A STARTUP VALUATION

STORY
Tell the story behind the numbers
www.bluebook.io
STARTUP VALUATION: ROUND A FINANCING
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The co-founders of Citydine, a dining app startup have forecasted
annual sales of 2.5 million in 5 years. Comparable public companies
in their industry are valued at 20x price-earnings ratio and earn profit
margins of 15%. Expected annual profit at Citydine in Year 5 is
predicted to be 375,000 (2.5 million x 15%).
Citydine Exit Value = PE Ratio x Year 5 Profits
20 x 375,000 = 7.5 million
Citydine valuation today: Citydine Exit Value / (1 + Investors Rate
of Return)^No. Years
Startup Valuation Today = 7.5 million / (1+ 50%)^5 = 987,654
Citydine has attracted significant interest from angel investors. These
investors have a required 50% rate of return for ventures with this risk
profile. The co-founders sought 500,000 investment from angels. As
such, the angels would own (500,000 / 987,654) = 50.63% equity.
As Citydines valuation (post-money) was 987,654, the pre-money
valuation was 987,654 500,000 = 487,654

The co-founders had initially incorporated Citydine with 100,000
shares before the financing round. Following the investment round,
the total number of shares in the business increased to 100,000 /
50.63% = 202,532 of which the angels owned 102,532 (202,532
100,000). With a valuation of 987,654 and 202,532 shares, the price
per Citydine share until the next round of investment was 4.88.
Year 5 Sales 2,500,000
Profit Margin 15%
Net Profit 375,000
In Year 5
PE(multiple) 20
Required Rate of Return 50%
Terminal value on Exit
Startup Valuation
7,500,000
987,654
Initial Investment 500,000
Equity Stake 50.63%
Current Outstanding Shares 100,000
Total Outstanding Shares 202,532
VC Owns # Shares 102,532
Share Price 4.88
Pre-Money Valuation 487,654
Post-Money Valuation 987,654
STARTUP VALUATION: ROUND B FINANCING
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The co-founders anticipated they will need three rounds of financing
(rounds A, B and C) over the next five years until they exit the
company. At the start of the first year, the co-founders secured
500,000 investment from angels who expected to earn 50% return
each year. The future value of this investment in five years time
would be 500,000 x 1.50^5 = 3,796,895.
In Year 5, both the co-founders, angels and venture capitalists
expected to exit the business through a sale to an acquiring
company.
As before, after the first financing round the angel investors held
50.63% of equity at a price per share of 4.88. 102,532 new shares
were issued to these investors.
At the end of the second year, Citydine raised 750,000 from
venture capital investors (VCs). Because the investors took a stake in
the business at a more mature stage, their required return on
investment was 40%, lower compared to the angels. The future value
of this investment after five years would be expected to grow to
750,000 x (1+40%)^3 = 2,058,000. As such, the VCs would own
27.4% of the total shares (2,058,000 / 7,500,000). For their
investment, the company had to increase its number of shares to
(202,532 / (1-27.4%) = 279,123.
Overview
Net Income at Exit Year 375,000
Term 5
PE(multiple) 20
Shares Outstanding Before Investment 100,000
Company Value at Exit 7,500,000
Shares Outstanding After Final Round 1,898,134
Terminal Share Price 3.95
Investor
Round A
Investment Amount 500,000
Investment Year 0
Required Return 50%
Future Value 3,796,875
Required Ownership 50.63%
Outstanding Shares (Pre) 100,000
Outstanding Shares (Post) 202,532
Investor Owns No. Shares 102,532
Share Price 4.88
Pre-Money Valuation 487,654
Post-Money Valuation 987,654
STARTUP VALUATION: ROUND C FINANCING
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As new stock is issued to later-round investors, the early-round
investors would expect to suffer dilution - a loss of ownership
due to the issuing of additional shares. After this financing
round, the co-founders held 100,000 shares (35.8%), angels
owned 102,532 (36.7%), and the VCs received 76,591 shares.
Citydines valuation after this stage increased from 987,654 to
(375,000 x 20) / (1 + 40%)^3 = 2,733,236. The price per share
after this round also increased to 9.79 (2,733,236 / 279,123).
In Year 4, Citydine started earning positive cash flows and
attracted a further 1 million VC investment. As the company
was further established, investors at this stage could only
command an expected return of 25%. As such the future value
of their investment on exit was 1 million x (1+25%)^1 =
1,250,000. After this investment, the VC claimed 16.7%
(1,250,000 / 7,500,000) ownership.
With this additional investment, Citydine had to increase its
number of shares available to 334,948 (279,123 / 1 - 16.7%). Of
which the new VC investors received 55,825 shares. The
company valuation increased from 2,733,236 to 6 million
(375,000 x 20) / (1+25%)^1).
Investment Amount
Investment Year
Required Return
Future Value
Required Ownership
Outstanding Shares (Pre)
Outstanding Shares (Post)
Investor Owns No. Shares
Share Price
Pre-Money Valuation
Post-Money Valuation
Investor Investor
Round B Round C
750,000 1,000,000
2 4
40% 25%
2,058,000 1,250,000
27.44% 16.67%
202,532 279,123
279,123 334,948
76,591 55,825
9.79 17.91
1,983,236 5,000,000
2,733,236 6,000,000
STARTUP VALUATION: THE DILUTION STORY
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For Round A investors, from their original 500,000 investment, they
claimed 50.6% of Citydine. Following Round B investment, their
stakeholding was diluted to 36.7%, and to 30.6% after Round C. Round
A shareholders wealth on exit was 2,295,844 (30.6% x 7.5 million),
or 4.6x return on investment.
For Round B investors, their 750,000 investment gave them 27.4% of
the company. Following Round C, their stakeholding was diluted to
16.7%. Round B shareholders wealth on exit was 1,715,000 (16.7% x
7.5 million), or 2.3x return on investment.
For Round C investors, in return for 1 million investment, they took
16.7% of Citydine and there was no further dilution. Round C investors
wealth on exit was 1,250,000 (16.7% x 7.5 million), or 1.3x return on
investment.
The founders were diluted in each round from 49.4% after angel
investment in Round A, to 35.8% after the first set of venture
capitalists, and finally down to 29.9% after Round C. After 5 years,
they generated wealth of 2.24 million on exit.

7.5M
6.0M
2.7M
988K
ROUND A - ANGELS: 500K
ROUND B - VC 1: 750K
ROUND C - VC 2: 1M
EXIT
VALUATION ROUNDS
Angels Founders
Angels Founders
VC 1
Angels Founders

VC 1 VC 2
Angels
VC 1 VC 2
50.6%
36.7%
49.4%
35.8%
27.4%
30.6% 29.9%
22.9% 16.7%
4.6x
2.3x 1.3x