uppose a startup has the following ownership structure. All current shareholders hold common shares.

Founders 300,000 shares Angels 250,000 shares Employees 200,000 shares

A VC offers to invest $2 million for a 25% equity stake in the startup. It also requires for all standard preferred shareholder rights that include a 2X liquidation preference right.

a) How many new shares will be issued to the VC?

b) What is the new ownership percentage for each group of shareholders after the investment?

c) What is the pre- and post-money valuation for this company?

d) A couple of years go by and the startup receives an acquisition proposal that offers $20 million for the startup. How much would each group of investors get paid if there were no cap on its participation right? How much would each group of investors get paid if the VC’s participation were capped at 2.5X?

e) Analysts estimate that if NewCo went public, it would be worth about $15 million. What would be the value of shares owned by each group of investors? Please note that VCs must convert their preferred shares to common shares when NewCo goes public.