Question

You and your new partner have successfully built a prototype of your personal tax product and have attracted the attention of investors. You have identified that you need to raise between $500k and $1 million to build out your development team and start early marketing efforts to start testing if you have product market fit. Through your connections, you have raised the interest of some investors. After presenting your idea to several, you have early deal terms from 4 different investors that you and your partner need to evaluate.

Two of the deals are proposing to invest $20-25 million in your business and are being led by traditional venture capital firms. The other two deals are from angel investors and are in line with your original ask of $500k-$1M. You have determined that, all things being equal, you like all 4 investors and think they can add value. Your decision at this point is going to be based purely on the numbers.

Here are the deals:

Deal #1 - VC:

Investment: Pre-Money Valuation: Stock Option Pool: Liquidation Preference:

Deal #2 - VC:

Investment: Pre-Money Valuation: Stock Option Pool Liquidation Preference:

Deal 3 – Angel:

Investment Pre-Money Valuation Stock Options Pool: Liquidation Preference

Deal 4 – Angel:

Investment
Pre-Money Valuation Stock Options Pool: Liquidation Preference:

$20 million
$40 million
25% taken from founder’s equity 1x fully participating

$25 million
$35 million
20% taken from founders equity 1x fully-participating

$750,000
$1,250,000
20% taken from founders equity 1x non-participating

$1,000,000
$2,000,000
25% taken from founders equity 1x non-participating

Question 2A:? You have 2 very different types of deals from 4 different investors. Should you take more money than you originally thought and pursue the two venture capital deals, or should you focus on the two angel deals that are closer to your original ask of $500,000-$1,000,000. What factors should you consider? Choose either the VC deals (1&2) or the Angel deals (3&4) and justify. (20pts)

Question 2B?: Depending on which direction you chose from part A (VC or Angel), evaluate the two deals (either 1&2 or 3&4). Calculate/evaluate the following: (20pts)

What is the Post-Money Valuation in each deal

How is the equity split between investors, stock options pool, and founders in each deal

Which of the two deals, based purely on the numbers, do you accept – be sure to tell me

why.

Question 2C?: Congrats, it is 2 years after you took the investment and you have an offer to sell the company! Based on the Liquidation Preference of EACH of the 4 deals, tell me which deal is better for the founders in each of the two cases (VC and Angel). The offer to buy the company is for $60 million dollars. Be sure to show calculations (20pts)

Answer 1

	Deal 1	Deal 2	Deal 3	Deal 4
	VC	VC	Angel	Angel
Investment (preferred stock)	20000000	25000000	750000	1000000
%age investment to post money value	25%	29%	27%	25%
Pre-Money Valuation (common stock)	20000000	25000000	750000	1000000
%age pre-money value to post money value	25%	29%	27%	25%
Stock Option Pool	40000000	35000000	1250000	2000000
%age stock option pool to post money value	50%	41%	45%	50%
Liquidation Preference	25% taken from founder’s equity 1x fully participating	20% taken from founder’s equity 1x non participating	20% taken from founder’s equity 1x fully participating	25% taken from founder’s equity 1x non participating
post money valuation	80000000	85000000	2750000	4000000

Post money valuation = Investment + pre-money valuation + stock option pool

Following factors should be taken into consideration while choosing the deals:-

1. Deals 1 & 2 lead to a higher common stock option (25% and 29%) as compared to deals 3&4
2. On liquidation, non - participating preference would allocate higher returns to the founders (80% in deal 2 as compared to 75% in deal 4)
3. On liquidation, fully participating preference would allocate higher returns to founders in case of deal 1 as compared to deal 3

Hence, deals 1&2 for VC should be selected.

question 2B -

Between Deals 1 & 2, deal 2 (VC) would lead to higher realizations for founders, considering the liquidation preference i.e 20% taken from founder’s equity 1x non- participating.

The post money valuation is calculated in the table above. Also, the percentage equity for investors, founders and stock option equity is indicated in the table

Question 2C – Among the 4 Deals, deal 2 (VC) would lead to higher realizations for founders, considering the liquidation preference i.e 20% taken from founder’s equity 1x non- participating

In case of non - participating preferred stock by investors, first the original investment is paid out followed by pro rata distribution to the common stock holders (founders)

In case of participating preferred stock by investors, first the original investment is paid out followed by pro rata distribution to the common stock holders (founders) as well as investors

On liquidation, the returns to each category is given below:-

Investors	20000000	25000000	12000000	15000000
Founders	10000000	10294117.65	20727272.73	15000000
Stock option pool	30000000	24705882.35	27272727.27	30000000

Investors would earn higher amount of original investment or equity takeout