Question

Ever the risk taker, Max has invested in another of Sam’s companies. This time, he pays $3 million for 30 percent of SpecialStuff (SS). Calculate the payout table and draw the graphs for Sam and Max in the following situations:

a. The deal is structured as all-common, and PredatoryPurchaser (PP) offers Sam $3.5 million for the company.

b. The deal is structured as redeemable preferred with cheap common, and PredatoryPurchaser offers Sam $3.5 million for the company.

c. The deal is structured as convertible preferred, and PredatoryPurchaser offers Sam $5 million for the company. At what price will Max convert to common?

d. SpecialStuff goes public at a valuation of $20 million, and Max owns participating convertible preferred.

e. OtherStuff, a private company, buys SpecialStuff for $7 million. Max owns participating convertible preferred.

Answer 1

(a).

Max receives 30% of valuation: 30% x 3.5 mil=1.05 mil (loses on his $3 million investment)

Sam receives 70% of valuation 2.45 mil.

 

(b).

Max receives his initial investment of $3 mil

They split the rest, and Max also gets 30% x 0.5 mil = 0.15 mil

Max receives $3.15 mil, and Sam receives 0.35 mi

 

(c).

To convert, 30% of the offer price should equal Max investment ((30% x X)=$3mil)

The price of the offer should be at least $9 mil.

 

(d).

Max receives his initial investment of $3 mil and 30% of the remaining $17 mil

Max receives = $3mil + 30% x $4mil = $4.2mil.

 

(e).

Max receives his initial investment and 30% of the remaining $4 mil

Max receives $3 mil plus (30%x$4mil) = 4.2mil

(a) Sam receives 70% of valuation 2.45 mil.

(b) Max receives $3.15 mil, and Sam receives 0.35 mi