Problems

Assume, for the next four problems that A-round investors believe that the terminal value of the company will be $50 million in 5 years and that the investors believe the risk warrants a 50% discount rate.

Problem 1

Also assume that the investors plan to invest $3 million for round A. Assuming that the founders own 70% and existing seed investors own 30%, what will be the post-money percentage of ownership for the founders, seed investors, and round A investors? What are the pre and post-money valuations of the company?

Pre-Money Value

Post-Money Value

Post-Money Percent:

Founders:

Seed Investors:

Round A Investors:

Problem 2

For round A, shares were issued for $1/share at the post money valuation. It is now 2 years later. Round B Investors have determined that the pre-money valuation will be $10 million and the round B investors will purchase 50% of the company. The Round B investors want the company to issue 25% of the company as options—prior to their investment. There is no price protection for Round A investors.

a) What is the price per share for Round B?

b) How much money are round B investors investing? What will be the total shares outstanding after the investment/post-money?

c) What percent of the company will each group have after the investment?

Founders

Seed Investors

Round A Investors

Option Pool

Round B investors

Problem 3

Discuss the growth trap. How can a profitable company run out of cash in a high growth scenario? What, other than raising capital, are ways for such a company to generate cash to grow?