Reference no: EM133003815
The founders of a start-up issued themselves 1,000,000 shares of common stock when the company was formed. One year later, a venture investor provided $500,000 in return for preferred stock shares convertible into 500,000 shares of common stock ($1.00 per share). The venture investor negotiated FULL RATCHET anti-dilution protection at the time of the $500,000 investment. Subsequently the company needed to raise $625,000 and did so by issuing 1,000,000 new shares of convertible preferred stock ($.625 per share).
Initial conversion price is $1/share
Company sells 1,000,000 new shares at $.625
How many shares are considered "outstanding" after Round 2 (considering the revised full ratchet conversion price)?
What are the percentage ownership interests of the Founders, Round 1 and Round 2 investors after the $625,000 Round 2 investment (based on the Round 1 investors FULL-RATCHET anti-dilution protection)?
If the Round 1 investors have weighted average anti-dilution protection, what is the new conversion price for the Round 1 investors after the $625,000 Round 2 investment (down from $1.00)?
What are the percentage ownership interests of the Founders, Round 1 and Round 2 investors after the $625,000 Round 2 investment, if Round 1 investors have weighted average anti-dilution protection?
Explain the role anti-dilution protection plays in raising capital. Discuss the risk factors which it addresses; whether investors want to take advantage of anti-dilution protection; AND identify a situation in which anti-dilution protection does not affect conversion price or ownership interests. (Think about this. Answers are almost self-evident)
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