90.2K

Verified Solution

Link Copied!

only need answer from c

Question 2 Part A: a. John Thompson, CEO of New Venture, Inc., seeks to raise $5 million in equity for his early stage venture. Thompson conservatively projects net income of $5 million in year five and knows that comparable companies trade at a price earnings ratio of 20X. Samantha Jones of Gorsuch Capital is considering an investment. What share of the company will she require today if her required rate of return is 50% per anum? b. If the company has 1,000,000 shares outstanding before the investment, how many new shares should she purchase? What will be the share price of the new shares? (Assume investment is in standard convertible preferred stock with no dividends and a conversion rate to common of 1:1) As she does her due diligence, Samantha Jones likes Thompson's plan, but thinks it naive in one respect: to recruit a senior management team, she believes Thompson will have to grant generous stock options in addition to the salaries projected in his business plan. From past c. experience, she thinks management should have the ability to own at least a 15% share of the company by the end of year 5. Given her beliefs, what share of the company should Samantha insist on today if the option pool is created after investment and her required rate of return is 50%? e. During negotiations between Samantha Jones and John Thompson, Jones proposes using convertible participating preferred stock with 1X liquidation preference. Continue to assume there will be a 15% Option pool created after the investment. d. Draw the payoff diagram for the participating preferred security (use the ownership % from (c)) What share of the company will Samantha Jones require today if her required rate of return is 50% and she uses a participating preferred stock instead of a standard convertible preferred security? Remember to take into account future dilution from the option pool. f. If the company has 1,000,000 shares outstanding before the investment, how many new shares should she purchase? What will be the share price of the new shares? g. How does utilizing participating versus standard preferred change Samantha's perceptions of the risk and reward profile of this deal? h. A VC using participating preferred stock typically calculates his share using the approach used in (a) rather than in (e). Why might an entrepreneur argue that this is unfair"? Question 2 Part A: a. John Thompson, CEO of New Venture, Inc., seeks to raise $5 million in equity for his early stage venture. Thompson conservatively projects net income of $5 million in year five and knows that comparable companies trade at a price earnings ratio of 20X. Samantha Jones of Gorsuch Capital is considering an investment. What share of the company will she require today if her required rate of return is 50% per anum? b. If the company has 1,000,000 shares outstanding before the investment, how many new shares should she purchase? What will be the share price of the new shares? (Assume investment is in standard convertible preferred stock with no dividends and a conversion rate to common of 1:1) As she does her due diligence, Samantha Jones likes Thompson's plan, but thinks it naive in one respect: to recruit a senior management team, she believes Thompson will have to grant generous stock options in addition to the salaries projected in his business plan. From past c. experience, she thinks management should have the ability to own at least a 15% share of the company by the end of year 5. Given her beliefs, what share of the company should Samantha insist on today if the option pool is created after investment and her required rate of return is 50%? e. During negotiations between Samantha Jones and John Thompson, Jones proposes using convertible participating preferred stock with 1X liquidation preference. Continue to assume there will be a 15% Option pool created after the investment. d. Draw the payoff diagram for the participating preferred security (use the ownership % from (c)) What share of the company will Samantha Jones require today if her required rate of return is 50% and she uses a participating preferred stock instead of a standard convertible preferred security? Remember to take into account future dilution from the option pool. f. If the company has 1,000,000 shares outstanding before the investment, how many new shares should she purchase? What will be the share price of the new shares? g. How does utilizing participating versus standard preferred change Samantha's perceptions of the risk and reward profile of this deal? h. A VC using participating preferred stock typically calculates his share using the approach used in (a) rather than in (e). Why might an entrepreneur argue that this is unfair

Answer & Explanation Solved by verified expert

See Answer