A VC invests $10 million in Michigan Co for a Series A investment. Michigan Co's founders have 60million common shares. The VC considers three possible security structures in exchange for their$10 million investment:

Structure I: 20 million shares of common stock (unrealistic).
Structure II: 20 million shares of convertible preferred stock, 2x liquidation preference.
Structure III: 20 million shares of participating convertible preferred, 2x liquidationpreference.

a) Suppose that the startup is acquired for S18 million after five years, having raised noadditional capital. What will be the payoffs earned by the VC and the founders under eachstructure?

 
b) Answer the same question, but now assume that the startup goes public at a $800 millionvaluation after seven years, again having raised no additional capital.

Answer rating: 100% (QA)

a For each structure we need to calculate the distribution of proceeds between the VC and the founders based on the liquidation preference and participation rights if any Structure I 20 million shares ... View the full answer