In a previous round of financing for a resort spa, an investor contributed $2 million in exchange
Question:
In a previous round of financing for a resort spa, an investor contributed $2 million in exchange for 1 million shares of common stock. The entrepreneur retained ownership of 2 million shares. Because of massive construction cost overruns and delays, things have not gone well for the spa since the investment. The venture needs another $1 million, with which the entrepreneur hopes to complete development. However, the existing investment agreement includes a ratchet provision for the prior investor. Under the terms of the ratchet, the investor will receive enough new shares for free so that the investor's average cost per share is the same as that of any new investor.
- Assume the new investor has renegotiated the terms of the deal and is now willing to invest $1 million for 25% of the company. Under a full ratchet provision, how many free shares will be issued to the original (old) investor?
Introduction to Corporate Finance
ISBN: 978-0324657937
2nd edition
Authors: Scott B. Smart, William L Megginson