the worth in stock of the founder, of VC1, of VC2, and of VC3?
Part 1
- A founder owns 100% of her startup. She is offered an equity investment by a VC investor, accepts, and eventually, undergoes two more rounds of financing, each time by another VC investor. The financing events are as follows: VC investor 1 steps in with $0.5 million at a pre-money value of $2 million; later, VC investor 2 contributes $3 million at a pre-money of $7 million; and, finally, VC investor 3 coughs up $5 million at a pre-money of $20 million. At that point, i.e. Round 3, what is the worth in stock of the founder, of VC1, of VC2, and of VC3? What percentage of the company does each own?
- All things being equal, why is a high pre money valuation good for the entrepreneur? Does this mean she should negotiate only for the best price? Why or why not?
- In “Silicon Valley”, HBO’s TV series, the founder of Pied Piper has two conflicting offers from different investors: $200,00 for 5% or $10,000,000 in cash. He chooses the first offer. What does that tell you?
- Explain briefly why the labels could not apply demand based pricing in recorded music sales before Apple iTunes. Source: Alhadeff, P., “The Value of Music and the Trappings of the Marketplace, 1990-2005”; MEIEA Journal, Vol. 6 No. 1, 2006, pp. 13-27; please find the PDF here.
Part 2, respond to the following
Dermot Berkery of Delta Partners, a firm that specializes in high-end technology investments in Europe, has written that entrepreneurs need to argue just two things in a serious business plan: the existence of an opportunity for investment and the possibility of a good deal for investors.
Music startups seem to afford new opportunities for investment and there is much inefficiency in the current music marketplace. Think about the last point in connection with the four traditional sectors of the music business: music products, live music, recorded music, and publishing. Where do you see market inefficiencies begging for entrepreneurial acumen?