After the Monday call, the partners at venture fund Johnson & Smith (J&S) were seriously thinking about

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Question:

After the Monday call, the partners at venture fund Johnson & Smith (J&S) were seriously thinking about investing in Crypto. Paul, the partners presenting the deal did a good job in terms of summarising the key figures, and now was the time to put a good analyst to work to look at the company in more depth. One of the first things that J&S usually did when they were interested in a company was to hire external consultants specialising in the company’s market to carry out a business due diligence. With the information provided by the consultants, the J&S analyst prepared Crypto’s detailed financial accounts for the next three years, From the forecasted statement of cash flows it was clear that, to support 55 per cent annual growth, they would need more money, or they would be running out of cash in two years. A second round of financing of around €3 million was needed to provide working capital investments and capex. The analysts asked Paul what the price of the shares might be in the second round of financing. Based on Paul’s experience, a twofold increase in price would be more than acceptable, taking into account the fact that the company would be larger and a less risky proposition in two years’ time. According to J&S’ policy, they would not be investing in the second round of financing. Therefore, any future financing round would imply a dilution of their stake in Crypto. This could have an effect on the previous numbers presented by Paul to the committee. The analyst was reviewing the numbers to make sure that J&S would be the owners of 10.92 per cent of Crypto stock at the time of exit. Otherwise, they would not reach their planned IRR of 40 percent, and this was a serious matter for Paul and his partners.

Questions

1. How many shares should J&S ask for in respect of the €2 million invested in the first round?

2. What would the price offered be?

3. Everything was looking good, but an investment manager told the analyst right before the meeting that he was sure the partners would be asking for pre-money and post-money valuation. Can you calculate these valuations?