Chapter 23
The Mechanics of Raising Equity Capital
23-1.

Private companies can raise equity capital from angel investors, venture capitalists, institutional investors, or corporate investors.

23-2.

Advantages of raising money from a corporate investor are that the large corporate partner may provide benefits such as capital, expertise, or access to distribution channels. The corporate partner may become an important customer or supplier for the startup firm, and the willingness of an established company to invest may be an important endorsement of the new company.
The disadvantages are that not all corporate investments are successful. The corporate partner may gain access to proprietary technology, or eventually even become a competitor. Once a young firm has aligned itself with one corporate partner, the competitors of this partner may be unwilling to do business.

23-3.
a.

After the funding round, the founder’s 8 million shares will represent 80% ownership of the firm. To solve for the new total number of shares (TOTAL):
8,000,000 = .80*TOTAL
So TOTAL = 10,000,000 shares. If the new total is 10 million shares, and the venture capitalist will end up with 20%, then the venture capitalist must buy 2 million shares. Given the investment of $1 million for 2 million shares, the implied price per share is $0.50.

b.

23-4.
a.

After this investment, there will be 10 million shares outstanding, with a price of $0.50 per share, so the postmoney valuation is $5 million.

Before the Series D funding round, there are (5,000,000 + 1,000,000 + 500,000 = 6,500,000) shares outstanding. Given a Series D funding price of $4.00 per share, the pre-money valuation is (6,500,000) ×
$4.00/share = $26 million.

b.

After the funding round, there will be (6,500,000 + 500,000 = 7,000,000) shares outstanding, so the postmoney valuation is