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You founded your own firm two years ago. You initially contributed $250 000 of your own money and in return you received 2.5 million shares of stock. Since then, you have sold an additional 1.25 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, the post-money valuation of your shares is closest to:

Question

Quizplus · Accepted Answer

The pre-money valuation of the company can be calculated by summing up the initial investment plus the investment from angel investors. This is: 
$250,000 + 1.25 million shares x $1/share = $1.5 million

The post-money valuation will include the new investment from the venture capitalists: 
$1.5 million + $5 million = $6.5 million

The total number of shares after the new investment is: 
2.5 million + 1.25 million + 2 million = 5.75 million

To find the price per share after the new investment, we divide the post-money valuation by the total number of shares: 
$6.5 million / 5.75 million shares = $1.13

Therefore, the post-money valuation of the founder's initial shares (2.5 million) is: 
2.5 million shares x $1.13/share = $2.825 million

So, the post-money valuation of the founder's initial shares plus the newly issued shares to the venture capitalists (2.825 million + $2 million) is $4.825 million.

The closest answer choice is C: $9.4 million, which is not accurate.

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