Management team identifies a security software firm, DigiVault, that has developed a 256-bit data encryption key that is licensed by Fortune 100 companies and governments to protect sensitive database information from prying eyes. The firm's founders are out of money and want to sell their technology. Because you and your team don't have enough money to acquire the firm outright on your own, you turn to outside sources of funding. A venture bank is willing to put up a $3.5 million, five-year loan at 11% per year, which only has interest payments due during its life; the principal balance will be paid off at the liquidity event. Your team puts up $750,000 of its own capital. One of your friends from the MBA program is a venture capitalist, and his firm agrees to invest $3.5 million at an expected 60% annual return for five years, at which time they expect a liquidity event in order to obtain their money and the return back. Include all your calculations to support each answer in order to earn full credit. Answers must be completed in sequence.
Required:
(a) Assume that in five years, DigiVault will have an expected exit enterprise value of $48 million, based on an EBITDA multiple of 5.0 from similar exit transactions. What does this indicate the firm's expected EBITDA will be at that time?
(b) Given the future value calculated in (a), what will be the equity value at that time?
(c) Because the VC firm expects a 60% compound return on its investment, what would be the dollar value of its portion of the equity value you calculated in (b)?
(d) Based on your answer in (c), what would be the amount of the equity up front that you would have to give up in order to obtain DigiVault's original venture capital investment?
(e) What will be the dollar value of the management team's original $750,000 equity investment at the time of the liquidity event?