KMR is a start-up company which raised $5 million in convertible preferred equit
ID: 2797026 • Letter: K
Question
KMR is a start-up company which raised $5 million in convertible preferred equity financing from the venture capital firm VCA last year. VCA received 2.5 million Series A preferred shares at $2/share, with conversion price of $2 (remember, the conversion ratio is the initial share price divided by the conversion price). The founder, the only other shareholder, retained 4 million shares of common equity. There is no vesting period, employee pool, or reserved shares. 1. One of the drugs KMR had been testing just failed an early round trial, and everyone agrees that this lowers the current valuation of the KMR by 40 percent relative to the post-money valuation of the initial financing round. KMR needs additional financing to continue development, and plans to issue $4 million worth of Series B preferred stock to another venture capital firm, VCB. VCB will pay a per share price equal to the current pre-money valuation of KMR divided by the number of (as if converted) common shares outstanding. a. b. c. What is the pre-and post-money valuation of the firm in the initial round of financing? What is the pre- and post-money valuation of the firm in the second round of financing? What is the per share price paid by VCB? How many common shares (on a converted basis) will be owned by VCB? d. How many shares and what percentage of the firm are owned by each of the three parties (founder, VCA, and VCB), on an as-if-converted basis if the antidilution provision in VCA's contract is i. nonexistent. ii. full ratchet. ii weighted average.Explanation / Answer
Soln : a) For iNitial Round of financing :
Post - money Valuation = New investment* No. of outstanding shares outstanding/Shares issued for new investment
Post = 5 *(4+2.5) / 2.5 = 2*6.5 = $13 million
Pre- money Valuation = Post money valuation - new investment = 13 - 5 = $ 8 million
b) 2nd round of financing:
Pre- money Valuation = (1-40%) * Post money valuation of initial financing = 0.6 * 13 = $7.8 million
Post money valuation = Pre- money Valuation + New investment = 7.8 + 4 = $11.8 million
c) Price paid by VCB per share = pre-valuation price (current)/ no. of shares outstanding = 7.8/ 6.5 = $1.2 per share
Common shares owned by VCB = 4/1.2 = 3.33 million
d) (I) If clause non existent
Then, total no. of shares owned by each of them will be = 4 million by founder, 2.5 million by VCA and 3.33 by VCB
% of firm owned, by founder = (4/9.83) = 40.7%
by VCA = 25.43%, VCB = 33.87%
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