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Venture capital method: the post-money and pre-money value a 50 % target return implies, with 30 % later dilution

Tool	Venture Capital Method
Source	Sahlman, W. A. (1987). A Method for Valuing High-Risk, Long-Term Investments: The "Venture Capital Method". Background Note 288-006, Harvard Business School, Boston. The note is cited for the method only; the numbers are an illustrative company worked from the closed forms and checked against a share-by-share simulation (test_venture_capital_method.php).
Level	Undergraduate

Problem

An investor puts 2,000,000 into a young company that is expected to be worth 100,000,000 at an exit in 5 years. The investor requires 50 % a year on a successful deal and expects later financing rounds and option grants to dilute its stake by 30 % before the exit. The company has 1,000,000 fully diluted shares before the round. Find the ownership the investor needs, the post-money and pre-money valuation, the price per share, the new shares issued, and the return if the company is sold for half the expected value.

Inputs to Enter

Investment 2,000,000; exit value 100,000,000 (entered directly); years to exit 5
Target return 50 % a year; later dilution 30 %; 1,000,000 fully diluted shares before the round

Open the Venture Capital Method tool (loaded with this example)

Answers

Required value of the stake at exit = 2,000,000 × 1.5^5 = 15,187,500 (7.594 times the money)
Ownership needed at exit = 15,187,500 / 100,000,000 = 15.19 %; ownership needed today = 0.151875 / (1 − 0.30) = 21.70 %
Post-money valuation = 2,000,000 / 0.216964 = 9,218,107; pre-money valuation = 9,218,107 − 2,000,000 = 7,218,107
One-line check: 100,000,000 × 0.70 / 1.5^5 = 9,218,107
Price per share = 7,218,107 / 1,000,000 = 7.2181; new shares = 1,000,000 × 0.216964 / 0.783036 = 277,081
Exit at 50,000,000: proceeds 0.151875 × 50,000,000 = 7,593,750, multiple 3.80×, IRR 3.796875^(1/5) − 1 = 30.58 % a year
Pre-money valuation at a 40 % target 11,015,410, at a 60 % target 4,675,720

Notes

The tool's default inputs are this case; press Submit. Advanced mode gives the same valuation from two later rounds (15 % sold with a 5 % option-pool top-up, then 12.5 % sold: 0.80 × 0.875 = 0.70 kept) and from three scenarios whose probability-weighted exit value is 100,000,000. The result shows what the assumptions imply; it is not an estimate of what a company is worth, and the page is not investment advice.