Entreprenurial Finance Essay

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 â€Å"grant† venture investors a 100% return on their business plan projections. A. What percent of ownership must be sold to â€Å"grant† the 100% three-year return? Value to Achieve in 3 years Initial Financing Time in years Rate Future value Percent Owned by Investors 100,000,000.00 2,000,000.00 3 100% 16,000,000.00 16.00% B. What is the resulting configuration of share ownership (starting from the 1,000,000 founders’ shares? Shares Of founders Percentage of the investors Percentage left Total of Shares 1,000,000.00 16.00% 84.00% 1190476.19 Shares to be Issued to Investors 190476.1905 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 Founders Shares 8,000,000.00 40% 11,200,000.00 11.20% 72.80% 1,373,626.37 153,846.15 219,780.22 1,000,000.00 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 88.80% 1,340,626.34 11.20% 14.21% 74.59% 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.