Apr 04, 2023

Anyone able to help with the below?

Situation -  Considering a \$50mn investment into a company (\$30mn of the \$50mn would purchase common equity from existing shareholders, with the remainder going to the company in the form of a convertible preferred investment.)  The founder will roll his existing 5% stake in the business.  Post investment, we would have 60% basic as-converted ownership.  Our investment implies a valuation of 3x 2021E revenue (\$20M rev).  We intend to put a management option pool representing 10% of basic post-close shares (4 of 10 goes to founder) in place struck at the same price as our investment.

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Is this the whole question? Maybe I'm dumb but I understood this as

It \$60m valuations I'm assuming this is Pre-money as post-money is \$110m

you calculate the price per share based on the \$30m, I assume as its is a CLN the remainder will convert post-investment (is it the identical PPS or a discount to this investment)

The owner will be diluted but if he is rolling his 5% you need to make up the shortfall to ensure he doesn't lose.

The ESOP is also dilutive post-close you will have to adjust and make sure that your ownership is still 60% and the owner still has 50%

you can back-solve the ownership with the pre-money to get share's

it looks something like this

• Pre-money valuation: \$60 million
• Investment amount: \$50 million
• Portion of investment going towards common equity: \$30 million
• Portion of investment going towards a convertible note: \$20 million
• Post-money valuation after common equity conversion: Pre-money valuation + Portion of investment going towards common equity = \$90 million
• Conversion price of the convertible note: To calculate the conversion price, we need to know the terms of the note, such as the interest rate, maturity, and any other applicable terms.
• Assuming a conversion price of \$18.33 per share  the number of shares that the \$20 million convertible note will convert to is:

Number of shares from convertible note = Convertible note amount / Conversion price

Number of shares from convertible note = \$20 million / \$18.33 per share = 1,090,909 shares

• Total number of shares after the investment:

Total number of shares = (Post-money valuation after common equity conversion + Convertible note amount) / Price per share

Total number of shares = (\$90 million + \$20 million) / \$18.33 per share = 6,250,000 shares

• Therefore, the price per share is:

Price per share = (Post-money valuation after common equity conversion + Convertible note amount) / Total number of shares

Price per share = (\$90 million + \$20 million) / 6,250,000 shares = \$16 per share

So, the investor is paying \$16 per share for a 60% ownership stake in the company. The share price before the investment was:

Pre-money share price = Pre-money valuation / Total number of shares

Pre-money share price = \$60 million / 10 million shares = \$6 per share

Agree question seems incomplete or a little strangely drafted. OP should clarify given we are taking time to respond. Caveat that I'm not in VC / GE so not my expertise. But curious to see if we can solve this.

1. How do you come up with \$18.33?

2. Why do you add the \$30 to post-money. That is not new money but rather secondary.

3. If founder rolls 5%, then investor owns 95% of common plus has a convert. The math for getting to 60% isn't really possible here?? Unless you assume converts in new round with more money?

4. You are converting based off of \$30mm, not \$20mm. Remember, \$30 is the secondary

5. When you say "Total number of shares = (Post-money valuation after common equity conversion + Convertible note amount) / Price per share

Total number of shares = (\$90 million + \$20 million) / \$18.33 per share = 6,250,000 shares". To my point above, post-money should be \$60. Also, shouldn't \$110mm/\$18.33 = 6,000,000?

6. When you say "Price per share = (Post-money valuation after common equity conversion + Convertible note amount) / Total number of shares

Price per share = (\$90 million + \$20 million) / 6,250,000 shares = \$16 per share" I think the math from \$5 isn't consistent, unless you factored in MIP somewhere here. Also your division should equal \$17.6 and not \$16?

7. When you say investor is paying \$16 for 60%. So if shares are 6.25mm. 60% = 3.75mm shares * \$16 = \$60mm of value. But he put \$50mm in, and then there was a MIP that was dilutive. How do you explain that?

Tone is hard on the internet, so not being a prick / jerk at all. Maybe you take another stab at this.

If anyone else can chime in, how would the conversion lead to dilution of the investor's holdings. He has 95% pre MIP and 85.5% post-MIP. Conversion will only give him more shares??? Is the question just plain wrong? Or poorly worded? Or maybe I'm missing something.

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