Suppose Elizabeth Entrepreneur (EE) raises her first round of venture capital in

Question

Suppose Elizabeth Entrepreneur (EE) raises her first round of venture capital investment from Very Good Venture Capitalists (VC) in order to grow her company, University Food, Inc. (UFI)

VC invests $2.1 million for 30% of the company on an "as converted basis" in Participating Convertible Preferred Stock with a liquidity preference of 1x, and receives 5 million shares in UTI.

What would be the payout to VC if the company is sold 4 years after the investment for $ 10 million?

The correct Answer is 4.47 million dollars. But can you please show me step by step to get the answer? Thanks.

Explanation / Answer

As VC invests $2.1 million for 30% of the company on an "as converted basis" in Participating Convertible Preferred Stock with a liquidity preference of 1x (mulitple of 1), and receives 5 million shares in UTI.

Means on liquidation the payout to VC for $2.1 is guaranteed over and above the $2.1 the VC has 30% shares as 5 Mn shares so working will be

Total investment after 4 years will be $ 10 Mn

Less Guaranteed to VC $ 2.1 Mn

Balance investment is $10-$2.1 = $7.9 Mn

30% of shares holding i.e. $7.9 Mn * 30% = $2.37Mn

So guaranteed $ 2.1 Mn + $ 2.37 Mn = $ 4.47 Mn

Hence VC will receive $ 4.47 Mn

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