Hi everybody. So far you have learned how to estimate the value of a startup using discounted cash flow method and multiple method. In this class we are going to learn how to apply these methods to a hypothetical startup that requires an investment from a venture capitalist. Let's consider the situation of a startup which requires a $1 million investment from a venture capitalist. The startup is expected to earn $0.5 million in year five. And should be comparable to companies with PE ratio of 20. Assume that the venture capital's required rate of return is 50%, and shares outstanding is 1 million. How much ownership should the startup give to the venture capital to persuade the venture capital to investment in the startup? We can summarize the fact as the following. New money from venture capital is $1 million. That income in five years is $500,000. Comparable companies PER is 20 times. Investment horizon is five years. Shares outstanding is 1 million shares. And venture capital's required rate of return is 50%. In order to find the venture capital's required ownership amount to satisfy his or her required return, we need to find the startup's future value and the venture capital's future value given its required rate of return. Since the venture capital requires 50% return per year, we can find the future value of $1 million in five years using fv function in Excel. Let's start Excel and type in =fv. Then in fv function, type in 50% for rate, 5 for NPER, 0 for PMT, and -1 million for PB. We put minus sign before PB to get positive fv. The result is 7.593 million. Now we can estimate the value of the startup using PE ratio. Since comparable companies' PE ratio is 20 and expected earning of the startup is $0.5 million, the expected value of the startup would be $10 million in five years. Based on the future value of venture capital's investment and the startup, you know the venture capitalist's ownership is 75.94%. That is, 7,593,750 divided by 10 million. That means the startup must give 75.94% ownership to the venture capital to raise $1 million of investment. In summary, future value of venture capitalist investment at required return is $7,593,750. Net income in five years times compare with companies PER is equal to value of a company in five years, which is $10 million. Therefore, venture capitalist ownership is 75.94%. We can also tell how many shares should the startup give to the venture capital. Venture capital's ownership should be the new shares to the venture capital divided by old shares plus new shares. In other words, X divided by share out plus X equal to venture capital's ownership where X is new shares and share out is old shares. We can rewrite the formula as new shares is equal to percent ownership divided by 1- percent ownership times old shares. Then, the new shares to the venture capital is 75.94% times 1 million divided by 1- 75.94%, which is 3.155 million shares. In order to replicate this calculation, you need to use Excel. Otherwise, there is a rounding error and you don't get the number of these shares shown in this slide.