Question: Marion has started a venture, DecorLab, with 1,000,000 shares for herself. The venture is not expected to make any profit until year 5 when its

Marion has started a venture, DecorLab, with 1,000,000 shares for herself. The venture is not expected to make any profit until year 5 when its net income is $3,000,000.

An investor wants to invest $1,500,000 in Marion's venture now for new shares and he requires 50% annualised return. Marion estimates that in order to reach her projection in year 5, she will need a second-round financing of $2,000,000 at the end of year 2. The second-round investor expects 30% annualised return. Marion also wants to set aside 4% of ownership as incentive compensation at the time of exit for her employees.

Marion has identified a comparable firm with her venture, Ornate, which is currently trading at $35 per share. Ornate's net income for the most recent year is $400,000 and it has 100,000 shares of common stock outstanding.

Round your answers to two decimal places.

What is the founder's and first-round investor's percentage of ownership between the first and the second round?
How does the venture capital valuation method differ from basic cash flow-based equity valuation?

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