The fourth step is to determine the projected multiple in the exit year and calculate the exit value. This is done exclusively on a comps basis. Typically a VC exit comp. Depending on the type of business, the exit comp or exit multiple would typically be either a revenue multiple or an EBITDA multiple. If there is an EBITDA figure, or the VC will also look up price to book multiples, i.e., the desired market value of the company versus book value of its net assets.

So let's see the exit multiple and the values that it creates in each of our three scenarios. And the revenue multiple in year five is five times, but then in year six, that revenue multiple's gone up and in year seven it's gone up. Again, this won't necessarily be the case in all startup companies, but where it can justify very high growth that may lead to these revenue multiples going up.

Let's go back to year five and let's take the best case of revenue and we'll multiply that by the five.

I'm going to want to copy that down and then to the right, but I don't want it to move from row 22, so I'm just gonna lock onto row 22. And now I've got my three different scenarios, best base and low over three different exit years. We can see that the year seven figures are significantly higher because the company's still growing and it's using that higher revenue multiple.

The fifth step is to discount the exit value to present value using the VC fund's targets, internal rates of return or IRR.

This discount rate varies by VC funds, but a rate in the 20% to 40% range would not be unusual.

The discount rate is typically just the cost of equity, since there will likely be no debt or nominal level of debt in the capital structure of the startup. At this stage, the discount rate is higher than the discount rates used for mature companies, and this is to compensate the VC fund investors for their risk and time to exit.

The required IRR is typically the highest at the seed stage and subsequently goes down. There are some early stage VC funds that require an IRR of 70 to 80% because the probability of reaching a series C stage funding is so low, IRR requirements go down as the startup becomes a little more viable and robust.

So let's see, step five, that was the discounting here we've got our exit years here, five, six, and seven, and we've already calculated our discount factors that's linking to that 40% to the power of the number of years that we're in.

And the sixth and final step is to calculate the pre-money, value and percentage ownership stake.

So let's do that in step six. We'll calculate the post money valuation and then the pre-money and the percentage ownership stake. Let's do it for the best case first, I'm gonna take the exit value of 552.8, that's from year five in the best case, and I'm gonna multiply it by the discount factor of 18.6.

That gets me a post money valuation of 102.8.

Now the pre-money valuation says we need to take that post-money valuation and subtract out the capital investment we're putting in. So let's go subtract out that 25 that we had at the top. Again, I'm going to lock onto that. So I've now subtracted out that 25. And finally, let's work out the percentage ownership. Remember, we're putting in 25 million, that's going to be 25 as a percentage of the post money 102. So let's go get that 25 again, I'll lock onto that and I'll divide that by the post money valuation, giving me percentage ownership, 24.3%, and I can copy all of those numbers to the right. Now, we might notice that the percentage ownership goes down.

Why is that? Well, it's because our valuation's going up as the company's growing with its revenue and it's got that higher revenue multiple as the years go by. Yes, the percentage ownership's going down, but that's because we're getting a slice of a big pie.

We can do exactly the same with the base case and the low case.

Great. And in the base case, we can now see the percentage ownership has gone up slightly, and in the low case, the percentage ownership has gone up quite a bit. But again, that's because the company isn't doing as well. So yes, we have higher ownership, but the company's not performing as healthily as it could. It's not growing as quickly as we'd hope in the, in the best case. So the ownership percentage has gone up. This provides us with a range of exit values, a range of percentage ownerships in the best base and low and over three different exit years.