MINI CASE 2 ANSWER SHEET GROUP #2
R.K. Maroon is a seed-stage web-oriented entertainment company with important intellectual property. RKM’s founders, all technology experts in the relevant area, are anticipating a quick leap to dot-com fortune and believe that their unique intellectual property will allow them to achieve a subsequent (year 3) $100,000,000 venture value with a one-time initial $2,000,000 in venture financing.
In contrast, similar dot-commers in their niche are currently seeking multistage financing amounting to $10,000,000 to achieve comparable results. The founders have organized with 1,000,000 shares and are willing to “grant” venture investors a 100% return on their business plan projections.
A. What percent of ownership must be sold to “grant” the 100% three-year return? Value to Achieve in 3 years
Time in years
Percent Owned by Investors
B. What is the resulting configuration of share ownership (starting from the 1,000,000 founders’ shares?
Shares Of founders
Percentage of the investors
Total of Shares
Shares to be Issued to Investors
C. Suppose the venture investors don’t buy the business plan predictions and want to price the deal assuming a second round in year 2 of $8,000,000 with a 40% return. What changes?
Second Round Money
Second Round E. Return
Money + Retunr Second Round
Second Round Investor Ownership
Founder % of ownership
Total Shares Out
Second Round Shares
First Round Shares
D. Suppose the venture investors agree with the founders’ assessment, price the deal accordingly (as in Part B) and turn out to be wrong (an additional $8,000,000 at 40% must be injected for the final year). 1. What is the impact on the founders’ and round one investors’ final ownership assuming the second round
is funded by outsiders?
% Owned by first rond and Founder
Total Shares At Exit
Second Round Final Ownership
First Round Final Shares Owned
Founder Final Shares Owned
1. Compare these to your results for Part C.
Compared to the results in part C, first round of investors will keep more percent of the company IN the results of C than in the part D
2. Who bears the dilution from an anticipated round?
Founders bear the cost of all rounds anticipated by the first round of investors 3. Who bears the dilution from an unanticipated round?
Fist round of investors fail to anticipate a second round. This might cause this first round investors will bear some of the dilution
E. Suppose that the deal is priced assuming the second round (as in Part C) and it turns out to be unnecessary. Comment on the final ownership percentages at exit (year 3). What do you conclude about the impact of anticipated but unrealized subsequent financing rounds?
At the beginning, the first round investors got a share allocations that protected them from second round dilution, while the founders beared the hedging of the first round investors. In the other hand, if the second round never arrives, first round investors will benefit a lot because they didn`t bear the anticipated dilution. Meanwhile, founders and first round would not have an incentive to have a bonus arrangement unless this help them to avoid a second round.