A software developer and entrepreneur, has developed very promising gaming software and is considering a financial deal
Question:
A software developer and entrepreneur, has developed very promising gaming software and is considering a financial deal with a first‐round investor. The investor and company have agreed on a $2 million investment for 2 million shares of the company, including a full ratchet. The resulting post money valuation is $20 million.
a) Explain the purpose of including a full ratchet provision in this financing deal.
b) At this point, how many shares does the entrepreneur have and how many shares
does the investor have?
c) Now suppose that after the round‐one investment Hacker has been stymied by
architecture issues and will need considerably more money to continue its line of software. As a result, the post-money valuation from the first round drops to $8 million, so that this $8 million would become the pre‐money value in the next round of investing. Hacker estimates that he needs $4 million of new investment to continue. If Hacker is able to raise the $4 million, what will happen to the price per share with the full ratchet in place? What fraction of the company will Hacker own after the round?
Using Financial Accounting Information The Alternative to Debits and Credits
ISBN: 978-1111534912
8th edition
Authors: Gary A. Porter, Curtis L. Norton