Venture Finance

Investment in each round

1. Find the company’s terminal value in 2030.

   • [$V_N = P/E \times E_N$] (Price/Earnings) in year N
   • [V = P/R x R] (Price/Revenues)
   • Given a ratio of (P/E or P/R) and a income statement, then calculate

2. Find the target value [$V_{i,N} = I_i \times (1 + ROI_i)^N$] of Series A & B investors in 2030.

3. Find the target % ownership [%Own = VIN / VN] of Series A & B investors in 2030.

4. Find the retention [= 100% - ∑%Own of later rounds] for Series A & B investors.

5. Find the % of the company Series A & B investors must acquire [%Acq = %Own / Retention] at the time of their respective investments.

6. Find the post-money valuations of the Series A & B investors [= $ Invested / % Acq].

7. Find the pre-money valuations of the Series A & B investors [= Post-Money Valuation - $Invested].

8. Find the lesser of post-money valuation of the SAFE and valuation cap [Post-$SAFE =Pre-$SerA x (1 - Discount)]

9. Find the % acquired by SAFE investor at time of conversion [= InvSAFE ÷ (Post-$SAFE).

10. Find the # of shares acquired by the SAFE investor at the time of conversion[SSAFE =(%Acq / (1 - %Acq)) x (# Old Shares)].

11. Find the discounted conversion price per share for the convertible note [PSAFE = InvSAFE / SSAFE].

12. Find # of shares acquired by each investor (Ser A & B ) [SSerN = (%Acq / (1 - %Acq)) x (# OldShares)]

13. Find the price per share for each investor (Ser A & B ) [PSerN = InvSerN / SSerN].

Founder ROI

1. Find the total number of company shares outstanding in 2030 [STotal = Founders Shrs + SAFE Note Shrs + Series A & B Shrs].
2. Find the terminal price per share in 2030 [PTerm = V / STotal].
3. Find the cash value of the founders’, Terri’s, Carl’s and PVC’s shares in 2030 [= # Shrs Owned x PTerm].
4. Find the annual rates of return realized by Terri & Carl in 2030 [ROI = (Cash Value / $ Invested)(1/N)].
5. Why the difference in founders’ ROIs?

Different price paid by Terri v. Carl due to difference in contribution

• Can only vary price at founding of company (founders’ shares), or
• if company issues different class of stock

Feasibility

1. Find the target value [VIN = I x (1 + ROI)N] of Series A investor in 2030.
2. Find the target % ownership [%Own = VIN / VN] of Series A investor in 2030.

Time value of money is too expensive

Option pool

incorrect calculation of total shares at exit, impacting percent acquired values found. new shares, price/share, pre-money and post money valuations should change as well

• Stock option pool

  10% of total company shares @ liquidity event

• Change in results of Q 1a, 1b & 2?

At time of liquidity event Creates additional dilution for Founders (and therefore, lower ROI). Investors can factor in as additional “round,” changing retention percentage and preserving their ROI

1. Begin with your results from Questions 1a, 1b & 2.
2. Recompute the retention [= 100% - ∑%Own of later rounds] for Series A & B investors including the 10% dilution of the option pool as the last “round.”
3. Continue recomputing your answers using these updated retention values for Series A & B.

Delay

• Change in plan before Series B (2nd round)
• Liquidity event delayed until 2031 (1 year)
• Series B investment increases $5,000,000 to $25,000,000
• Unchanged terminal value; Stock option pool remains
• Change in results to Question 4?
• ROIs realized by Series A & B?

Additional dilution of those who can’t change their terms
(Series A already purchased shares, and SAFE converted based on Series A price)

1. Begin with your results from Question 4.

2. There is no change to your Series A deal, i.e., # shares, $/share, etc.

3. Recompute your Series B deal using the new delayed timing and additional
   investment.

Convertible Preferred Stock

• Convertible Preferred Stock in Series A and B
  • Cumulative, non-cash, non-compounding 12% p.a. dividend
  • In 2030, preferred stock convertible to common stock (1:1) at original price
  • Accumulated dividends also convert to common stock
  • Other terms as in Question 4
    (ignore Question 5 delay/additional investment scenario)
• Questions
  • ROIs realized in 2030 by Series A and B investors?
  • Cash distributed in 2030 to Terri & Carl?

Reduces share price at liquidity (more shares for same terminal value of company)

1. Begin with your results from Question 4.
2. Find the value of the accrued Series A and B dividends in 2030 [= I x (Interest Rate) x (# Years Between Investment and 2030)].
3. Find # new shares acquired by Series A and B when their respective $ dividends convert to shares [= (Dividend Value) / (Original $/Shr)].
4. Add the new dividend shares to the original Series B shares in Question 4
5. Recompute the total number of company shares outstanding in 2030 [STotal = Founders Shrs + SAFE Shrs + Series A Shrs + Series A Dividend Shrs + Series B Shrs + Series B Dividend Shrs].
6. Find the terminal price per share in 2030 [PTerm = VN / STotal].
7. Using this new PTerm, recompute the ROIs realized by the Series A & B investors [ROI for SAFE and Terri & Carl not required, though provided].