At the investment committee meeting to discuss the proposed investment, one of your partners points out that in one of your potential scenarios, the company could be sold within one year of the investment for a value of $20 million. Given that could be an attractive outcome for the existing shareholders, but not for your firm, you consider structuring the investment as a $5 million non-dividend paying convertible preferred stock, convertible at your option into 15% of the common stock of the company. Also, the CEO has come back to you and believes that her company has much more upside than you are projecting. (She thinks the company could be worth $150 million in four years.) As a result, she believes that your requirement for 15% of the company is too high. As a result of that feedback, you also consider a structure consisting of preferred stock and free equity as a way to bridge the value gap. You look at an investment structure that would consist of $5 million of non-dividend paying redeemable preferred stock and free equity representing 10% of the company (rather than 15%). Please fill in the following table to analyze the various alternatives, and then answer the question that follows.

If the VC firm is most concerned with the downside scenario, then which of the various investment structures do you think seems to address the concerns of both the CEO and the VC investor and why ?

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$5 million investment Investment structured as common stock for 15% of the Company Value of the Business ($ millions) 20 100 150 Less preferred stock Value of the common stock 20 100 150 Proceeds to your VC Firm Proceeds to the other shareholders Investment structured as preferred stock convertible into 15% of the Company Value of the Business 20 100 150 Less preferred stock Value of the common stock Proceeds to your VC Firm Proceeds to the other shareholders Investment Structured as redeemable preferred stock plus free equity for 10% of the company Value of the Business 20 100 150 Less preferred stock Value of the common stock Proceeds to your VC Firm Proceeds to the other shareholders $5 million investment Investment structured as common stock for 15% of the Company Value of the Business ($ millions) 20 100 150 Less preferred stock Value of the common stock 20 100 150 Proceeds to your VC Firm Proceeds to the other shareholders Investment structured as preferred stock convertible into 15% of the Company Value of the Business 20 100 150 Less preferred stock Value of the common stock Proceeds to your VC Firm Proceeds to the other shareholders Investment Structured as redeemable preferred stock plus free equity for 10% of the company Value of the Business 20 100 150 Less preferred stock Value of the common stock Proceeds to your VC Firm Proceeds to the other shareholders

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A Investment structured as common stock for 15 of the company 1Scenario 1 Business value 20 million ... View the full answer