A VC is planning to invest $20 million in a startup with a pre-money valuation of $40 million. In exchange, the VC will receive newly issued (non-participating) convertible preferred shares with a 1.5x liquidation preference. Prior to the investment, the startup is 100% owned by its founders, who own 10 million common shares. The VC expects the following potential exits for the startup:

 

• IPO at $1.5 billion in 5 years, with probability 15%.
• Acquisition for $45 million in 5 years, with probability 40%.
• Failure (with the startup being valued at $0), with probability 45%.

The startup will not need to raise any additional capital before the eventual exit.

Calculate the following:

a) The number of convertible preferred shares that the VC will get, the % of stock ownership that these shares represent, and the price per share.

b) The VC's expected IRR.

Answer rating: 100% (QA)

a The number of convertible preferred shares that the VC will get the of stock ownership that these shares represent and the price per share The premo... View the full answer