Dale DePriest looked from one term sheet to the other. It was May 2019, and DePriest had just received two term sheets from Wally Smith of Dillingham Venture Partners (DVP). Smith had agreed to be the lead investor in DePriest's venture, Togiak Networks, and in fact had agreed to seed the writing of the business plan. The plan was to have one other investor in addition to DVP. DePriest and Smith had agreed that the basic terms should be settled before considering other investment firms. Smith had early on proposed that DVP would be willing to take less equity if DePriest would accept a set of terms generally more favorable to the investors. In one option (A), DVP would invest $3 MM in a simple convertible preferred, with the founders owning 22.5% of the fully-diluted shares that would be outstanding (with a 15% allocation for employee options). In the other option (B), the same amount would be invested in participating preferred. In this option, management would start out owning a little over 29% of the post-financing fully-diluted shares outstanding (with a 19.4% allocation for employee options). DePriest agreed to consider the proposal. The two term sheets are summarized below: Amount Security Price Option Pool Founder Shares Option A $3 million Convertible Preferred $1.00 per share 720,000 shares 1,080,000 Option B Same Participating Preferred Same 1,128,000 shares 1,692,000 Questions: 1) a. Under Option A, what percentage of the equity do DVP, the founders, and the option pool each own if DVP converts? What percentage do they each own if DVP does not convert? b. Under Option A, at what exit value is DVP's payoff from converting the same as DVP's payoff from not converting? c. At what exit value is DVP's payoff the same under Option A and Option B? 2) Draw each party's payoff diagram under both Option A and Option B (assuming that the exit is via an acquisition). 3) What can you infer about Dale DePriest and the other founders from the choice they make? Dale DePriest looked from one term sheet to the other. It was May 2019, and DePriest had just received two term sheets from Wally Smith of Dillingham Venture Partners (DVP). Smith had agreed to be the lead investor in DePriest's venture, Togiak Networks, and in fact had agreed to seed the writing of the business plan. The plan was to have one other investor in addition to DVP. DePriest and Smith had agreed that the basic terms should be settled before considering other investment firms. Smith had early on proposed that DVP would be willing to take less equity if DePriest would accept a set of terms generally more favorable to the investors. In one option (A), DVP would invest $3 MM in a simple convertible preferred, with the founders owning 22.5% of the fully-diluted shares that would be outstanding (with a 15% allocation for employee options). In the other option (B), the same amount would be invested in participating preferred. In this option, management would start out owning a little over 29% of the post-financing fully-diluted shares outstanding (with a 19.4% allocation for employee options). DePriest agreed to consider the proposal. The two term sheets are summarized below: Amount Security Price Option Pool Founder Shares Option A $3 million Convertible Preferred $1.00 per share 720,000 shares 1,080,000 Option B Same Participating Preferred Same 1,128,000 shares 1,692,000 Questions: 1) a. Under Option A, what percentage of the equity do DVP, the founders, and the option pool each own if DVP converts? What percentage do they each own if DVP does not convert? b. Under Option A, at what exit value is DVP's payoff from converting the same as DVP's payoff from not converting? c. At what exit value is DVP's payoff the same under Option A and Option B? 2) Draw each party's payoff diagram under both Option A and Option B (assuming that the exit is via an acquisition). 3) What can you infer about Dale DePriest and the other founders from the choice they make