4. Jonna Vella, Inc. is raising $250,000 in early stage money to fund development of their prototype. The company is still in a very early stage, and doesn't feel ready to put a valuation on themselves. So they are raising this round as a convertible debt round with the following parameters: The debt will convert to equity on the first priced round, at the valuation of the firm in that priced round, plus a 20% bonus. The debt will earn 7% per year until conversion (which will be rolled into the total value of the debt). Suppose that the company raises $1.5 million in a priced round in three years, and that the round values the company at $10 million. a. How much will the debt be worth (in dollars) at the time of conversion? b. What % ownership of the company will that represent, at the time of conversion? (Use the post-money valuation] c. What % ownership of the company will the new investors want for their $1.5 million? BUS 451: Venture Formation and Finance Brad Barbeau d. If the founders own 100,000 shares, how many shares will the new investors receive? e. How many shares will the convertible debtholders receive at conversion? f. Create a table to show the shares owned, and corresponding % ownership, by each of the three groups (founders, convertible debt investors, equity investors) after conversion. Shares Owned % Ownership Founders Equity Investors Conv. Debt Investors TOTAL g. Suppose that the convertible debt investors try to negotiate a larger "bonus" of 25% to their investment. Who would benefit from this, and who would lose? Show calculations to demonstrate who benefits and who loses. h. Suppose that the convertible debt investors receive the original 20% bonus but negotiate a valuation "cap" of $5 million. This means that their debt would convert as if the company were worth no more than $5 million, regardless of the valuation from the 4. Jonna Vella, Inc. is raising $250,000 in early stage money to fund development of their prototype. The company is still in a very early stage, and doesn't feel ready to put a valuation on themselves. So they are raising this round as a convertible debt round with the following parameters: The debt will convert to equity on the first priced round, at the valuation of the firm in that priced round, plus a 20% bonus. The debt will earn 7% per year until conversion (which will be rolled into the total value of the debt). Suppose that the company raises $1.5 million in a priced round in three years, and that the round values the company at $10 million. a. How much will the debt be worth (in dollars) at the time of conversion? b. What % ownership of the company will that represent, at the time of conversion? (Use the post-money valuation] c. What % ownership of the company will the new investors want for their $1.5 million? BUS 451: Venture Formation and Finance Brad Barbeau d. If the founders own 100,000 shares, how many shares will the new investors receive? e. How many shares will the convertible debtholders receive at conversion? f. Create a table to show the shares owned, and corresponding % ownership, by each of the three groups (founders, convertible debt investors, equity investors) after conversion. Shares Owned % Ownership Founders Equity Investors Conv. Debt Investors TOTAL g. Suppose that the convertible debt investors try to negotiate a larger "bonus" of 25% to their investment. Who would benefit from this, and who would lose? Show calculations to demonstrate who benefits and who loses. h. Suppose that the convertible debt investors receive the original 20% bonus but negotiate a valuation "cap" of $5 million. This means that their debt would convert as if the company were worth no more than $5 million, regardless of the valuation from the
