6 points 9x Suppose VCs invested 40 million to purchase 3000

(6 points) 9.x Suppose VCs invested $40 million to purchase 3,000,000 Series A Participating Preferred Shares. The Series A shares: have a 3X liquidation preference te with common shares on an \"as converted\" basis (after the liquidation preference has been paid) are each convertible to 2 common shares. There are 14,000,000 common shares c shares). If the company was sold for $300 million, how would the funds be distributed? Circle your final payout totals for each group, and show how you calculated them.

Solution

A VC investor will be issued shares of preferred stock, not common stock. Preferred stock, as the name suggests, is preferable because it grants certain key rights to the holders – making it far more valuable than common stock. One of those rights is a liquidation preference.

In Participating preffered shares, the preferred stockholders would be entitled to the return of their entire investment (plus any accrued dividends) prior to the distribution of any proceeds to the common stockholders.However, the preferred stockholders would then also be treated like common stockholders and would share ratably in the remaining proceeds –in effect, being paid twice (or “double”).

Also with 3x participating, they will get 3 times the original investment.

So, VC investor will get :

40 million * 3 = $ 120 millions.

Now, $ 180 millions are left.(300 - 120)

Then they will be converted into common shares @ 2 per preference share = 3.000.000 * 2 = 6,000,000

So, now there are 20,000,000 shares. So, they will receive another = $ 54 millions (180*6000000/20000000)

So, VC investor will receive = $ 174 millions (54+120)

Other shareholders will receive = $ 126 millions (300-174)