60.1K

Verified Solution

Link Copied!

1. Youre a venture capitalist evaluating a business plan from a startup. You estimate that the company has a 50% chance of success and 50% of failure for its product development. If the startup successfully develops the product, you think the market will probably value the startup at $10 million. In contrast, if the product development fails, the startup has a 60% chance of going bankrupt and investors will not be able to recoup any of their investments, whereas the startup has a 40% chance of selling the assets (e.g., patents, customer lists, etc.) to another company for $2.5 million. If you ignore time value of money, how much would you pay for the startup using a decision-tree type of analysis?

2. Suppose a startup has the following ownership structure. All current shareholders hold common shares.

Founders 300,000 shares Angels 250,000 shares Employees 200,000 shares

A VC offers to invest $2 million for a 25% equity stake in the startup. It also requires for all standard preferred shareholder rights that include a 2X liquidation preference right.

a) How many new shares will be issued to the VC?

b) What is the new ownership percentage for each group of shareholders after the investment?

c) What is the pre- and post-money valuation for this company?

d) A couple of years go by and the startup receives an acquisition proposal that offers $20 million for the startup. How much would each group of investors get paid if there were no cap on its participation right? How much would each group of investors get paid if the VCs participation were capped at 2.5X?

e) Analysts estimate that if NewCo went public, it would be worth about $15 million. What would be the value of shares owned by each group of investors? Please note that VCs must convert their preferred shares to common shares when NewCo goes public.

Please show work, no excel spreadsheet

Answer & Explanation Solved by verified expert

See Answer