Venture deals week 3 answer key

Exercise 1:

$8,000,000

A higher valuation cap is better, but only until it exceeds the pre-money valuation, after which the
valuation cap has no effect.

See detailed instrument conversion calculations below.

Exercise 2:

7% more ownership than what you would have if you went with the “standard” terms.

3% more ownership than “standard” terms but 4% lesser than your counter offer.

Lowest possible pool size based on hiring plans is ideal. Common stockholders pay for the option pool
completely, so every bit matters.

Exercise 3:

Never:

Preferred stock in this case is always more valuable than common stock.

$20M:

We assume that the reserved option pool will be completely unused at the time of exit.
If all shares reserved in the (20%) option pool are unissued at exit, the option pool collapses and all
shareholders benefit from it pro rata. The investor's ownership increases to 25% (Before, investor
owned 20 per 100 shares. After option pool collapses, investor owns 20 per 80 shares = 25%). Thus, they
get a better deal by converting to Common at any exit higher that $20M (Eg. 25% of $21M = $5.25M,
which is greater than the investor's preference proceeds $5M).

$40M

Instrument conversion math

Price per share for instrument conversion is calculated by:

Share price = effective valuation / instrument conversion capitalization

Here, effective valuation is the lowest value between the pre-money valuation or the valuation cap. And
instrument conversion capitalization is calculated as below:

capitalization (pre-money conversion) = Sum of all issued stock, options and warrants pre-money +
Unissued shares reserved in the newly allocated option pool + sum of all shares from converting
instruments

or,

capitalization (post-money conversion) = Sum of all issued stock, options and warrants pre-money +
Unissued shares reserved in the newly allocated option pool
In our example:

Share price (pre-money conversion) = $5M / (8000000 + 3076923 + 1230769) = $0.40625

Share price (post-money conversion) = $5M / (8000000 + 2958904) = $0.45625

The shares are calculated based on this share price:

Converted shares (pre-money conversion) = $500,000 / 0.40625 = 1,230,769

Converted shares (post-money conversion) = $500,000 / 0.45625 = 1,095,890