Anti-dilution

So far the founders had looked at cases in which after two years the second round would happen at a premium to the first round.  They also wanted to know what would happen in a so-called "down-round," in which the share price falls below the previous round.  They realized that anti-dilution clauses would then kick in.  Exhibit 2 at the end of the case explains how anti-dilution clauses work.

They considered again the situation in which there are 10.5 million shares-4 million shares owned by Vulture Ventures, 5 million shares owned by the founders, and 1.5 million shares owned by employees.  The founders wanted to examine the following situation, which they projected to occur after two years.  At that time they would require an additional $5 million, and they would need another four years to be acquired.  The acquisition at the end of year six was then projected to occur at a valuation of $60 million.  Investors would use a 45 percent discount rate throughout.  Starting in year two and projecting forward, using the standard valuation model with a single round, the founders calculated that the price per share for the second round would be $0.82 and the pre-money-valuation would be $8.573.106.  This was a lower price per share than the original round of $1 per share.  As a consequence, the anti-dilution clause would now have to come into play.  While the founders understood the information in Exhibit 2, they still disagreed about how they should set up their calculations.

Question a: Krishnuvara suggested the following. Using the standard valuation model, Krishnuvara saw that the price of the new round would be $0.82. He therefore took this price per share, and used it to calculate the price adjustments for the two types of anti-dilution provisions. Which anti-dilution clauses do the Series A investors prefer? What about the Series B investors?

Question b: Annabella took issue with Krishnuvara's calculations. She argued that if the Series A investors would be given additional shares, as part of the anti-dilution clause, then the Series B investors would want to revise their own calculation. She therefore wanted to do a more complicated calculation whereby Series B investors would price the new round according to the usual valuation model, taking into account that the Series B price would affect the adjusted Series A price, and thus the number of shares for Series A investors. What price per share does Annabella find for the two anti-dilution clauses? Which anti-dilution clauses do the Series A and Series B investors prefer now?