R.K. Maroon Company

R.K. Maroon (RKM) is a seed-stage, Web-oriented entertainment company with important intellectual property. RKMs founders, all technology experts in the relevant area, are anticipating a quick leap to dot-com fortune and believe that their unique intellectual property will allow them to achieve a subsequent (Year 3) $100 million venture value with a one-time initial $2 million in venture financing.

In contrast, similar dot-come firms in their niche are currently seeking multistage financing amounting to $10 million to achieve comparable results. The founders have organized with one million shares and are willing to grant venture investors a 100 percent return on their business plan projections.

• What percent of ownership must be sold to grant the 100 percent per year return for the three years?
• What is the resulting configuration of share ownership (starting from the one million founders shares)?
• Suppose the first round venture investors dont agree with the business plan predictions and want to price the deal assuming a second round of outside investorsat the end of Year 2 of $8 million with a 40 percent return. In this situation the first round investors will maintain their initial ownership percentage. What is the resulting configuration of share ownership?
• Suppose the first round venture investors agree with the founders assessment, price the deal accordingly (as in Part B) , and turn out to be wrong (an additional $8 million at 40 percent must be injected for the final year). In this situation the first round investors will maintain their initial number of shares.
• What is the resulting configuration of share ownership?
• Compare these results to your results for Part C.
• Who bears the dilution from an anticipated round?
• Who bears the dilution from an unanticipated round?
• Suppose that the deal is priced assuming the second round (as in Part C) and it turns out to be unnecessary. Comment on the final ownership percentages at exit (Year 3). What do you conclude about the impact of anticipated but unrealized subsequent financing rounds?