A.The following information is for pedagogical purposes only and unlike earlier

Question

A.The following information is for pedagogical purposes only and unlike earlier questions does not deal with real situation. Menlo Ventures provided funding for DriveUMUC start-up by investing convertible preferred shares. DriveUMUC expects to go public in 5 years, at which time it expects to have a post IPO valuation of $ 5 Billion. Until the company goes public, preferred shares will pay 8% annual dividend.

a.What % of post IPO equity should VC's shares to be converted in to provide VC its expected return?

b.Assume that the percentage ownership agreement remains the same as in a. What actual return VC gets, if the IPO value is $ 15 billion? 2 Billion? What if instead of an IPO, the company is acquired at $ 500 Million in 5 years? Remember that Menlo Ventures have convertible preferred shares.

Explanation / Answer

CALCULATION OF ACTUAL RETURN ON INITIAL PUBLIC OFFERING BY DriveUMUC

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Particulars $5 Billion 15 Billion 2 Billion   

Actural Return VC gets, if the IPO 0.4 Billion 1.2 Billion 0.16

Market Value of the Equity X Minimum expected rate of return 8%

The company is acquired at $500 Million in 5 years will get 40 million return in years. In case the company convereted into preferred shares need of ratio between preferred shares and equity shares.

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