Problem 1 (20 Points) Marty Jones is negotiating with a Venture Capital Fund for $10 MIL financing for his new venture Marty is the sole founder and owns 100 of the companys equity He is adamant that he must keep a 60 interest in the company after external capital is raised A VC investor believes an 10X return in NLT 5 years is an appropriate return for the risk associated with this investment The company has just begun generating revenue, and it does not expect to generate positive Cash Flow (CF) until Year 2 Discreet Cash Flow projections prepared from pro forma financial statements are presented below After the discreet forecasting period (Yr 4), Rick and the VC expect CFs to grow by 3 5 per year in perpetuity Year Cash Flow 1 $ 2,800,000 2 $ 1,000,000 3 $ 3,750,000 4 $ 11,000,000 What imputed rate of return demanded by the investor (3) Given that required rate of return, what value would the VCs probably give to projected Discreet Period pro forma CFs (3) What is the firms Terminal Value (TV) (2) What is the Present Value of the firm (2) At that valuation how much of the company will Marty have to give up to raise $10 million and will he do the deal 20 points Question 17 Problem 2 (20 points) Your start up company has been funded as follows Investment ownership Preference Cap Family Loans (Yr 0) $ 1,250,000 0 na na Founders Investment (YR 0) $ 500,000 40 (0) na Round 1 Investment (YR 2) 4,000,000 35 (2X) None Round 2 Investment (YR 3) 5,000,000 25 (1X) 2X The family loans carry a 14 coupon cumulative simple interest rate however the company was only able to pay $50,000 interest in Year 1 and $ 80,000 interest in Year 3 In Year 6 the company is considering a $31,000,000 purchase offer from larger competitor Round 1 and Round 2 investors hold CONVERTIBLE, fully PARTICIPATING Preferred Stock Participation is in the s indicated above Round 1 Shares earn 8 CUMULATIVE annual Dividends and Round 2 Shares earn 6 CUMULATIVE annual Dividends No Dividends have been paid prior to the Sales Transaction Assume preference will be paid in order of investment (i e Round 1 gets paid first) How will the net sale proceeds be distributed to each stakeholder and what are their rates of returns assuming the deal closes during Year 6 Family lenders Round 1 Investors Round 2 Investors Founders

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Problem 1 (20 Points) Marty Jones is negotiating with a Venture Capital Fund for $10 MIL financing for his new venture. Marty is the sole

Problem 1 (20 Points)

Marty Jones is negotiating with a Venture Capital Fund for $10 MIL financing for his new venture. Marty is the sole founder and owns 100% of the companys equity. He is adamant that he must keep a 60% interest in the company after external capital is raised.

A VC investor believes an 10X return in NLT 5 years is an appropriate return for the risk associated with this investment.

The company has just begun generating revenue, and it does not expect to generate positive Cash Flow (CF) until Year 2. Discreet Cash Flow projections prepared from pro forma financial statements are presented below. After the discreet forecasting period (Yr 4), Rick and the VC expect CFs to grow by 3.5% per year in perpetuity.

Year	Cash Flow
1	$ -2,800,000
2	$ 1,000,000
3	$ 3,750,000
4	$ 11,000,000

1. What imputed rate of return demanded by the investor? (3)
2. Given that required rate of return, what value would the VCs probably give to projected Discreet Period pro forma CFs? (3)
3. What is the firms Terminal Value (TV)? (2)
4. What is the Present Value of the firm? (2)
5. At that valuation; how much of the company will Marty have to give up to raise $10 million and will he do the deal?

20 points

Question 17

Problem 2 (20 points)

Your start-up company has been funded as follows:

	Investment	% ownership	Preference	Cap
Family Loans (Yr 0)	$ 1,250,000	0	na	na
Founders Investment (YR 0)	$ 500,000	40%	(0)	na
Round #1 Investment (YR 2)	4,000,000	35%	(2X)	None
Round #2 Investment (YR 3)	5,000,000	25%	(1X)	2X

The family loans carry a 14% coupon cumulative simple interest rate; however the company was only able to pay $50,000 interest in Year 1 and $ 80,000 interest in Year 3.

In Year 6 the company is considering a $31,000,000 purchase offer from larger competitor. Round #1 and Round #2 investors hold CONVERTIBLE, fully PARTICIPATING Preferred Stock.

Participation is in the %s indicated above. Round #1 Shares earn 8% CUMULATIVE annual Dividends; and Round #2 Shares earn 6% CUMULATIVE annual Dividends. No Dividends have been paid prior to the Sales Transaction. Assume preference will be paid in order of investment (i.e Round 1 gets paid first)

How will the net sale proceeds be distributed to each stakeholder and what are their rates of returns assuming the deal closes during Year 6?

Family lenders:

Round 1 Investors:

Round 2 Investors:

Founders: