OVM Technologies, Inc. (OVM), a tech start-up company, was formed on January 1, 2018 with $250,000 in founder funds (for which founders received 500,000 shares of common stock); and $350,000 in loans from family members and friends. These personal loans have no fixed maturity dates and accrue SIMPLE INTEREST at the rate of 9% per year. It is anticipated that loan principal and all accrued interest will be paid from the proceeds of a future harvest event. Because the founders made a significant initial investment in the company, their shares are FULLY VESTED.

On January 1, 2019, OVM raised $1,500,000 from an early stage Venture Capital fund in return for 1,000,000 shares of $1 par, 7% cumulative dividend on Par, Participating Convertible Preferred Stock (Round 1). The Round 1 investors negotiated the right to BLOCK a Sale of the company for a price which would not yield them at least a 5X return NLT January 1, 2024; FULL RATCHET anti-dilution protection (very rare, but Round 1 investors were in a very strong bargaining position); two seats on OVMs Board of Directors; a 1X Liquidation Preference if harvest happens before January 1, 2022 and a 2X Liquidation Preference if harvest happens between January 2, 2022 and January 1, 2025. The Round 1 investment is subject to a 6X CAP. Any accrued dividends paid at closing WILL COUNT AGAINST THE CAP. No dividends will be paid on Round 1 shares until a liquidation event occurs.

Suppose a second round of 375,000 $1 Par, 5% cumulative dividend on Par, shares of Participating Convertible Preferred Stock is issued to raise $750,000 on January 1, 2021 (Round 2). Round 2 investors also have full ratchet anti-dilution protection, no blocking rights on Sale, but the right to BLOCK additional financing; a 1X Liquidation Preference with no date limitations or enhancements; and NO CAP on total return. As with Round 1, no dividends will be paid to Round 2 investors until a harvest event occurs.

Remember that parties participation rights are based on the percentage of total shares they own, or could own, on an as-if converted basis. (Assume a 1 for 1 conversion rate).

1. As of January 1, 2023 what will the relative (percentage) ownership interests in OVM be on an as-if converted basis? (2 points)
2. Suppose OVM receives an offer to purchase all the equity and assume all the operating debt (other than the family loans) that will NET the stakeholders $ 12,000,000, with closing on the Sale on July 1, 2023. Given the contractual obligations to all investors, how would the $12,000,000 proceeds be distributed? (6 points)
3. Under this scenario, what effect would the negotiated anti-dilution protections have on the rights of the parties? (1point)