As highlighted in Exhibit 1: Convertible Preferred Payout Diagram (above), an investment in convertible preferred equity can create a range over which the VCs portion of the exit proceeds is increasing while the proceeds to the entrepreneurs are flat (i.e., the entrepreneur doesnt get any money, even though the total pool of exit proceeds is increasing).

A) Why would this make sense?

B) Refer to Exhibit 1: Convertible Preferred Payout Diagram (above). How would you characterise the inflection point in the Exit value to VC line that occurs where zones B and C meet? At what value will the line between zone B and C start to increase?

Enterprise value to be divided at exit Entrepreneur percentage Post-money valuation Exit value to VC Venture Capital investment VC percentage 1 Value of the enterprise B Legend: Enterprise value to be divided at exit Post-money valuation Venture Capital investment Exit value to VC