Caleb Clark Ventures invests $2 million in convertible preferred stock in a company with an $8 million pre-money valuation. The term sheet shows the investment is non-participating with 1x liquidation preference. A) Assume the preferred stock is participating. At an exit value of $15,000,000, what is the payoff to the common stockholders (i.e. Founders & Management)? B) If the VC owned non-participating convertible preferred stock with a 2x liquidation preference at what exit value is the VC indifferent between either converting or not converting?

Caleb Clark Ventures invests $2 million in convertible preferred stock in a company with an $8 million pre-money valuation. The term sheet shows the investment is non-participating with 1x liquidation preference. A) Assume the preferred stock is participating. At an exit value of $15,000,000, what is the payoff to the common stockholders (i.e. Founders & Management)? B) If the VC owned non-participating convertible preferred stock with a 2x liquidation preference at what exit value is the VC indifferent between either converting or not converting?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 11P

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Caleb Clark Ventures invests $2 million in convertible preferred stock in a company with an $8 million pre-money valuation. The term sheet shows the investment is non-participating with 1x liquidation preference. Answer the following: A) What is the ownership percentage of the VC after the investment? 20% B) At what exit value is the VC indifferent between either converting or not converting? C) Assume the preferred stock is participating. At an exit value of $15,000,000, what is the payoff to the VC? D) Assume the preferred stock is participating. At an exit value of $15,000,000, what is the payoff to the common stockholders (i.e. Founders & Management)? E) If the VC owned non-participating convertible preferred stock with a 2x liquidation preference at what exit value is the VC indifferent between either converting or not converting?
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