to
the VC?

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Practice Question

Example 1

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X = new shares
ShOut = old shares
Practice Question

Example 1

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Practice Question

Example 1

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