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FRM Part II · FRM Exam Part II · Private Markets Investing

A venture capital fund invests USD 4 million for 20% of a start-up in a Series A round. Immediately after the round, a new investor puts in USD 10 million in a Series B round at a post-money valuation of USD 50 million. Assuming no other issuance and no anti-dilution protection, what is the fund's stake and the value of that stake immediately after Series B?

The fund holds 16%, worth USD 8 million. The Series B investor takes 20% of the company (USD 10 million over USD 50 million post-money), diluting existing holders to 80%, so the fund's 20% becomes 16%, and 16% of USD 50 million is USD 8 million.

  1. A16%, worth USD 8 millionCorrect
  2. B20%, worth USD 10 million
  3. C16%, worth USD 4 million
  4. D12%, worth USD 6 million

Explanation

The Series B investor owns 10/50 = 20%, so existing holders are diluted to 80%. The fund's stake is 20% x 80% = 16%, worth 16% x 50 = USD 8 million. Keeping 20% ignores dilution; USD 4 million is cost, not value.

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