Maxwell Hacker, a software developer and entrepreneur, has developed very promising gaming software and is considering a financial deal with a firstround investor. The investor and Hacker 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.

[5 points] Explain the purpose of including a full ratchet provision in this financing deal.

[5 points] At this point, how many shares does the entrepreneur have and how many shares

does the investor have?

[10 points] Now suppose that after the roundone 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 premoney 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?