Maria Hernandez and Da Qian, two neighbors in Burke, Virginia, were the parents of 16-year old boys who were learning to drive. They were nervous about their sons’ aggressive driving, and didn’t want them to get injured in a car accident. Mrs. Hernandez, a software engineer, decided to develop a device that could be used to monitor the speed and location of her son’s car in real time. Mr. Qian, who was also an engineer, joined in the design effort. Each of them decided to invest $10,000 of their savings, and incorporated the company in Virginia under the name Auto Monitor, Inc. in January 2011. Each held 50% of the common shares at that time.
As they continued to work on the project, they realized that they wanted to incorporate additional features, such as real time video (from the driver’s viewpoint) and audio, as well as real-time alerts if problems arose with the vehicle or its drivers. In order to develop these additional features, they needed to hire additional engineers and programmers, and therefore needed more capital. In July 2011, Mrs. Hernandez’s wealthy uncle Carlos Clemente offered to provided $25,000 in exchange for 10% of the company. At the same time, the founders also decided to give stock options to their first five employees, who each received options to purchase 1.5% of the company’s equity for $0.01 per share.
By late 2011, the company was in need of additional funding. Mrs. Hernandez was able to get a $10,000 Small Business Administration Loan in January 2012, which was secured by their computers and office equipment. In January 2012, the company also received $110,000 from Jack Jaworski, a local entrepreneur, who had recently retired after selling his business. Mr. Jaworski received 15% of the company for his investment, which was done in the form of convertible preferred stock (which would convert into 15% of the company’s common equity). At the same time, the founders gave options to purchase 5% of the company’s equity to a new group of employees that they had hired.
In March 2012, a prototype of the company’s product was available for testing. The company was able to convince Dash Carbo, a writer for Automobile magazine, to test the product. Mr. Carbo was immediately impressed and wrote a very positive review for the next month’s issue. As a result, orders started pouring in, and the company needed to ramp up its manufacturing capacity very quickly. They called a number of venture capital firms, and, in July 2012, were able to secure $1.5 million of funding from Parnelli Ventures, a venture capital firm based in Chicago. Parnelli Ventures invested via its Parnelli Fund III in the form of subordinated debt that was convertible into 32% of the company’s common equity.
As orders continued to pour in, additional capital was required to continue to fund the company’s rapid growth. In January 2013, Brogner Industries, an automotive electronics company, invested $7 million in Auto Monitor in exchange for a 20% minority stake.
As the company continued to grow, it began to receive interest from investment banking firm to go public through an IPO. In January 2014, the company did a $37 million IPO of primary shares, which gave the new public investors a 27% stake in the company after the previous employee options were exercised and the convertible debt and preferred were converted into common shares.
In July 2016, Brogner Industries bought out Parnelli Fund III’s equity in Auto Monitor for $80 million.
For each of the following questions, show all of your calculations. I would recommend doing them in an Excel spreadsheet.
Question 1
After the January 2012 transactions were completed, what was the company’s equity value? What percentage of the equity did the two founders each own? How much was it worth? What was the company’s enterprise value, assuming no excess cash?