For this assignment, use this file and update it by following this case.

Pat, Ashley and Jo meet in an entrepreneurship class at Cornell and start a company on January 1, 2023. 1,200,000 common shares are issued and split 1/3 each. The three founders agree on January 1, 2023 to restricted stock agreements with a reverse vesting provision that allows them to earn into their equity over four years, quarterly. That means that at the end of each quarter, they each earn back into 1/16 of their stock.

On April 29, 2023, the company wins $100,000 at the New York State Student Business Plan Competition and begins using the money for company expenses like product development, travel, patent filing, etc. but not salaries. (note: this is for context but does not get reflected in the cap table.)

On August 1, 2023 Jo takes a full-time job at Amazon, and quickly becomes unavailable for meetings, calls, or startup-related tasks; after a tense phone call from Pat and Ashley, Jo agrees to end vesting.

On January 1, 2024, the company closes on $463,000 in a convertible note. Key terms: 8% interest, 20% discount to the next round, $7m premoney conversion cap. More info on notes, here.

Pat and Ashley begin taking modest salaries, hire two people, and run average net cash flow of -$35,000 per month, aka "burn rate". (note: this is for context but does not get reflected in the cap table.)

On January 1, 2025, (one year later) the company closes on $2.5m of Series A convertible preferred stock on a $5m premoney valuation. The Series A has an 8% non-cumulative dividend and has a 1x participating preferred liquidation preference. The investors require the creation of an option pool equal to 15% of the post-money shares outstanding. The founders hire a 409a valuation firm, who puts the strike price on the options at 20% of the Series A preferred issue price.

On January 1, 2027, (two years after raising the Series A) the company is sold for $15m cash. Assume $50,000 in transaction expenses, zero advisory fees, and remember that there's no debt anymore because it converted to preferred equity.

After having completed the cap table, answer these questions and upload a pdf with your answers here. When the question asks for a number, a simple answer is fine; for the expository questions, a paragraph is perfectly fine, maximum two paragraphs per answer.

Who gets paid what at closing? What is the annualized percentage return (IRR) of the convertible note investors? Which would have been better for the founders? a. An option pool of 10% (rather than 15%)

b. A Series A valuation of $6m (rather than $5m)

c. A discount on the convertible note of 10% (rather than 20%)

d. Non-participating preferred rather than participating

Put yourself in the shoes of the different participants (founders, investors) - how would you feel about this outcome? If you were the founders and received simultaneous to the $15m purchase offer an offer to continue the company with a Series B investment of $7.5m on a $15m premoney valuation. What would you think about as you evaluate the two alternatives? Assume the outcome is a lot better - say, a $150m cash purchase offer rather than $15m. How does the answer to the "which would have been better for the founders" question change?