Suppose that the VC holds convertible preferred with 1X liquidation rights. The VC invested $2.5m and if they convert, they would own 20% of the equity. Suppose the combany the VC invested is sold for $10m. How much would the VC get in the sale? Would the VC want to convert their shares? The VC wouldn't want to convert their shares. By not converting, they get $2.5m. The VC would want to convert their shares. By converting they would get $2.75m. The VC would be indifferent between converting or not, they would get $2.5m. The VC would not want to convert. By not converting, they would get 2x the value of their investment, which will be $5m. For Questions 2-4. Suppose EBV makes a $6M Series A investment in Newco for 1M shares at $6 per share. One year later, Newco has fallen on hard times and receives a $6M Series B financing from Talltree for 6M shares at $1 per share. The founders and the stock pool have claims on 3M shares of common stock. Going forward, for brevity we will use the term "employees" to mean "founders and the stock pool