Suppose a VC invests $17 million in a Convertible Preferred security issued by firm A at a fully-diluted pre-money valuation on the term sheet of $74 million. The security has a face value of $17 million, a maturity of eight years and pays no interest. Other companies in firm As industry have an annual volatility of 60%. The annualized risk-free rate over the next eight years is 3%. Prior to this security issuance, firm A was an all-equity firm owned completely by the entrepreneur.

b) Please draw a general diagram for the Convertible Preferred payoffs in eight years for different future firm values. Also, as a specific example, suppose firm A is sold for $150 million in eight years. What payoff will the VC receive at that time?