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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

Venture Capital and the Finance of Innovation[Course number]

Chapter 16

Participating Convertible Preferred Stock

Professor [Name ]

[School Name]



Binary option pricing formulas
Binary Option Pricing formulas

Plain Binary Option

Random-Expiration Binary Option


Example 1
Example 1

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?


Example 2
Example 2

  • 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?


Example 3
Example 3

  • 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?


Example 4
Example 4

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?