1) SLE Ventures is making an $8M Series A investment in MemChu TechCo. The founders and employees of MemChu (together called the founders) have claims on a total of 12M shares of common stock (as exercised).

a) SLE is deciding among the following six deal structures for this transaction:

I. 8M shares of Convertible Preferred

II. 8M shares of common

III. Redeemable Preferred ($8M APP) + 8M shares of common

Draw an exit diagram for each structure. Mark any key x-axis and y-axis values, and any key slope angles on the diagrams. Please show your calculations.

b) For Structure I and III, what is the $W on the x-axis of the exit diagram such that SLE earns a deal-level gross value multiple (GVM) of 2 on the investment? Show your steps.

2) Crothers Ventures (CV) is considering an $8M Series A investment for CP at $1 per share in Lagunita Inc. The founders and employees of Lagunita have claims on a total of 12M shares of common stock (as exercised). Thus, following the Series A investment, Lagunita will have 12M common shares outstanding (on as-exercised basis) and would have 20M shares outstanding upon conversion of Series A CP. Crothers estimates a 25% probability for a successful exit, with an expected exit in four years, and an exit valuation of $300M. The $300M CV II has annual fees of 2.0% of committed capital for each of its ten years of life, and earns 20% of carried interest on all profits after return of committed capital. Assume retention of 50%.

a) Using the modified VC method (as covered in class 17 and Chapter 10), what is your investment recommendation for CV? Please label each term and show all of your steps. (Assume that the VC cost of capital is 10% for this question.)

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

3) Perform a reality-check DCF analysis for a high-growth, publicly traded company of your choice. (Use DCF.xlsx as a starting template.) What assumptions (if any) would be necessary to justify the companys current market valuation? Do you think those assumptions are realistic for the company? Why and why not? Points will be awarded for demonstration of critical and analytical thinking, as well as for performing sound quantitative analysis. In other words, please try to go beyond just stating The market valuation is justified/unjustified find out and explain which model inputs affect the valuation significantly, and why you think the particular parameter values are realistic or unrealistic for the company of your choice.