Create one exhibit showing your calculations of the company value, future cash requirements, and the implications for John's net worth of his equity split decision.

Exhibit 2: Carbon 6 financial projections 1 $400,000 $120,000 30% $280,000 2 3 $800,000 $1,600,000 $240,000 $480,000 30% 30% $560,000 $1,120,000 70% 70% 4 $3,200,000 $960,000 30% $2,240,000 5 $6,400,000 $1,920,000 30% $4,480,000 70% 70% 70% $320,000 $1,152,000 20% 18% Year Total Revenue Total COGS COGS % of revenue Gross Profit Gross profit % of revenue Expenses: Sales and Marketing Expense S&M % of revenue R&D Expense R&D % of revenue SG&A SG&A % of revenue Depreciation Expense Operating Profit (EBIT) Operating profit % of revenue Income Taxes Net Income NI % of revenue Working capital (year end) WC % of revenue Capex CapEx % of revenue $120,000 30% $60,000 15% $300,000 75% $80,000 $280,001 $200,000 25% $80,000 10% $375,000 47% $80,000 -$175,001 -22% $52,500 -$122,501 -15% $159,587 20% $608,000 19% $256,000 8% $585,938 18% $80,000 $710,062 22% $213,019 $497,043 16% $488,417 15% $512,000 8% $732,422 11% $80,000 $2,003,578 -70% $128,000 8% $468,750 29% $80,000 $123,249 8% $36,975 $86,275 5% $277,931 17% $200,000 13% 31% -$84,000 $196,001 -49% $89,536 22% $400,000 100% $601,073 $1,402,504 22% $877,858 14% Cash Flow $605,537 $112,552 $152,069 $366,558 $1,093,064 Since their early results were so promising, they wanted to get a bigger return. Still, their plan had its risks. Kickstarter occasionally decides to cancel projects. If a project is deemed to have violated Kickstarter's rules, it does not get funded. If this happened John and Claire would be left with a $20,000 in personal debt and no money to repay it. Trouble a Brewing After only two weeks the project had gained substantial momentum and had reached $125,000 in pledged funds. Now that the Kickstarter campaign had exceeded expectations, Daniel and Heather began to seriously talk about their 33% ownership stake in the company. John was flabbergasted. How could they have the gall to think he owed them anything? John remembered: It started to get really ugly. On the one hand, we felt that Daniel and Heather really didn't have a claim to the equity. On the other hand, I wanted to be a man of my word. When we all thought the project would be fairly small at $11,500 Daniel and Heather didn't feel it was worth their time. They didn't contribute any effort or money, but I had promised them 33%. "I decided to offer them a buyout of $4,000 which seemed reasonable. At first they accepted my offer, but later changed their minds. They started talking to their father and brother, who were both lawyers. They said they had a legal claim on 1/3 of the profits from the project. They also threatened to sue us if we didn't honor our agreement." John estimated that if his partners sued him he would have to pay $25,000 in legal fees whether he won the suit or not. He believed that Daniel and Heather had a pretty low probability of winning - possibly 10% but if they won they would retain 33% of the company equity. If they lost, John would get their share of the equity for himself. With the project on track to reach more than $300,000 in total proceeds, John worried about how much it would cost him to satisfy his co-founders. Worse yet, John expected to have to raise additional outside capital as the company achieved scale. How would dead-beat cofounders owning such a large share of equity affect an investor's willingness to invest in the company? How would it affect the valuation, if at all? How much would it take to placate Daniel and Heather? Should John retain them as equity partners or risk a lawsuit? If he retained them, how much would it cost him in dollars? John researched luxury jewelry brands and found that company valuations could be based on transaction multiples of 10X EBITDA. (See Exhibit 5.) Could John use these data to estimate the value of Carbon 6? To make matters worse, John received a menacing email from Red Robin. Apparently, now that Carbon 6 was a hot idea, Red Robin felt threatened. Robin asked that John to cease and desist from promoting his project, claiming that John's rings infringed on Red Robin's invention and violated his intellectual property rights. John had searched for US patents covering luminescent carbon rings. He believed he was not violating any patents, but he wasn't 100% sure. He worried whether or not he was breaking the law with his rings. More importantly, he just wanted to do the right thing and now questioned what that was. Red Robin began attacking Carbon 6 in the online community and social media, trying to dissuade backers from supporting Carbon 6. Exhibit 2: Carbon 6 financial projections 1 $400,000 $120,000 30% $280,000 2 3 $800,000 $1,600,000 $240,000 $480,000 30% 30% $560,000 $1,120,000 70% 70% 4 $3,200,000 $960,000 30% $2,240,000 5 $6,400,000 $1,920,000 30% $4,480,000 70% 70% 70% $320,000 $1,152,000 20% 18% Year Total Revenue Total COGS COGS % of revenue Gross Profit Gross profit % of revenue Expenses: Sales and Marketing Expense S&M % of revenue R&D Expense R&D % of revenue SG&A SG&A % of revenue Depreciation Expense Operating Profit (EBIT) Operating profit % of revenue Income Taxes Net Income NI % of revenue Working capital (year end) WC % of revenue Capex CapEx % of revenue $120,000 30% $60,000 15% $300,000 75% $80,000 $280,001 $200,000 25% $80,000 10% $375,000 47% $80,000 -$175,001 -22% $52,500 -$122,501 -15% $159,587 20% $608,000 19% $256,000 8% $585,938 18% $80,000 $710,062 22% $213,019 $497,043 16% $488,417 15% $512,000 8% $732,422 11% $80,000 $2,003,578 -70% $128,000 8% $468,750 29% $80,000 $123,249 8% $36,975 $86,275 5% $277,931 17% $200,000 13% 31% -$84,000 $196,001 -49% $89,536 22% $400,000 100% $601,073 $1,402,504 22% $877,858 14% Cash Flow $605,537 $112,552 $152,069 $366,558 $1,093,064 Since their early results were so promising, they wanted to get a bigger return. Still, their plan had its risks. Kickstarter occasionally decides to cancel projects. If a project is deemed to have violated Kickstarter's rules, it does not get funded. If this happened John and Claire would be left with a $20,000 in personal debt and no money to repay it. Trouble a Brewing After only two weeks the project had gained substantial momentum and had reached $125,000 in pledged funds. Now that the Kickstarter campaign had exceeded expectations, Daniel and Heather began to seriously talk about their 33% ownership stake in the company. John was flabbergasted. How could they have the gall to think he owed them anything? John remembered: It started to get really ugly. On the one hand, we felt that Daniel and Heather really didn't have a claim to the equity. On the other hand, I wanted to be a man of my word. When we all thought the project would be fairly small at $11,500 Daniel and Heather didn't feel it was worth their time. They didn't contribute any effort or money, but I had promised them 33%. "I decided to offer them a buyout of $4,000 which seemed reasonable. At first they accepted my offer, but later changed their minds. They started talking to their father and brother, who were both lawyers. They said they had a legal claim on 1/3 of the profits from the project. They also threatened to sue us if we didn't honor our agreement." John estimated that if his partners sued him he would have to pay $25,000 in legal fees whether he won the suit or not. He believed that Daniel and Heather had a pretty low probability of winning - possibly 10% but if they won they would retain 33% of the company equity. If they lost, John would get their share of the equity for himself. With the project on track to reach more than $300,000 in total proceeds, John worried about how much it would cost him to satisfy his co-founders. Worse yet, John expected to have to raise additional outside capital as the company achieved scale. How would dead-beat cofounders owning such a large share of equity affect an investor's willingness to invest in the company? How would it affect the valuation, if at all? How much would it take to placate Daniel and Heather? Should John retain them as equity partners or risk a lawsuit? If he retained them, how much would it cost him in dollars? John researched luxury jewelry brands and found that company valuations could be based on transaction multiples of 10X EBITDA. (See Exhibit 5.) Could John use these data to estimate the value of Carbon 6? To make matters worse, John received a menacing email from Red Robin. Apparently, now that Carbon 6 was a hot idea, Red Robin felt threatened. Robin asked that John to cease and desist from promoting his project, claiming that John's rings infringed on Red Robin's invention and violated his intellectual property rights. John had searched for US patents covering luminescent carbon rings. He believed he was not violating any patents, but he wasn't 100% sure. He worried whether or not he was breaking the law with his rings. More importantly, he just wanted to do the right thing and now questioned what that was. Red Robin began attacking Carbon 6 in the online community and social media, trying to dissuade backers from supporting Carbon 6