QUESTIONS

Why do venture capitalists use preferred stock?

If you were an entrepreneur, how would you think of the difference between a preferred$-$plus$-$cheap$-$

common structure and a convertible preferred structure?

How does the concept of fiduciary duty play into the use of preferred stock?

Why is the concept of vesting used in venture capital deals? Why do managements agree to it$?$

Why would Mark Rockefeller and Mickey Konson of StreetShares agree to a transaction that

included a $3$ liquidation preference, an ongoing quarterly management fee, a put in six years priced

at the greater of fair market value or the accrued return, and a $$5$ million pre$-$money valuation claw$-$

back should the company not reach a long$-$term deal? Why would Rotunda Capital Partners have

suggested it$?$

Ever the risk$-$taker, Maxine has invested in another of Sam's companies. This time, she pays $$3$ million

for $30$ percent of Special Stuff $($SS$).$ Calculate the payout table and draw the graphs for Max and Sam

in the following situations:

a$.$ The deal is structured as all$-$common, and PredatoryPurchaser $($PP$)$ offers Sam $$3\mathrm{.}5$ million for

the company.

b$.$ The deal is structured as a redeemable preferred with cheap common deal and PredatoryPurchaser

$($PP$)$ offers Sam $$3\mathrm{.}5$ million for the company.

c$.$ The deal is structured as convertible preferred and PP offers Sam $$5$ million for the company. At

what price will Max convert to common?

d$.$ SS goes public at a valuation of $$20$ million and Max owns participating convertible preferred.

e$.$ OtherStuff, a private company, buys SpecialStuff for $$7$ million. Max owns participating convertible

preferred.

Why would an investor even fund a company that would accept a $5$ liquidation preference?

Consider that you hold securities in a company that has just accepted an investment of $$10$ million

with $6$ liquidation at $$3$ million pre$-$money. How would you value this company if you were the "new

money"? The previous investors?

SpecialStuff needs another $$3$ million. Acme, happy with its returns on Sam's first company, eagerly

agrees to participate, investing $$4$ million for $20$ percent of the company. Assume the first round was as

in question $6$ and each owns convertible preferred stock.

a$.$ How much do Max and Sam now own?

b$.$ Create payout tables for exit values at $$4$ million, $$8$ million, $$12$ million, and $$20$ million for each

participant assuming pooled seniority$.$

c$.....$with Acme senior to Max and Sam.

How does anti$-$dilution make sense?

Calculate the difference in Max's ownership in the following scenarios: SpecialStuff raised its A round

at $$1\mathrm{.}50$ per share. Max invested $$1\mathrm{.}5$ million for $1$ million shares and $30\%$ ownership. Now Special$-$

Stuff is raising a B round, but the market has turned against it and Acme will only pay $$1\mathrm{.}00$ per share

for $1$ million shares. $($Assume that Max doesn't participate at all and allows Acme Ventures to take the

whole round.$)$

a$.$ What if Max has full ratchet antidilution?

b$.$ Weighted average?

c$.$ If Max participates pro rata to her ownership, how will A and B change?