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# Venture Capital and the Finance of Innovation [Course number] - PowerPoint PPT Presentation

Venture Capital and the Finance of Innovation [Course number]. Chapter 16 Participating Convertible Preferred Stock. Professor [Name ] [School Name]. Binary Options. Binary Option Pricing formulas. Plain Binary Option. Random-Expiration Binary Option. Example 1.

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### Venture Capital and the Finance of Innovation[Course number]

Chapter 16

Participating Convertible Preferred Stock

Professor [Name ]

[School Name]

Plain Binary Option

Random-Expiration Binary Option

Suppose that EBV offers the employees of Newco a bonus pool of \$5M upon any exit where firm value exceeds \$200M. Currently, the firm value of Newco is \$40M, and base-case option pricing assumptions (Series A) apply.

Problem

What is the current value of this bonus incentive?

• EBV considering \$6M Series A investment in Newco

• PCP (\$6M APP) for 5M shares, with a QPO threshold at \$6 per share.

• Pre-money shares = 10M

• Question: What is the breakeven valuation?

• Talltree is considering a \$12M Series B investment in Newco

• 5M shares of PCP, with a QPO at \$12 per share.

• Employee shares = 10M

• EBV (Series A) has 5M shares of PCPC (\$6M APP) a \$6 per share QPO, and a 4X cap.

Questions:

1) What is the exit diagram for the Series A?

2) What is the breakeven valuation?

XYZ ventures is considering a \$20M Series F in Newco for 10M shares of PCP with a QPO threshold of \$6 per share.

• Employees have claims on 20M shares of common

• Series A: 10M shares of CP (\$6M APP)

• Series B: 10M shares of CP (\$10M APP)

• Series C: 10M shares of CP (\$4M APP and 3X liquidation preference)

• Series D: 10M shares of PCPC (\$10M APP) with 3X cap and \$5 QPO

• Series E: 10M shares of CP (\$10M APP)

• All venture investors have \$250M committed capital and \$50M in lifetime fees.

Questions

• What is the exit diagram for the Series D PCPC.

• What is the breakeven valuation?