Jonna Vella, Inc. is raising $250,000 in early stage money to fund development o
ID: 2720674 • Letter: J
Question
Jonna Vella, Inc. is raising $250,000 in early stage money to fund development of their prototype. The company is still in a very early stage, and doesn't feel ready to put a valuation on themselves. So they are raising this round as a convertible debt round with the following parameters: the debt will convert to equity on the first priced round, at the valuation of the firm in that priced round, plus a 20% bonus. The debt will earn 5% per year until conversion. Suppose that the company raises $1 million in a priced round in one year, and that the round values the company at $10 million.
How much will the debt be worth (in dollars) at the time of conversion?
What % ownership of the company will that represent, at the time of conversion?
What % ownership of the company will the new investors want to own for their $1 million?
If the founders own 100,000 shares, how many shares will the new investors receive?
How many shares will the convertible debt holders receive at conversion?
Make a simple table to show the shares owned, and corresponding % ownership, by each of the three groups (founders, convertible debt investors, equity investors) after conversion.
Suppose that the convertible debt investors try to negotiate a larger "bonus" of 25% to their investment (so they would receive an extra 25% share of the company instead of 20%). Who would benefit from this, and who would lose?
Suppose that the convertible debt investors negotiate a valuation "cap" of $5 million. This means that their debt would convert as if the company were worth no more than $5 million, regardless of the valuation from the priced round. Who wins and loses with this valuation cap?
Explanation / Answer
(i)20% Bonus Debt 250000 Groups Market Value % No.of shares 20000 Debt 312500 3.13 3597 Int 12500 New 1000000 10.00 11511 Bonus 50000 Founders 8687500 86.88 100000 Total accretion in 1 Year 312500 10000000 100.00 115108 (ii 25% Bonus) Groups Market Value % No.of shares On the basis of Total MV Debt 250000 Debt 325000 3.25 3746 Benefit 20000 New 1000000 10.00 11527 Int 12500 Founders 8675000 86.75 100000 Lose Bonus 62500 10000000 100.00 115274 Total accretion in 1 Year 325000 Market cap of 5000000 Groups Market Value % No.of shares On the basis of Total MV Debt 312500 6.25 4237 Benefit New 1000000 20.00 13559 Founders 3687500 73.75 50000 Lose 5000000 100.00 67797
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