Lockhart&Stark, a VC firm, has invested $ 3 million for 30% of the company, Banana. Palm, a leader in the same industry with Banana, is considering to acquire Banana. Answer the questions in the following situations.

a) Would the deal be structured as all-common? Why?

b) If the deal is structured as redeemable preferred (with face value $2.5 million) and common stocks, and Palm offers Banana $4.5 million. What are the net proceeds to Lockhart&Stark and Banana.

c) The deal is structured as participating convertible preferred with 2X liquidation preference, and Palm offers Banana $12 million. What are the net proceeds to Lockhart&Stark and Banana.

d) The participating convertible preferred in c) is combined with a term that the 2X liquidation preference is only valid when the exit value is less than $ 16 million. Calculate the range for the exit value where Lockhart&Stark may have a distorted incentive (prefer a lower exit value).

e) What is your suggestion to remedy the distorted incentive for Lockhart&Stark in d)?

Answer rating: 100% (QA)

a The deal would be structured as allcommon The reason for this is that Banana and Palm are in the same industry and one companys success could easily be attributed to the other companys success There... View the full answer