Terry and Maria have started a company. They started out sharing theequity equally and

subsequently completed a seed round with friends and family Angels, selling $$1\mathrm{.}0$ million

of common stock at a pre$-$money valuation of $$2\mathrm{.}5$ million. They did not create a pool of

unallocated options for additional employees at the close of the seed round. At the close

of the seed round there are $7\mathrm{.}0$ million shares outstanding.

The company$$s product was being well received, and they were getting real traction in

the marketplace. But like most new companies, additional capital was needed to grab

market share and enhance the product offering. They raised a Series A round and one

investor; Mulch Ventures took the whole round of $$3$ million at a pre$-$money valuation of

$$12$ million. The step up in valuation from the seed round was quite healthy, and the rest

of the terms were at market for the current financing environment.

In their pro$-$formas at the time of the Series A$,$ they projected that by Q$42022$ they would

have $230,000$ customers paying on average $$50/$year for their product. Instead, they now

project they will have $190,000$ customers paying an average of $$45/$year$.$ But the

customer growth is steady and does not seem to be leveling off. The founders believe the

company will be an attractive acquisition target, and the exit could be as high as $$175$

million.

As is often the case with founders, Terry and Maria have different explanations for why

the targets have not been met and what needs to happen to accelerate the company$$s

growth. Maria, who is the CEO and leads the technical team, believes Terry has not hired

the right leadership in sales and marketing. Terry believes they would be blowing through

the original targets if their product had more of the features offered by competitors.

Despite their conflict, they have three term sheets for a Series B$.$ They are lucky that the

market is hot, and valuations are high. Mulch Ventures has agreed to invest another $$2\mathrm{.}5$

million at the terms the lead investor for Series B negotiates with the Board. The founders

have really found Mulch to be valuable, and they appreciate their constructive presence

on the Board. They want to include them in the Series B$.$ Mulch$$s investment will be on

top of any amount that the Board accepts from the new investors. All the potential new

investors have agreed. All potential new investors have also agreed that an option pool of

$1\mathrm{.}2$ million shares will be created at the Series B$,$ and it is included in the pre$-$money

capitalization.

Maria and Terry are terrifically excited that they have so much interest. However, they

are worried that many are predicting that the window for financing will tighten

considerably in second half of $2022.$ Also, as the term sheets came rolling in$,$ Maria and

Terry learned from a member of their team that the company$$s database containing

customer information may have been compromised.

You now must evaluate offers from Rocco Ventures, KT$8$ Ventures and Eagle Ventures.

You can only take one as your lead.

Series B Offers:

$(1)$ Rocco Ventures

Willing to Invest: $$10$ million

Pre$-$Money Valuation: $$35$ million

Liquidation Preference: $1$X

Board: $5$ members $(2$ founders, Mulch, Rocco, $1$ independent chosen by the founders and

approved by the new board$)$

Other Conditions: You like the lead partner from Rocco very much.

$(2)$ KT$8$ Ventures

Amount: $$10$ million

Pre$-$Money Valuation: $$70$ million

Liquidation Preference: $3$X

Board: $5$ members $(1$ Founder, Mulch, KT$8,2$ Independents chosen by KT$8$ and Mulch$)$

Other Conditions: KT$8$ Ventures has strategic relationships in the industry that you

believe could open very important new distribution channels for your product.

Additionally, they have privately told Terry that they are considering replacing Maria as

soon after the Series B closes and will let her know only just before closing.

$(3)$ Eagle Ventures

Amount: $$20$ million $($$$10$ million at closing and an additional $$10$ million only if the

company reaches $200,000$ customers by the end of Q$42022)$

Pre$-$Money Valuation: $$50$ million

Liquidation Preference: $1$X

Board: $5$ members $($CEO$,2$ Mulch reps, Eagle, $1$ independent that the new Board

approves$)$

Other Conditions: Eagle is a relatively new VC but with some experienced and wellknown former entrepreneurs as the general partners. They seem to be aggressive in trying

to quickly become a top tier firm, but it is too early to tell

Please answer each of the following case questions in less than $300$ words.

$2.$ If these were the best and final offers for Series B which offer would you take if you were the founders and why?

$3.$ If you could negotiate to improve one offer, which offer would that be and what would you ask for? What arguments would you use to persuade them that they should improve their offer?

$4.$ For the offer you took $($#$2),$ what would be everyone$$s ownership $\%$ at the close of Series B$?$

$5.$ If you were Maria, would you tell the potential investors about the possible data breach, and if so$,$ when would you tell them? Explain your rationale?