Suppose a wireless Internet company, Halfdome Systems, desperately needs to finance $2 million in cash. Previously, founders own 5 million shares of common stock valued at $0.80 per share and other previous investors own 5 million shares of convertible preferred stock valued at $0.80 per share (Assume the price per share for common and convertible preferred is the same for simplicity). Due to their immediate need of new financing for their additional investment in R&D and for the recruitment of quality CEO, none of their previous investors wants to fund more because they are uncertain regarding the future of Halfdome. Instead, they recommend Battery Ventures who wants to invest into Halfdome Systems at $0.20 per share. While Battery Ventures wants to include a full ratchet anti-dilution in their term sheet, Chris Mais, founder of Halfdome wants to have a weighted-average ratchet. Since Chris is not quite familiar with this anti-dilution issue, he wants SCU Leavey School of Business consulting group to analyze the resulting ownership under two mutually exclusive anti-dilution methods, full ratchet vs. weighted average ratchet. Suppose you are a member of SCU LSB consulting group.

(A)What should be the final percentage ownership for Chris Mais, previous investors, and Battery Ventures under the full ratchet and weighted average ratchet methods #1 and #2. Try two separate weighted average ratchet methods. Show your solution procedure either in Excel or in hand solution procedure.

Hint: Weighted average ratchet #1 is based on [(A + C)/(B + D)] x old conversion price where A = the number of shares outstanding before the new investment; B = the number of shares after the new investment; C = the number of shares which 10 have been issued for the price if the old or higher conversion price had been used; and D = the number of shares actually issued at the new price.

Hint: Weighted average ratchet #2 is using NCP (new conversion price) = [(OB * OCP) + New$] / OA where OB represents outstanding shares before offering, OC P refers old conversion price, New$ means an amount raised in offering, and OA stands for outstanding shares after offering.

(B) From the above results, what inferences can you make for entrepreneurs, previous VCs, and new venture capitalists? Discuss precisely.