7.

(Series A)

Kathleen has just been contacted by PolyCanyon Ventures (PCV), a Cal Poly-focused investment fund, which is interested in making an investment in her company. PCV plans to buy an equity stake in the company. The startup expects to use the funds received from the financing to improve their product, hire additional developers, and for expenses associated with outreach and onboarding of the private equity and corporate consulting groups.

PCV offers Kathleen $2.5 million for 20% of the company (Teachers note: In real life PCV makes much smaller investments). PCV is nervous that Kathleen hasn't established an option pool and therefore requires a 10% option pool be created before they will invest a single dollar. The parties agree that the share price will be $1 per share. Build the cap table before and after this Series A funding round and use it to answer the following questions.

After the Series A investment Kathleen's company is growing like mad. She and the lead investor from Poly Canyon Ventures (PCV) realize that the company needs to raise another round of financing and finds another venture firm, Tech Coast Capital (TCC), that is willing to take part and lead the Series B round. The Series B investment will close on January 1, 2018 (without bowl games because of social distancing, might as well meet at a lawyers office to sign paperwork).

TCC decides to invest $4.5 million at $3 per share, and PCV decides to invest enough in the Series B round to buy 540,000 additional shares at the same price as TCC of course.

Put together the CAP table before and after the Series B so you can answer the following questions.

Question:

How much is PCV's Investment in Kathleen's company worth BEFORE the Series B round?