CASE

Terry and Maria have started a company. They started out sharing the equity equally and subsequently completed a seed round with friends and family Angels, selling $$1\mathrm{.}0$ million of common stock at a pre$-$money valuation of $$2\mathrm{.}5$ million. They did not create a pool of unallocated options for additional employees at the close of the seed round. At the close of the seed round there are $7\mathrm{.}0$ million shares outstanding. The company$$s product was being well received, and they were getting real traction in the marketplace. But like most new companies, additional capital was needed to grab market share and enhance the product offering. They raised a Series A round and one investor; Mulch Ventures took the whole round of $$3$ million at a pre$-$money valuation of $$12$ million. The step up in valuation from the seed round was quite healthy, and the rest of the terms were at market for the current financing environment. In their pro$-$formas at the time of the Series A$,$ they projected that by Q$42022$ they would have $230,000$ customers paying on average $$50/$year for their product. Instead, they now project they will have $190,000$ customers paying an average of $$45/$year$.$ But the customer growth is steady and does not seem to be leveling off. The founders believe the company will be an attractive acquisition target, and the exit could be as high as $$175$ million. As is often the case with founders, Terry and Maria have different explanations for why the targets have not been met and what needs to happen to accelerate the company$$s growth. Maria, who is the CEO and leads the technical team, believes Terry has not hired the right leadership in sales and marketing. Terry believes they would be blowing through the original targets if their product had more of the features offered by competitors. Despite their conflict, they have three term sheets for a Series B$.$ They are lucky that the market is hot, and valuations are high. Mulch Ventures has agreed to invest another $$2\mathrm{.}5$ million at the terms the lead investor for Series B negotiates with the Board. The founders have really found Mulch to be valuable, and they appreciate their constructive presence on the Board. They want to include them in the Series B$.$ Mulch$$s investment will be on top of any amount that the Board accepts from the new investors. All the potential new investors have agreed. All potential new investors have also agreed that an option pool of $1\mathrm{.}2$ million shares will be created at the Series B$,$ and it is included in the pre$-$money capitalization. Maria and Terry are terrifically excited that they have so much interest.

However, they are worried that many are predicting that the window for financing will tighten considerably in second half of $2022.$ Also, as the term sheets came rolling in$,$ Maria and Terry learned from a member of their team that the company$$s database containing customer information may have been compromised. You now must evaluate offers from Rocco Ventures, KT$8$ Ventures and Eagle Ventures. You can only take one as your lead.