In the first stage of financing of Hotmail, the pioneer internet email service, the VC firm Draper Fisher, Jurvetson (DFJ) provided VC capital in of the first stage according to the following terms: $315,000 in return for 15.75% equity stake. Prior to the VC financing, the entrepreneur had 10,490,272 shares outstanding.

a) What is the post-money firm valuation and what is the implied share price and what is the value of the entrepreneur’s stake?

b) In the second round of VC financing, the entrepreneur is offered an additional $750,000 in return for 10.53% stake. Calculate the per share price under the terms of the second round.

c) Consider the VC’s situation in first stage financing. In the negotiations prior to the final first stage terms, the entrepreneur is offering 15% stake in return for $300,000 cash infusion (the final first stage terms above were slightly different). It was anticipated that after successive rounds of VC financing over the years, the original VC’s share would be diluted to 5% by the time of the exit at the IPO 5 years later. What must the estimated proceeds at the IPO be if the original VC’s required rate of return for such investments is 50% per year? Assume no debt outstanding by the time of the IPO.

d) In order to check the viability of the VC’s investment, he wishes to estimate the number of subscribers required in year 5 for supporting the exit valuation in (c) above. Assume that Hotmail will be valued at a revenue multiple of 5X. Internet advertising prices are $5 per CPK (cost per thousand impressions) and the average subscriber checks e-mail once-a-day for 200 days in a year and would be subject to 5 ad impressions per visit. Based on these assumptions, what must be the number of subscribers in year 5 to support your valuation?