1. For S³, Selling equity at this stage clearly is not attractive they would have to give up most of the company, as little value has been created so far. So the founders are considering a different funding scheme to delay the valuation until there is more proven value in the company. They want to sell convertible debt to raise the $200k, with a 5% interest rate, and a 20% bonus at conversion. Suppose they are successful, and at the end of one year they have opened the first small restaurant, shown it to be a success, and are now ready to open two slightly larger restaurants. Their estimate is that they will need $1 million for this next stage, which they will raise by selling preferred stock in a priced round.
   1. If the company now has a pre-money valuation of $2 million (present value), how much of the company will they need to sell to raise the $1 million?

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2. The debt will now convert, also into preferred shares. What % ownership of the company will the convertible debt holders receive?

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3. What % of the company will the founders retain after the priced round and conversion?

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4. How much of the company (in %) will each group own: founders, the convertible debt investors, and the priced round investors?
   1. Founders:
   2. Convertible debt holders:
   3. Priced-round investors:

5. If the founders own 100,000 shares, how many total shares will be outstanding after the new financing and conversion of the debt?

6. How many shares will the company sell to the new investors, and at what price?

7. How many shares will the convertible debt investors receive, and what will the value per share be?

8. Suppose there were a valuation cap of $1 million. What would the ownership percentages be after conversion for the founders, first round investors, and second round investors?

1. How would the answer to the previous question change if the valuation cap were $3 million?