1. You need financing for your startup for a total of $50M. Of this amount, you need $20M right now and you can wait one year for the remainder $30M. Next year, news about product development prospects will have come out. Probability of good news is 70% with certain payoff of $250M. Probability of bad news is 30% with 10% chance of success (payoff $250M) and 90% chance of complete failure of product.

1. What is value of company with staging? Without staging? Why is value different?

2. What is the VC ownership and founder ownership if funding is not staged?

3. What is VC ownership and founder ownership if funding is staged?

2. Suppose you need a total of $100M in financing, $40M of which is needed right away and remainder in one year. Next year, news about product development prospects will have come out. Probability of good news is 80% with certain payoff of $400M. Probability of bad news is 20% with 10% chance of success (payoff $400M) and 90% chance of complete failure of product.

1. What is value of company with staging? Without staging? Why is value different?

2. What is the VC ownership and founder ownership if funding is not staged?

3. What is VC ownership and founder ownership if funding is staged?

CARRIED INTEREST (Players)

3. Sunny Bird Ventures is considering two alternative carry structures for its SBV II. Structure 1: allows for 25% carry with a basis of all committed capital. Structure 2: allows for 20% carry with a basis of all investment capital. Committed capital is $ 250 M. Management fees are 2.5% of committed capital every year of fund duration of 10 years. Suppose total cumulative distributions for 10 years is $400 M.

a) How much carry would GP get under 1 and 2? Which is better for the GP?

b) What is the breakeven amount of distributions that makes GP indifferent between structure (1) and (2)?

4. Suppose Fund III has $250M in committed capital with 25% carried interest and carry basis of all committed capital. Priority return of 10% with 100% catch-up. Suppose all committed capital is drawn down on first day of fund. Total exit proceeds of $320M. Suppose also that $275M of these proceeds come at end of year 1, $15M in year 2 and remainder in year 3.

a) How much will LP and GP receive in each of year 1, 2 and 3.

b) Compare the total carry for GP with and without catch-up.

c) Suppose proceeds for this fund were $300 with $250 disbursed in year 1, $35M in year 2 and $15M in year 3. What would LP receive in each year with and without catch-up?

VALUATION (one round)

5. Venture is formed with 2,000,000 shares held by founders. New investor contributes $1M to venture. Exit time is in 5 years. Investor demands 50% annualized return. Venture income of $1,000,000 @ exit. A similar venture recently sold shares to the public for $20M with venture earnings of $2M.

a) What is the ownership of the VC?

b) How many shares will be issued for VC?

c) What is the issue share price?

VALUATION (Cap table)

6. At inception, founders owned 4 million shares at $0.20 a share. Two years later, they raised first round of financing in the amount of $1.5M for a total of 1 million shares. In an unanticipated second round of funding, the second VC invests $3.3M for 25% of the ownership.

What is the pre-money and post-money valuation after the first round?

What is the dilution of founders in the first round? In the second round?

Find the implied share price for each round? Is the second round, an up round or a down round?

What is the wealth of the first VCs ownership after second round?

Fill in the values in Cap Table below based on calculations that are shown in detail regarding # shares, equity value, % ownership and price per share.

	Price per share			Price per share			Price per share
	# Shrs	Equity	%Own	# Shrs	Equity	%Own	# Shrs	Equity	%Own
Founders
1st VC
2nd VC
Total

VALUATION (two rounds)

7. Suppose you are getting $500,000 in financing from VC1. VC1 required IRR is 50% for first 2 years and 25% for last two years. Exit is expected in 4 years at $4M. Founders have 1 M shares.

1. What is percent ownership required by VC?
2. What is ownership of founders after financing round?
3. What is post money and pre money?
4. What is the share price?

Unexpectedly, a second investment of $1M is needed at end of year 2 and VC2 makes that investment.

e. What is the proportion ownership that VC2 will require?

f. How will that affect ownership of VC1 and founders. Give their specific percentage ownership.

g. What is total number of shares after second round?

h. What is the price per share after second round? Is it an up or down round? Why?

1. Suppose VC1 knew that more financing will be needed in year 2, what would be the ownership that she would require in first round?

10. Following up on (i), what would be ownership of founders after round two?

VALUATION (in tranches)

8. Suppose a venture needs financing from a VC in amount of $3.5M. The VC requires 50% rate of return. The expected PE ratio for such businesses is 15x. Ventures estimated earnings in year of exit, year 5, are $2.5M. Founders have 1,000,000 shares outstanding prior to VC investment.

a) What is the size of the pie at exit?

b) What percentage ownership will the founders have?

c) What is the number of new shares issued?

c) What is the share price after the investment?

e) What is the wealth of the VC? Of the founders (i.e., pre-money)? What is post-money value?

Suppose that the VC more realistically decides to stage the financing so that in year 0, she pays $1.5M, in second round in year 2 for $1M and in third round in year 4 $1M in funding occurs. Given that the investment is less risky with time, the discount rate demanded in year 3 is 40% and for year 4, discount rate is 25%.

f) What is the % ownership of VC after first round? What is % VC ownership right after second round? After third round? Take into account the dilution effect

7. What is the % ownership of VC after three rounds? Why is this different than ownership of VC in part (A) of the question?

h) What are the numbers of shares after each round?

i) What is the share price after each round?