Multiple Approach

Pre-money valuation

Hyun-Han Shin
Previous Class

We have learned
• How to estimate the value of a startup using
1) Discounted Cash Flow Method
2) Multiple Method

Now, we are going to learn how to apply

these methods to a hypothetical startup
Practice Question

Example 1
• A startup requires 1 million dollars from VC
• Expected to earn 0.5 million dollars in 5years
• Comparable to companies with PE ratio of 20
• the VC’s required rate of return is 50%
• Shares outstanding is 1 million
Practice Question

Example 1
• A startup requires 1 million dollars from VC
• Expected to earn 0.5 million dollars in 5years
• Comparable to companies with PE ratio of 20
• the VC’s required rate of return is 50%
• Shares outstanding is 1 million
• How much ownership should the startup give
to the VC to persuade the VC to investment
in the startup?
Practice Question

Example 1
(1) New money from VC : 1,000,000 dollars
(2) Net income in 5 years : 500,000 dollars
(3) Comparable companies PER : 20 times
Investment horizon : 5 years
Shares outstanding (ShOut) : 1,000,000 shares
VC required rate of return : 50%
Practice Question

Example 1
To find the VC’s required ownership amount,
→ Need to find the startup’s future value & the
VC’s future value
Practice Question

Example 1
• The value of the startup in 5 years
= Comparable companies’ PE ratio X Expected
Earnings
= 20 X 0.5 million dollars
= 10 million dollars
Practice Question

Example 1
• VC’s Ownership
= 7,593,750 / 10,000,000
= 75.94%
Practice Question

Example 1
(1) New money from VC : 1,000,000 dollars
→ FV : 7,593,750 dollars
(2) Net income in 5 years : 500,000 dollars
(3) Comparable companies PER : 20 times
→ Value of company in 5 years
= (2) X (3)
= 10,000,000 dollars
→ VC’s Ownership: 75.94%
Practice Question

Example 1
• How many shares should the startup give to
the VC?
𝑵𝒆𝒘 𝒔𝒉𝒂𝒓𝒆𝒔 𝒕𝒐 𝒕𝒉𝒆 𝑽𝑪
𝑽𝑪′ 𝒔 𝑶𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑 =
(𝑶𝒍𝒅 𝒔𝒉𝒂𝒓𝒆𝒔 + 𝑵𝒆𝒘 𝒔𝒉𝒂𝒓𝒆𝒔)
Practice Question

Example 1
𝑿
𝑽𝑪′ 𝒔 𝑶𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑 =
(𝑺𝒉𝑶𝒖𝒕 + 𝑿)
• X = new shares
• ShOut = old shares
Practice Question

Example 1
𝑽𝑪′ 𝒔 𝑶𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑
𝑿= ′
× 𝑺𝒉𝑶𝒖𝒕
𝟏 − 𝑽𝑪 𝒔 𝑶𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑
Practice Question

Example 1
𝑽𝑪′ 𝒔 𝑶𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑
𝑿= ′
× 𝑺𝒉𝑶𝒖𝒕
𝟏 − 𝑽𝑪 𝒔 𝑶𝒘𝒏𝒆𝒓𝒔𝒉𝒊𝒑
𝟕𝟓. 𝟗𝟒% × 𝟏, 𝟎𝟎𝟎, 𝟎𝟎𝟎
=
(𝟏 − 𝟕𝟓. 𝟗𝟒%)
= 𝟑, 𝟏𝟓𝟓, 𝟖𝟒𝟒 𝒔𝒉𝒂𝒓𝒆𝒔