New ventures commonly set aside 10 to 20 percent of company shares at the valuation date f...

New ventures commonly set aside 10 to 20 percent of company shares at the valuation date for employee bonuses and stock options. Modify the valuation of ZMW Enterprises in Panel B of Table to include an employee set aside equal to 20 percent of the company in year 5. Specifically, calculate Touchstone’s required percentage ownership at time 0 under these revised conditions. Assume as before that Touchstone and the second-round venture capital company continue to target returns of 60 percent and 40 percent, respectively.

TABLE

The Venture Capital Method of Valuation