Dan will appear on Shark Tank and ask for $75,000 in exchange for 12% equity in his company, Tinker Toys Gone Wrong. What Pre-money valuation is Dan using here?

Question

BlackTom AI · Accepted Answer

Let's break down the deal step by step to see how the valuations are derived.
Option analysis:
Option "$75,000": This value is the amount Dan is asking for to invest, not the company valuation. Using only the investment amount ignores the equity stake and leads to a misunderstanding of post-money and pre-money values.
Option "$1,000,000": This figure would imply a different implied ownership if interpreted as post-money or pre-money without calculation. If the investment were $75,000 for 12%, the implied valuation would not match $1,000,000, making this option inconsistent with the stated terms.
Option "$625,000": This number corresponds to the post-money valuation calculated from the investment and ownership percentage, since $75,000 invested for 12% implies a post-money value of $75,000 ÷ 0.12 = $625,000. It represents the value of the company after the investment is included.
Option "$9,000": This is far too small to be related to either pre- or post-money valuations given a $75,000 investment for 12% equity. It misinterprets the scale of the deal altogether.
Option "$750,000": This figure could be encountered if one mistakenly applied a rough proportion (e.g., thinking 12% corresponds to $75k of $750k total) but that would yield an ownership mismatch and incorrect math compared to the actual 12% stake tied to the investment.
Option "$550,000": This is the pre-money valuation. It is derived by taking the post-money valuation ($625,000) and subtracting the new investment ($75,000): $625,000 – $75,000 = $550,000. This represents the company’s value before the new funding round, consistent with the given terms.
Conceptual idea check:
- Post-money valuation = investment amount ÷ ownership percentage = $75,000 ÷ 0.12 = $625,000.
- Pre-money valuation = post-money minus new investment = $625,000 − $75,000 = $550,000.
- The correct understanding aligns the 12% equity with the $75,000 investment and yields the $550,000 pre-money figure.
Common pitfalls to avoid:
- Confusing pre-money with post-money by using only the investment or the equity percentage without the arithmetic ties.
- Treating the implied valuation as $75,000 or $750,000 without applying the 12% stake, which misrepresents the economics of the deal.
- Assuming a different equity percentage or a different numerator/denominator in the calculation, which would break the stated terms of 75k for 12%.

MGT_2064_17971_202501 Final Exam

Dan will appear on Shark Tank and ask for $75,000 in exchange for 12% equity in his company, Tinker Toys Gone Wrong. What Pre-money valuation is Dan using here?

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