Question
Can someone help with the question below? Been muddling through it, especially part 3 of the problem. Question 2 Assume a company had an A-round
Can someone help with the question below? Been muddling through it, especially part 3 of the problem.
Question 2
Assume a company had an A-round in which it sold 10 million shares of convertible preferred
stock at $1.00 per share. Prior to the financing, Founders and Management owned 15 million shares
of common stock. The company needs to raise an additional $5 million in a Series B round and learns
that the investors insist on a pre-money valuation of $15 million. Your assignment is to figure out the
new price per share of Series B convertible preferred stock under three scenarios:
1. There is no dilution protection for prior investors (i.e., there is no price adjustment for prior
investors).
2. There is full ratchet protection (i.e., old investors are issued new shares for free such that
their effective price equals the new price being paid by new investors).
3. There is weighted average dilution protection (i.e., old investors receive additional shares -
free - to lower their effective price paid per share).
Under each scenario, also determine what share of the common stock equivalents outstanding is
owned after Series B by Founders and Management, the Series A, and the Series B investors.
A typical formula for calculating the price adjustments using weighted average dilution
protection is:
NCP= [(OB*OCP) + New$] / OA
where:
NCP = New Conversion Price for Series A Investment
OB = Outstanding Shares Before Offering
OCP = Old Conversion Price
New$ = Amount Raised in Offering
OA = Outstanding Shares After Offering
Note: Outstanding Shares After Offering [OA] is itself a function of the New Conversion Price
[NCP] in that a lower NCP will result in additional shares being issued to holders of this anti-dilution
protection, thus increasing OA and driving an even lower NCP. This circular reference will be
difficult to model in Excel.
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