Entrepreneurial Finance Capital Valuation Questions

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aba0726

Economics

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I'm working on a finance multi-part question and need an explanation to help me understand better.

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Problem Set 2: ROUGH SOLUTION Question 1 A seed investor has purchased $250’000 worth of seed convertible bonds with a valuation cap of 3 million and a discount factor of 0.8. There are currently 2 million shares of common stock outstanding, all of which are held by the founders. 6 months later, the firm conducts a Series A financing round, in which it sells 1 million shares of Series A preferred stock at a price of $3, implying a pre-money valuation of $6 million. Based on this information, what will be the ownership structure of the company after the Series A financing round? Question 2 An entrepreneurial friend of yours has just received the term sheet from a VC. He asks you for help as he does not fully understand many of the terms. In particular, he shows you the following excerpt from the term sheet: Securities: 5,000,000 shares of Series A Convertible Preferred Stock (henceforth Series A Preferred). Price Per Share: $1.00 per share (the “Original Purchase Price”). Current Outstanding: 15,000,000 shares of Common Stock. Pre-Money Valuation: The Original Purchase Price is based upon a fully-diluted premoney valuation of $15,000,000 and a fully-diluted post-money valuation of $20,000,000. Liquidation Preference: In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid as follows: First pay 1.5 times the Original Purchase Price on each share of Series A Preferred. The balance of any proceeds shall be distributed pro rata to holders of Common Stock. Optional Conversion: The Series A Preferred converts 1:1 to Common Stock at any time at option of holder. a) To help your friend understand the terms of the deal, create a diagram that shows the payoffs to the VC as a function of the firm’s future liquidation value. Make sure you label all relevant items in that diagram. b) Your friend also wants to hear some numbers. In particular, he wants you to tell him how much he (the entrepreneur) will receive in two specific liquidation scenarios: A liquidation value of 10 million and a liquidation value of 50 million. c) Once he understands the terms, your friend is very enthusiastic and tells you “wow, the VC thinks that my shares have a total value of $15 million today!” Do you agree with his assessment of the current valuation of common stock? Question 3 (2019 Final Exam Question) A firm is just about to complete its third round of external financing with the issuance of 2 million shares of Series C Convertible Preferred at a price of $4 per share for aggregate proceeds of $8 million. The following table summarizes the firm’s previous rounds of financing (Series A Convertible Preferred and Series B Convertible Preferred) as well as the Common Stock outstanding (owned by the founders and employees of the company). Securities Aggregate proceeds ($) Conversion Price ($) Number of shares Common stock 10,000,000 1 10,000,000 Series A 12,000,000 4 3,000,000 Anti-dilution protection No Full ratchet Series B 24,000,000 8 3,000,000 Weighted-average provision All convertible preferred securities (Series A, B, C) convert 1:1 to Common Stock at any time at option of holder. What will be the ultimate percentage ownership of the founders and employees after the third round of financing?
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Explanation & Answer

Hey buddy. Here is the typed answer to the assignment. Let me kow if you have any revision

Running Head: CAPITAL VALUATION
CAPITAL VALUATION

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Running Head: CAPITAL VALUATION
Question 1
Number of shares at startup= 2 million
Price/share=$3
At 0.8 factor discount:
0.8 × $3= $2.4/share per conversion
Considering the valuation cap ($3million):
=$3000000/2000000 shares
=$1.5/share in conversion
Using the discount approach:
250000/2.4
=104166.67 shares
Using the valuation cap approach:
250000/1.5
=166666.67 sha...

cnoybjngxvaf3 (956)
Carnegie Mellon University

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