EBV is considering a $6M Series A investment in Newco. EBV proposes to structure the investment as 5M shares of convertible preferred stock. The founder and employees of Newco have claims on 10M shares of common stock. Thus, following the Series A investment, Newco will have 10M common shares outstanding and would have 15M shares outstanding on conversion of the CP. EBV estimates a 30 percent probability for a successful exit, with an expected exit time in 5 years and an exit valuation of $300M. The $100M EBV fund has annual fees of 2 percent for each of its 10 years of life and earns 20 percent carried interest on all profits. Assume the following: The cost of venture capital is 10%; Expected GVM =2.5; expected retention for first round investors is 50%. GP% = 10%. Apply standard assumptions listed in the textbook and lecture notes for additional data and information required for the valuation. What is the proposed ownership today at the time of investment?

16.65%

33.3%

40.0%

What is the proposed ownership at exit (final ownership)?

16.65%

33.3%

40.0%

What is the target multiple of the money?

4.22

5.37

6.35

What is the target return of the money?

15.7%

39.95

46.5%

How much is the lifetime management fee?

$20M

$10M

$30M

Will GPs recommend the Investment following Standard VC method?

Yes, since the Partial Valuation ($M) =$9.65M which is higher than required investment of $6M.

No, since the Partial Valuation ($M) =$9.65M which is higher than required investment of $6M.

Yes, since the Partial Valuation ($M) =$7.76M which is higher than required investment of $6M.

No, since the Partial Valuation ($M) =$5.46M which is lower than required investment of $6M.

Will LPs accept the investment following Modified VC method?

Yes, since the LP valuation = $9.49M and LP Cost =$5.25M

Yes, since the LP valuation = =$5.25M and LP Cost =$9.49M

Yes, since the LP valuation = $8.71M and LP Cost =$7.5M

No, since the LP valuation = $6.99M and LP Cost =$7.5M.