Jonna Vella, Inc. is raising $250,000 in early stage money tofund development of their prototype. The company is still in a veryearly stage, and doesn't feel ready to put a valuation onthemselves. So they are raising this round as a convertible debtround with the following parameters: the debt will convert toequity on the first priced round, at the valuation of the firm inthat priced round, plus a 20% bonus. The debt will earn 5% per yearuntil conversion. Suppose that the company raises $1 million in apriced round in one year, and that the round values the company at$10 million.

How much will the debt be worth (in dollars) at the time ofconversion?

What % ownership of the company will that represent, at the timeof conversion?

What % ownership of the company will the new investors want toown for their $1 million?

If the founders own 100,000 shares, how many shares will the newinvestors receive?

How many shares will the convertible debt holders receive atconversion?

Make a simple table to show the shares owned, and corresponding% ownership, by each of the three groups (founders, convertibledebt investors, equity investors) after conversion.

Suppose that the convertible debt investors try to negotiate alarger "bonus" of 25% to their investment (so they would receive anextra 25% share of the company instead of 20%). Who would benefitfrom this, and who would lose?

Suppose that the convertible debt investors negotiate avaluation "cap" of $5 million. This means that their debt wouldconvert as if the company were worth no more than $5 million,regardless of the valuation from the priced round. Who wins andloses with this valuation cap?

Explain each question