Venture Capital Interview Question Help?
Could someone please help me better understand this sample interview question as I try to prep for VC interviews?
A company raises $10mm at $50mm pre-money valuation. Terms are 1x participating preferred at 2x cap. This is the only capital raised. Between what range of exit valuations is an investor indifferent?
Would recommend checking this out: https://www.theventurealley.com/2011/12/understanding-vc-financings-liq…
The investor would have 16.67% equity at the time of sale. The investor is indifferent at the exit values where returns at the 2x cap (with 1x preferred) are equal to returns on an as-converted basis to common stock (aka just 16.67% of the exit value).
For the lower bound - the 2x cap is $20M (2x the invesed capital). $10M is covered by the liquidation preference. The other $10M will covered by participation at 16.67% of the remaining equity. Thus the valuation is $10M (contributed to the liquidation preference) + 10/16.67% = $10M + $60M = $70M.
For the upper bound, the exit value is where $20M is 16.67% of that value. $20M/16.67% = $120M.
Thus the range of indifference for the investor is $70M to $120M (max returns will be $20M). Anything below $70M, the preferred/participation has the advantage on returns; anything above $120M, conversion to common stock has the advantage.
how would the investor have 16.67% equity?
$10M / $60M (post-valuation) = 16.7%
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