An entrepreneur seeks $10 million from a VC fund. The entrepreneur and fund managers agree that the
Question:
An entrepreneur seeks $10 million from a VC fund. The entrepreneur and fund managers agree that the entrepreneur’s venture is currently worth $25 million and that the company is likely to be ready to go public in five years. At that time, the company is expected to have net income of $7.5 million, and comparable firms are expected to be selling at a price/earnings ratio of 30. Given the company’s stage of development, the venture capital fund managers require a 50% compound annual return on their investment. What fraction of the firm will the fund receive in exchange for its $10 million investment?
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