Reference no: EM132768920

Buitendienst Partners are considering offering funding to two seemingly attractive ventures. Perdilo helps retailers deliver their goods to their customers using drones. Its founder, Ruud Gullig is a successful executive in a logistics company who spent one year preparing Perdilo for funding. His expected lifetime income is $3M. Building up the venture would require an investment of $2M and would generate an exit value of $10M after two years. Ruud knows he has a 20% chance of success (i.e., 80% chance of failure).

• Vincilo provides AI-powered advice to hospitals accepting new patients which would make initial screening faster and more efficient. Its founder, Maaike Crokk, studied computer science and had the idea after talking to her uncle Joost who heads a large hospital and is always complaining about the inefficiency of health care management. Maaike's expectedlifetime income is $3M. Building up her venture would also require $2M and generate an exit value of $10M after two years. Maaike knows she has a 50% chance of success.

• Geert, Buitendienst's partner who scouted these two companies, is convinced by their potential but is unsure to whether he can trust the founders' optimistic exit expectations. In case of failure there is no scrap value of the project. Geert considers two possible contracts to offer to the entrepreneurs.

• Contract 1 entails a pre-money valuation of $6M and the following preferred terms: a yearly dividend of 10% and a liquidation preference 1.3x for a convertible preferred security.

• Contract 2 entails a pre-money valuation of $4M and the following preferred terms: a yearly dividend of 10% and a liquidation preference 1.05x for a convertible preferred security.

• For this question you may ignore any discounting and taxes as well as any differences in risk tolerance between entrepreneurs.

Problem 1. Are these projects worth financing?