QUESTION ONE [30 MARKS]

A VC has a target rate of 70% per annum, makes an investment of $2.0 million today, and foresees an exit of $60 million in five years. The exit value includes the $2.0 million investment. There are currently 250,000 shares.

a) The probability of success (exit at $60 million) is 15% and the probability of failure (exit at $0) is 85%. What is the expected IRR?

b) Suppose an option pool of 40,000 shares is created. To maintain the same ownership percentage as in part a), how many new shares does the VC require?

c) Assume there is not an option pool. The investment by the VC above constitutes the Series A round. Now suppose there are three investment rounds, each by a different investor. The Series B and Series C rounds are for 25% and 20% of the company, respectively. If the Series A investor wants to maintain its goal stake, what ownership percentage does the Series A investor require after the Series A round? Assume the Series B investor wants to maintain its goal stake as well.