Term Sheet Analysis

You are an early$-$stage investor who invested $$1,000,000$ into a seed stage startup using a convertible note. The convertible note is for $12$ months, with $10\%$ annual simple interest, a $20\%$ discount $($applies to accrued interest as well$),$ and a $$15$M pre$-$money valuation cap. Assume there are $1,000,000$ shares outstanding prior to the Series A investment.

Part A

At the end of the $12$ months, the startup is now raising a priced Series A round of funding of $$10$M and the potential investors are talking about a post$-$money valuation range of $$25$M $-$ $$35$M$.$

At what post$-$money valuation are you indifferent between using the discounted share price versus the pre$-$money cap derived price to convert your investment into equity?

Below that post$-$money value, which one would you use? Above that post$-$money value, which one would you use?

Additionally, at the indifference valuation, show the:

Share price for the Series A investors at that valuation

Share price for the Seed investor $($you$)$ at that valuation

Number of shares purchased by you and the Series A investor

Percent ownership by Series A investor, you, and the other prior outstanding shares $($presumably for the founders and early team members$).$

Part B

After $12$ months, instead of a Series A funding round, the company agrees to be acquired before your convertible note has converted into shares of the company at a qualified financing. The good news is you have a Liquidation Preference term of $2$x payback $($including accrued interest$)$ or Participating, at your discretion. Again, assume there are $1,000,000$ shares outstanding prior to the transaction.

At what acquisition price, would you switch from the $2$x payback to the Participating option?

Additionally, show:

Your share price at that valuation

Share price of the other outstanding shares

Number of shares purchased by you

Percent ownership of the company by you