Example of share ratio calculation for a venture firm that plans to raise capital from a VC twice
Continuing from the previous case
Meanwhile, the entrepreneur is considering building a facility to secure market share by raising additional capital of £3million three years later. He also thought that he should have a stake of at least 60% then to maintain the management right. In this case, the followings are vital points to consider.
Assuming that the investor accepts the numbers of estimated future turnovers and profits presented by JC Health;
 How to calculate the first investor’s investment amount per share and share ratio?
 How to estimate the second investor’s ones after three years? As a result, how to maintain the owner’s share ratio over 60%?
 How to prepare for the unexpected scenario that the investors don’t accept the proposed future revenues and profits?
Things to consider when attracting investment
One of the most important things to consider when a venture company raises funds with equitytype is the investors’ share ratio according to the investment amount.
Accordingly, the owner’s share ratio is determined. It is also determined whether the owner could maintain the management right with the diluted share ratio when the company raise the secondary funding,
Therefore, if a company considers financing twice as above, it needs to estimate the share ratios of the first and the second investors according to their investment amounts. In doing so, it could judge whether the owner could maintain the share ratio above a certain percentage.
The concept of ‘Postvalue’ and ‘Prevalue’
Let’s understand the simple formula below first to calculate the stake percentage that the investor would hold according to the investment amount.
Postvalue = Prevalue + Investment
Investment: The investment amount of venture capital
Prevalue: The total stock value before investment
Postvalue: The total stock value after investment
In other words, the sum of the stock value before investment and the investment amount is the stock value after investment. Therefore, the formula can be changed as follows.
Prevalue = Postvalue – Investment
Venture capital usually calculates the prevalue by obtaining the postvalue of the target company first and then subtracting the investment amount.
To calculate the postvalue, you need to estimate the future turnovers and profits of the company. JC Health estimated them over the next 5 years. You need to note that the estimated performance could be achieved possible when successfully attracting investment from VC. If it is not done, those numbers may be difficult to achieve. Therefore, you can consider the exit value of £32million after 5 years as a postvalue which is the corporate value after investment. The discounted exit value of £6million is also the current postvalue. Substituting the example of JC Health into the above formula is as follows.
Prevalue of JC Health = Postvalue of JC Health – Investment of VC = £6million – £1million = £5million
This time, let’s consider raising additional capital of £3million after 3 years like mentioned in the case. VC1 is the current investor, and VC2 is the investor who will invest three years later.
1^{st} round 
2^{nd} round 

Investment timing 
Present 
3 years later 
Target Return 
40% 
30% 
Postvalue 
Around £6million 
? 
VC1 Investment amount 
£1million 

VC2 Investment amount 

£3million 
Prevalue 
Around £5million 
? 
Our main concern is to find out whether the owner could maintain the management right by calculating the investor’s stake and the resulting diluted owner’s stake when raising an additional £3 million from VC2 three years later. To do this, we need to find, using the VC method, the postvalue and prevalue when VC2 invests. Since the exit value equals the postvalue, we can express the VC Method as follows.
Expected postvalue in n year = Net income in n year x PER
Discounted postvalue = Expected post value / (1+Target return)^{n}
Let’s use the above VC Method formula to foresee the equity value of JC Health in 3 years when VC2 invests.
Postvalue after 5 years of JC Health = £1,340 thousand x 23.79 = £31,882 thousand
Discounted postvalue after 3 years = £31,882 thousand x 1.32= £18,865 thousand
At the time of VC2’s investing, the postvalue is £18,865 thousand, about £19million, and the prevalue is around £16million by subtracting VC2’s investment amount. Things to be aware of in this calculation are as follows.
 To calculate the postvalue in 5 years, the estimated income in 5 years is used for both the VC1’s investment time and the VC2’s one. This is because the expected income in 5 years should be the same to both VC1 and VC2 at present. And both could also exit from each investment when the company goes public in 5 years.
 However, the discount timing of the postvalue in 5 years is different for each. You should consider a fiveyear discount for VC1 since it invests at present, a twoyear for VC 2 since it does three years later.
 Target rates are also different for each. Investing three years later is safer than investing now in terms of investment risk. Therefore, the VC1’s target rate was assumed to be 40%, while the VC2’s one was considered to be 30%.
The post and prevalue at each point of investment by VC1 and VC2 can be summarized as follows.
1^{st} round 
2^{nd} round 

Postvalue 
£6million 
£19million 
VC1 Investment 
£1million 

VC2 Investment 

£3million 
Prevalue 
£5million 
£16million 
Figures 1: Excel screen – Calculation of share ratio according to twotime capital raising
Share ratio calculation
Now, let’s calculate the share ratio of holders each time VC1 and VC2 invest. We should use the following formula for it.
VC’s share ratio = Investment / Postvalue
Existing holders’ share ratio = 1 – VC’s share ratio
VC’s investment is cash. In other words, adding this cash to the prevalue forms the postvalue, and the cash portion in the postvalue is the VC share. Following the above formula, you can obtain the VC1’s and the VC2’s share ratio step by step as follows.
VC1’s share ratio = £1million / £6million x 100 = 16.9%
Owner’s share ratio = 1 – 16.9% = 83.1%
At present that VC1 invests, if VC1 acknowledges the prevalue of £5million and invests £1million, the VC1’s share ratio is 16.7%, and the existing owner’s share ratio is diluted to 83.3% from 100%.
VC2’s share ratio = £3million / £19million x 100 = 15.8%
Existing holders (Owner and VC1) share ratio = 1 – 15.8% = 84.2%
Three years later when VC2 invests, if VC2 acknowledges the prevalue of £16million and invests £3million, the VC2’s share ratio is 15.8%, and the share ratio of the existing holders is 84.2%. To obtain the respective share ratio, we multiply this 84.2% to each prior ratio before being diluted.
VC1’s share ratio = 84.2% x 16.9% = 14.2%
Owner’s share ratio = 84.2% x 83.1% = 70.0%
Possibility to maintain the owner’s 60% share after the second investment is attracted
Assuming the above conditions, as shown in the table below, even at the time of attracting the second investment, the owner will have a share of nearly 70%. Using the Excel template, even if the secondary investment amount goes up to £5million, the owner’s share ratio can remain up to 60%.
Holders breakdown
Investment 
1^{st} round 
2^{nd} round 
Owner 
83.1% 
69.9% 
VC1 
16.9% 
14.2% 
VC2 

15.9% 
Total 
100.0% 
100.0% 
However, as you can see, the bases for maintaining the above ownership ratio are on the following assumptions. So, you need to know how the share ratio changes, which is the sensitivity, when the assumptions change.
Assumption 1: In 5 years, net income of £1.34million and average PER of 23.79
The above ownership ratio is based on the fact that the equity value is £32million in five years. If the future net income or PER decreases, the investor’s share ratio will inevitably arise.
Assumption 2: Investor’s required rate of return – VC1 target rate 40%, VC2 30%
In ‘Investment / Postvalue’, the postvalue is obtained by dividing the equity value in five years by the VCs’ target return. Thus, the higher the VCs’ target rate, the higher their share portion.
Therefore, if existing shareholders want to hold more than a certain level of share ratio, you should establish the above assumptions well. If they lead to a lower postvalue, the investment amount should reduce to lower the stakes of new investors.
Investment multiple
Finally, if you learn the concept of ‘investment multiple’, you can easily understand the calculation of the acquisition price per share and the share ratio.
Investment multiple = Acquisition price per share / Par value per share
Investment multiple refers to how many times you pay for a stock compared to its par value. If you buy one stock with a par value of £1 at £10, that means the investment multiple is 10.
In the case of VC1 above, it acquired a stock with a par value of £1 at 49.3 times, and VC2 at 131.9 times. Generally, founders invest at the par value of stocks, which means the investment multiple of 1. However, subsequent investors invest at a higher investment multiple as the company value increases over time.
Total investment amount / Investment multiple = Total par value of acquired stocks
Therefore, dividing the investor’s total investment amount by the investment multiple calculates the total par value of the stock acquired by the investor. VC1 invested £1,000,000 for a total par value of £20,292, while VC2 invested £3,000,000 for £22,747.
For reference, you can also obtain the investment multiple by dividing the prevalue by the capital before investment.
Investment Multiple = Prevalue / Capital before investment
Related pages
 (Excel Financial Model) Excel valuation template for earlystage with ‘VC Method’
 (Blog) Earlystage Valuation with the Venture Capital method.