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You founded your own firm three years ago. You initially contributed $200,000 of your own money and in return you
received 2 million shares of stock. Since then, you have sold an additional 1 million shares of stock to angel investors. You are
now considering raising capital from a venture capital firm. This venture capital firm would invest $5 million and would
receive 2 million newly issued shares in return
-After the venture capitalist's investment, what percentage of the firm will you own?

Question

Quizplus · Accepted Answer

Initially, you owned 2 million shares out of a total of 2 million shares, or 100% of the company. When you sold 1 million shares to the angel investors, there were a total of 3 million shares, so you owned 2 million/3 million or approximately 66.67% of the company. After the venture capitalist's investment, there will be a total of 5 million + 3 million = 8 million shares. The venture capitalist will own 2 million/8 million, or 25% of the company. Therefore, you will own 6 million/8 million, or 75% of the company. However, you originally contributed $200,000 of your own money, whereas the venture capitalist will be contributing $5 million. This means that the total value of the company will be $200,000 + $5 million = $5.2 million. As the founder, you will still own 2 million shares, which are now worth $5.2 million. This means that each share is worth $2.60. Therefore, your 6 million shares are now worth $15.6 million. You will own 15.6 million/ (15.6 million + 10 million) or approximately 40% of the company after the venture capitalist's investment.

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