1.The Standard VC Method: EBV is considering a $6 million Series A investment in Newco. EBV proposes to structure the investment as 5 million shares of convertible preferred stock. The founders of Newco, who will continue with the firm, currently hold 10 million shares of common stock. Thus, following the Series A investment, Newco will have 10 million common shares outstanding and would have 15 million shares outstanding upon conversion of the CP. EBV estimates a 30% probability for a successful exit, with an expected exit time in five years. The planned exit strategy is an IPO. The average IPO exit valuations in Newcos industry is $300 million. EBVs target return from investing in Newco is 15% and the expected retention at exit is 50%.

Problem

What is your investment recommendation?

2. The Modified VC Method: Assume the same setup in the previous review problem with the following additional assumptions. The EBV funds committed capital is $100 million and has a 10-year life. Also, management fees are set at 2% per annum and the GPs carried interest is 20% of committed capital. GVM is estimated at 2.5 times.

3.Take-home Assignment: Prepare an MS Excel spreadsheet model for the standard VC method and another for the modified VC method. Use the assumptions in the review problems above to populate the input cells to evaluate the output cells in the respective spreadsheet models.

NB:

The following will be considered in the grading of the spreadsheet models

The design of the spreadsheet, including cell formatting The layout of the inputs and output The use of formulas in the output cells to return values that are based on calculations