Venture Capital, Coursework Example

Alpha Ventures’ proposal has two different capitalization tables. The tables depend on whether the fiscal year 2000 revenues threshold of $500,000 will be met.

Question 1

The threshold in Alpha Ventures and what it means

The threshold is $500,000 in revenue for the fiscal year 2000 revenue. According to the Alpha Ventures term sheet, the threshold will determine whether the Escrowed Shares provision will be issued. The term sheet indicates that 501,253 shares of Series A Preferred will be held in escrow. The shares held in escrow will only be issued if the Company achieves revenues of $500,000 in the fiscal year 2000.

The Escrowed Shares will not be issued if the threshold is not met. The weighted average issue price of the Series A Preferred will be $1.05. If the threshold is met, the Escrowed Shares will be issued to the investors at a lower price of $0.95. Therefore, the threshold serves as a condition for releasing the Escrowed Shares and determining the final issue price of the Series A Preferred. Meeting the threshold for the release of Escrowed Shares will not directly affect the company’s pre-money valuation.

Therefore, the answer will be

If revenues reach $500k, the company’s pre-money valuation will be unchanged.

Alpha Ventures: Threshold is NOT met

Question 2 

Shares held by the founders pre-financing (a)

4,500,000

Question 3 

Shares in the employee option pool pre-financing (b)

3,000,000

Question 4

Series A Preferred shares pre-financing (c)

No Series A Preferred shares are pre-financing. They are being issued in the proposed private placement.

Question 5

Total shares pre-financing (d)

7,500,000

Question 6 

Value of Founders equity pre-financing (e)

4,725,000

Question 7 

Value of shares in the employee option pool pre-financing (f)

3,150,000

Question 8 

Value of Series A preferred equity pre-financing (g)

No Series A Preferred shares are pre-financing. The Series A Preferred shares will be issued in the proposed private placement.

Question 9

Ownership percentage of the founders pre-financing (i)

60.0% 

Question 10 

Ownership percentage of the employee option pool pre-financing? Round to one decimal place. (j)

40.0%

Question 11 

Ownership percentage of Series A Preferred pre-financing? (k)

Since no Series A Preferred shares are pre-financing. They will be issued in the proposed private placement.

Question 12 

Shares held by founders hold post-financing (m)

4,500,000

Question 13 

Shares in the employee option pool post-financing (n)

3,000,000

Question 14 

Series A Preferred there post-financing (o)

4,761,905

Question 15 

Total shares are there post-financing (p)

12,261,905

Question 16 

Value of Founders equity post-financing (q)

4,725,000

Question 17 

Value of shares in the employee option pool post-financing (r)

3,150,000

Question 18 

Value of Series A preferred equity post-financing (s)

5,000,000

Question 19 

Ownership percentage of the founders post-financing (u)

36.7

Question 20 

Ownership percentage of the employee option pool post-financing. (v)

24.5% 

Question 21 

Ownership percentage of Series A Preferred post-financing (w)

38.8%

Question 22 

Alpha Ventures Investment

5,000,000

Question 23 

Original Purchase Price (OPP)?

1.05

Question 24 

Trendsetter’s pre-money valuation

7,875,000

Question 25 

Trendsetter’s post-money valuation

12,875,000

If the Threshold is Met

Question 26 

Shares held by founders pre-financing (a)

4,500,000

Question 27 

Shares in the employee option pool pre-financing (b)

3,000,000

Question 28

Series A Preferred shares pre-financing (c)

No Series A Preferred shares pre-financing since they are to be issued in the proposed private placement.

Question 29

Total shares pre-financing (d)

7,500,000

Question 30 

Value of Founders equity pre-financing (e)

4,275,000

Question 31 

Value of shares in the employee option pool pre-financing (f)

2,850,000

Question 32 

Value of Series A preferred equity pre-financing (g)

No Series A Preferred shares pre-financing. They will be issued in the proposed private placement.

Question 33 

Ownership percentage of the founders pre-financing. (i)

60.0%

Question 34 

Ownership percentage of the employee option pool pre-financing (j)

40.0%

Question 35

Ownership percentage of Series A Preferred pre-financing. (k)

No Series A Preferred shares pre-financing. They will be issued in the proposed private placement.

Question 36 

Shares held by founders post-financing (m)

4,500,000

Question 37 

Shares in the employee option pool post-financing (n)

3,000,000

Question 38 

Series A Preferred shares post-financing (o)

5,263,158

Question 39 

Total shares post-financing (p)

12,763,158

Question 40 

The value of Founders equity post-financing (q)

4,275,000

Question 41 

The value of shares in the employee option pool post-financing (r)

2,850,000

Question 42 

Value of Series A preferred equity post-financing (s)

5,000,000

Question 43 

Ownership percentage of the founders post-financing. (u)

35.3%

Question 44 

Ownership percentage of the employee option pool post-financing. (v)

23.5%

Question 45 

Ownership percentage of Series A Preferred post-financing. (w)

41.2%

Question 46 

Alpha Ventures Investment

5,000,000

Question 47 

Original Purchase Price (OPP)

0.95

Question 48 

Trendsetter’s pre-money valuation

7,125,000

Question 49 

Trendsetter’s post-money valuation

12,125,000

Question 50

The rationale behind Alpha’s proposal pre-money valuation being dependent on the threshold mentioned in item “a”

The release of the Escrowed Shares could indirectly affect the company’s post-money valuation. The additional investment will increase the company’s post-money valuation if the Escrowed Shares are released and issued to the investors. On the other hand, if the Escrowed Shares are not released, the post-money valuation will remain the same as it would be without the additional investment from the Escrowed Shares.

Therefore, the rationale behind Alpha’s proposal is

(a) To reduce Alpha’s exposure to risk in the case where Trendsetter fails to deliver high sales (>$500k). Therefore, Alpha will have a lower share of the company in the high-sales scenario and a greater share in the low-sales scenario.

and (b) To entice the entrepreneurs to put more effort into the company by giving them a higher share if they deliver high sales.

Therefore both (a) and (b) are correct.

Mega Fund

Question 51 

Shares held by founders pre-financing (a)

4,500,000

Question 52 

Shares in the employee option pool pre-financing (b)

2,500,000

Question 53 

Series A Preferred shares pre-financing (c)

No Series A Preferred shares are pre-financing. They are being issued in the proposed private placement.

Question 54 

Total shares pre-financing (d)

7,000,000

Question 55 

Value of Founders equity pre-financing (e)

4,500,000

Question 56 

Value of shares in the employee option pool pre-financing (f)

2,500,000

Question 57 

The value of Series A preferred equity pre-financing (g)

No Series A Preferred shares are pre-financing. They are being issued in the proposed private placement.

Question 58

Ownership percentage of the founders pre-financing. (i)

64.3%

Question 59 

Ownership percentage of the employee option pool pre-financing. (j)

35.7%

Question 60 

Ownership percentage of Series A Preferred pre-financing. (k)

No Series A Preferred shares are pre-financing. They are being issued in the proposed private placement.

Question 61 

Shares the founders hold post-financing (m)

4,500,000

Question 62

Shares in the employee option pool post-financing (n)

2,500,000

Question 63 

Series A Preferred shares post-financing (o)

5,000,000

Question 64 

Total shares post-financing (p)

12,000,000

Question 65 

Value of Founders equity post-financing (q)

4,500,000

Question 66 

Value of shares in the employee option pool post-financing (r)

2,500,000

Question 67 

Value of Series A preferred equity post-financing (s)

5,000,000

Question 68 

Ownership percentage of the founders post-financing (u)

37.5%

Question 69 

Ownership percentage of the employee option pool post-financing. (v)

20.8%

Question 70 

Ownership percentage of Series A Preferred post-financing. (w)

41.7%

Question 71

Investment from Mega Ventures

5,000,000

Question 72 

Original purchase price (OPP)

1.00

Question 73 

Trendsetter’s pre-money valuation

7,000,000

Question 74 

Trendsetter’s post-money valuation

12,000,000

Question 75

The entrepreneurs decide whether to accept the proposal.