Basic method: A VC is considering a $3 million investment as a final round for a company. The company has 4 million shares currently outstanding and earned revenues of $2.5 million this year and expect that number to triple over the next three years. The VC expects to harvest his investment at that point through a sale of the company at an 8x revenue multiple. Assuming the VC requires a 55% projected rate of return on a company of this risk profile, what price should he pay?

Future Dilution method: Using the same company above (recall the company has 4 million shares currently outstanding and earned revenues of $2.5 million this year), determine the price the current VC should pay if he anticipates future dilution. In this case, the company is expected to triple revenues over the next three years and then double revenues to $15 million in the following two years. After those five years, the company will exit by company sale at the same 8x revenue multiple. With the longer time to exit anticipated, the VC now requires a 60% projected rate of return on the company and is willing to invest $2 million to get the company to the next stage. In two years, it is expected the company will raise an additional $3 million from a Growth PE fund (Growth PE will likely require a 40% rate of return). Assuming the VC requires a 60% projected rate of return on a company of this risk profile, what price should he pay?