EBV is considering a $5M Series A investment in Newco. EBV proposes to structure the investment as 6M shares of convertible preferred stock. The employees of Newco have claims on 10M shares of common stock. Thus, following the Series A investment, Newco will have 10M common shares outstanding and would have 16M shares outstanding on conversion of the CP. EBV estimates a 25 percent probability for a successful exit, with an expected exit time in 5 years and an exit valuation of $500M. The $100M EBV fund has annual fees of 2 percent for each of its 10 years of life and earns 20 percent carried interest on all profits.

(a) What is your investment recommendation for EBV? (Show all steps.)

(b) How sensitive is this recommendation to different assumptions about the exit valuation and the probability of success?

(c) Given the evidence described in Chapter 7, do you think that 25 percent is an aggressive assumption about the probability of success for a first-round investment?