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A Venture Capitalist presents Arbuckle, Inc., the shoes manufacturer with the following term sheet for a series A funding round: Amount $5 million Convertible Preferred Security Mandatory Conversion Price Mandatory on IPO > $20m, and price > $4.00/share $1.50 per share 2x Liquidation preference on merger, sale, or liquidation. 3 million shares Liquidation Rights Option Pool (employees) Founder Shares 3 million shares Dividends/Redemption No Anti-dilution Full Ratchet 1. If the company goes public at a market value of $80 million, and assuming the mandatory conversion is triggered (that is, everyone is converted to common shares), how will the value be split between founders, employees, and VC (assuming no further financings)? 2. Does your answer to Question 1 change if the mode of exit were a merger or acquisition (at a $80m exit value) with no mandatory conversion (and investors remain with convertible preferred shares)? If so, give the new split. If not, explain why not. 3. Does your answer to Question 2 change if the security was participating preferred (and keeping the 2x preference)? If so, give the new split. If not, explain why not. 4. If you (the founder) were negotiating the term sheet as given in the table on page 2, and you were sure that the firm will ultimately get acquired at $80m, would you rather reduce the liquidation preference from 2x to 1x, or raise the price per series A share from $1.50 to $2? 5. Suppose the company accepts the term sheet as given in the table on page 2. Eight months later the company raises $6m in series B financing, for 40% of the company (i.e., series B investors will own 30% of the firm when the round is concluded). Does the anti- dilution provision trigger? A Venture Capitalist presents Arbuckle, Inc., the shoes manufacturer with the following term sheet for a series A funding round: Amount $5 million Convertible Preferred Security Mandatory Conversion Price Mandatory on IPO > $20m, and price > $4.00/share $1.50 per share 2x Liquidation preference on merger, sale, or liquidation. 3 million shares Liquidation Rights Option Pool (employees) Founder Shares 3 million shares Dividends/Redemption No Anti-dilution Full Ratchet 1. If the company goes public at a market value of $80 million, and assuming the mandatory conversion is triggered (that is, everyone is converted to common shares), how will the value be split between founders, employees, and VC (assuming no further financings)? 2. Does your answer to Question 1 change if the mode of exit were a merger or acquisition (at a $80m exit value) with no mandatory conversion (and investors remain with convertible preferred shares)? If so, give the new split. If not, explain why not. 3. Does your answer to Question 2 change if the security was participating preferred (and keeping the 2x preference)? If so, give the new split. If not, explain why not. 4. If you (the founder) were negotiating the term sheet as given in the table on page 2, and you were sure that the firm will ultimately get acquired at $80m, would you rather reduce the liquidation preference from 2x to 1x, or raise the price per series A share from $1.50 to $2? 5. Suppose the company accepts the term sheet as given in the table on page 2. Eight months later the company raises $6m in series B financing, for 40% of the company (i.e., series B investors will own 30% of the firm when the round is concluded). Does the anti- dilution provision trigger

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