The founders and owners of a private company have funded it through the following rounds of investment: Round Source Price Number of Shares
Series A Self $1.00 100,000
Series B Angel $1.00 225,000
Series C Venture Capital $1.25 350,000
The owners decide to take the company public through an IPO, issuing 1 million new shares. Assuming that they successfully complete the IPO, the net income for the next year is estimated to be $6 million. The price of shares is set using average price-earnings ratios for similar businesses of 15. What portion of the company will be owned by the angel investor after the IPO?

Question

Quizplus · Accepted Answer

Before the IPO, the total number of shares in circulation is:
100,000 (Series A) + 225,000 (Series B) + 350,000 (Series C) = 675,000

After the IPO, the total number of shares will be:
675,000 + 1,000,000 = 1,675,000

Assuming that the price-earnings ratio of 15 is applied to the net income of $6 million, the market capitalization of the company will be:
15 x $6 million = $90 million

Therefore, the price per share will be:
$90 million / 1,675,000 shares = $53.73

The angel investor currently owns 225,000 shares, which represent:
225,000 / 675,000 = 33.33% of the company

After the IPO, the angel investor will own:
225,000 / 1,675,000 = 13.43% of the company

Therefore, the answer is B) 13%.

The Founders and Owners of a Private Company Have Funded