Crothers Ventures (CV) is considering an $8M Series A investment for CP at $1 per share in Lagunita Inc. The founders and employees of Lagunita have claims on a total of 12M shares of common stock (as exercised). Thus, following the Series A investment, Lagunita will have 12M common shares outstanding (on as-exercised basis) and would have 20M shares outstanding upon conversion of Series A CP. Crothers estimates a 25% probability for a successful exit, with an expected exit in four years, and an exit valuation of $300M. The $300M CV II has annual fees of 2.0% of committed capital for each of its ten years of life, and earns 20% of carried interest on all profits after return of committed capital. Assume retention of 50%.

a) Using the modified VC method (as covered in class 17 and Chapter 10), what is your investment recommendation for CV? Please label each term and show all of your steps. (Assume that the VC cost of capital is 10% for this question.)

b) How sensitive is your recommendation to different assumptions about the exit valuation and the probability of success?