Company Z raises 30 on 40 with VC taking convertible preferred with a conversion price equal to the current share price implied by post money valuation. The conversion rate is 1 PS for 1 CS. Founders originally had 10M shares. The founders believe that either the company grows to $600M if their product work as expected or $300M if it is functional but not spectacular. a) What would VC get in following cases: Value of company at exit is $$20M; 50M; $90M; $300M. What would founders get in those cases? b) Suppose now the convertible preferred has full participation feature. What would the VC get when exit valuation is $50M; $90M and $300M? What would founders get in those cases? f) Suppose you are able to cap the participation to 3 times OPP. At what value of the firm would the VC convert voluntarily? What would VC and founders get in each of the above exit scenarios?

Look at C. What approach is correct?

OPP PPS = $4 Cap Price 3*4 = $12 a share

Shares = $30MM / $4 PPS = 2,500,00 shares

VC ownership = 2,500,00/ 12,5000,00 = 20%

Thus, founders ownership = 80%

VC would convert voluntarily @ $150MM.

($30MM / 20%)

Exit @ $50M: VC receives 20%*($50MM-$30MM) = $4MM + $30MM = $34MM Founders receives $16MM

Exit @ $90M: VC receives 20%*($90MM-$30MM) = $12MM + $30MM = $42MM Founders receives $48MM

Exit @ $300M: VC receives 20%*($300MM-$30MM) = $54MM + $84MM = $138MM Founders receives $162MM

VC shares 17,500,000 * 42.8571% = 7,500,000 shares

VC Cap = $12 * 7.5MM = $90MM

90MM = 30MM + 42.8571% (X 30MM)

60MM = 42.8571% - 12,857,130

72,857,130 / .428571 = X

X = $170,000,000

$90M / .428571 = $210,000,210