Assume that EBV has made $5M Series A investment in Newco. EBV proposes to structure the investment as 6M shares of convertible preferred stock. One year later, Talltree has made $10M Series B investment in Newco. Talltree proposes to structure the investment as 8M shares of convertible preferred stock.

Assume that EBV and Talltree invested in Newco as series A and B, and it is now one year later. Owl is considering a $30M Series C investment in Newco. Owl proposes to structure the investment as 12M shares of convertible preferred stock. The employees of Newco have claims on 14M shares of common stock, and the previous venture investors hold 6M shares of Series A convertible preferred (EBV) and 8M shares of Series B Convertible Preferred (Talltree). Thus, following the Series C investment, Newco would have 40M shares outstanding on conversion of the CP. Owl estimates a 40 percent probability for a successful exit, with an expected exit time in three years, and an exit valuation of $700M.

The $500M Owl fund has annual fees of 2 percent for each of its 10 years of life and earns 25 percent carried interest on all profits. GVM is 2.5 for all Owls investments.

Assumption:

LPs expected rate of return is 10%.

The typical retention by round is:

1st round = 50%, 2nd round = 60%, 3rd round = 67%, 4th round or later = 70%.

What is your investment recommendation for Owl?

Achtung! (Links to an external site.) The question is about Series C investment by Owl.

Answer the following questions with supporting works at the end of the answer.

Investment recommendation for GPs?

Investment recommendation for LPs?

Target multiple?

Target rate of return in percentage?

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