Lockhart&Stark, a VC firm, has invested $ 3 million for 30% of the company, Banana. Palm, a leader in the same industry with Banana, is considering to acquire Banana. Answer the questions in the following situations.

a) Would the deal be structured as all-common? Why?

b) If the deal is structured as redeemable preferred (with face value $2.5 million) and common stocks, and Palm offers Banana $4.5 million. What are the net proceeds to Lockhart&Stark and Banana.

c) The deal is structured as participating convertible preferred with 2X liquidation preference, and Palm offers Banana $12 million. What are the net proceeds to Lockhart&Stark and Banana.

d) The participating convertible preferred in c) is combined with a term that the 2X liquidation preference is only valid when the exit value is less than $ 16 million. Calculate the range for the exit value where Lockhart&Stark may have a distorted incentive (prefer a lower exit value).

e) What is your suggestion to remedy the distorted incentive for Lockhart&Stark in d)?