Question

Suppose VC#1 has already invested $3M in venture for 1M shares, resulting in founders owning 60% of company. In 18 months, an infusion of a $1M from VC#2 is needed priced at $2 per share. Assuming no ratchet provision, answer a, b, and c.

a) What is proportion of shares owned by VC#2 after new round?

b) What is the proportion of shares owned by VC#1 after new round?

c) What is proportion of shares owned by founders after new round?

Assuming full ratchet provision is in the term sheet, answer d and e.

d) What is the ownership of VC#1?

e) What is ownership of VC#2?

Answer 1

VC1 Paid $ 3 million for 1 million shares, allowing the founders to maintain 60% ownership in the firm. This implies VC1 ownership is 40% of the firm.

40% of Firm Value = VC1 Investment = $ 3 million

Firm Value = 3 / 0.4 = $ 7,5 million

Further, 1 million shares correspond to 40% ownership, therefore, full ownership would correspond to (1/0.4) = 2.5 million shares. The ownership structure of the firm would look like as given below:

Owners	No. of Shares	Ownership Value
Founder	1.5 million	$ 3 million
VC1	1 million	$ 4.5 million

Total 2.5 million shares $ 7.5 million

Price per Share = 7.5 / 2.5 = $ 3

VC2 comes in and offers $ 1million investment at $ 2 per share. This implies that (1/2) = 0.5 million new shares are issued.

(a) Share Ownership Structure Post VC2 Investment:

VC1 = 1 million, VC2 = 0.5 million and Founders = 1.5 million, Total = 3 milion

VC2 Proportional Ownership = (0.5 / 3) = 1/6 or 16.67 %

(b) VC1 Proportional Ownership = (1/3) = 0.3333 or 33.33%

(c) Founder Proportional Ownership = (1.5/3) = 0.5 or 50%

(d) Full Ratchet Provision implies that once VC2 is issued shares at a lower price of $ 2 per share as compared to the issue price of VC1, VC1 has the right to convert his/her existing stake into a $ 2 per share value. In other words VC1 is entitled to extra shares such that its stake per share becomes $ 2 with the total stake value remaining constant at $ 3million

Additional Shares Issued = (3/2) - 1 = 0.5 million

Total Number of Shares = 1.5 + 1.5 + 0.5 = 3.5 million

Proportional Ownership of Shares = (1.5/3.5) ~ 0.4286 or 42.86 %

(e) Proportional Ownership of VC2 = 0.5 / 3.5 ~ 0.1429 or 14.29 %