It’s Gonna Be Big (IGBB)
It’s Gonna Be Big (IGBB) is seeking venture capital investment of $8 million. The founder and the venture capital fund agree the firm is worth $15 million today, and the venture capital investor asserts it requires a 35% (compounded annually) expected return. IGBB and the venture capital investor foresee an IPO in four years, at which time IGBB is expected to be valued at $90 million.

-If the venture capital investor pushes for a 40% per year expected return,what share of IGBB's equity will it receive in exchange for its $8 million investment?

Question

It’s Gonna Be Big (IGBB)
It’s Gonna Be Big (IGBB) is seeking venture capital investment of $8 million. The founder and the venture capital fund agree the firm is worth $15 million today, and the venture capital investor asserts it requires a 35% (compounded annually) expected return. IGBB and the venture capital investor foresee an IPO in four years, at which time IGBB is expected to be valued at $90 million.

-If the venture capital investor pushes for a 40% per year expected return,what share of IGBB's equity will it receive in exchange for its $8 million investment?

Quizplus · Accepted Answer

The correct answer is A.The venture capital investor requires a 35% (compounded annually) expected return. So, the value of the investment after four years will be $8 million * (1 + 35%)^4 = $21.5 million. The venture capital investor will receive $21.5 million / $90 million = 24% of IGBB's equity.