1. Jones, the investor, proposes taking participating preferred stock1 with 1x liquidation preference in return for her $5 million investment. Draw the payoff diagram for this security from Jones’ perspective, assuming she invests $5 million at a pre-money valuation of $14.75 million with no option pool.

2. What is her cash-on-cash return (money received divided by investment) if NewVenture exits in December 2020 at a $150 million valuation?

3. Thompson, the founder, provides a counter-proposal in which the security will be a standard convertible preferred stock with a liquidation of 2X. Draw the payoff diagram for this security from Jones’ perspective.

4. If NewVenture exits in December 2020 at a $150 million valuation what would be Jones payoff? which type of a security would Jones prefer? Why?

5. At what company valuation would the two securities have an equal payout?
    

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Please provide detailed explanation of your answers. Part A A Venture Capitalist presents Arbuckle, Inc., the shoes manufacturer with the following term sheet for a series A funding round: Amount $5 million Security Convertible Preferred Mandatory Conversion Mandatory on IPO > $20m, and price > $4.00/share $1.50 per share Price Liquidation Rights 2x Liquidation preference on merger, sale, or liquidation. 3 million shares Option Pool (employees) Founder Shares 3 million shares Dividends/Redemption No Anti-dilution Full Ratchet Please provide detailed explanation of your answers. Part A A Venture Capitalist presents Arbuckle, Inc., the shoes manufacturer with the following term sheet for a series A funding round: Amount $5 million Security Convertible Preferred Mandatory Conversion Mandatory on IPO > $20m, and price > $4.00/share $1.50 per share Price Liquidation Rights 2x Liquidation preference on merger, sale, or liquidation. 3 million shares Option Pool (employees) Founder Shares 3 million shares Dividends/Redemption No Anti-dilution Full Ratchet

Answer rating: 100% (QA)

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