10-4 VC VALUATION AND DEAL STRUCTURING Chariot.com needs $500,000 in venture capital to bring a new Internet messaging service to market. The firms management has approached Route 128 Ventures, a venture capital firm located in the high-tech start-up

Route 128 Ventures believes that the firm will sell for six times EBITDA in the fifth year of its operations and that the firm will have $1.2 million in debt at that time, including $1 million in interest-bearing debt. Finally, Chariot.coms management anticipates having a $200,000 cash balance in five years. The venture capitalist is considering three ways of structuring the financing: 1. Straight common stock, where the investor requires an IRR of 45%. 2. Convertible debt paying 10% interest. Given the change from common stock to debt, the investor would lower the required IRR to 35%. 3. Redeemable preferred stock with an 8% dividend rate, plus warrants entitling the VC to purchase 40% of the value of the firms equity for $100,000 in five years. In addition to the share of the firms equity, the holder of the redeemable preferred shares will receive 8% dividends for each of the next five years, plus the face value of the preferred stock in Year 5.

Titman, Sheridan; Martin, John D. (2014-04-08). Valuation (2nd Edition) (Prentice Hall Series in Finance) (Page 386). Prentice Hall. Kindle Edition.