Can someone help me figure out this example interview question for VC recruiting? Any sort of step by step and explanation would be helpful!
A company raises $10mm at pre-money valuation of $50mm. Terms are 1x participating PFD at a 2x cap. Between what ranges of exit valuations are investors indifferent?
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Comments ( 3 )
Analyst 1 in IB-M&A, hey, look at the bright side, at least you didn't get a ton of monkey shit thrown at you...here is my best guess on threads that might be helpful:
More suggestions...
Hope that helps.
Given the information provided, the post-money valuation of the company after the funding round can be calculated as:
Post-money valuation = Pre-money valuation + Investment amount Post-money valuation = $50mm + $10mm Post-money valuation = $60mm
The liquidation preference of the preferred stock is 1x, which means that in the event of a sale or liquidation of the company, the preferred stockholders will receive their investment amount back before the common stockholders. The participating feature means that after the preferred stockholders receive their investment amount, they will also participate in the remaining proceeds on a pro-rata basis with the common stockholders. The cap of 2x means that the total payout to the preferred stockholders will not exceed twice their investment amount.
To calculate the exit valuations between which investors are indifferent, we need to find the point where the payout to the preferred stockholders is the same whether the exit valuation is below or above that point.
Let X be the exit valuation of the company. If X is the exit valuation, then the payout to the preferred stockholders will be:
Payout = Min(X, 2x Investment amount)
If X is less than 2x investment amount, then the payout to the preferred stockholders will be X. If X is greater than 2x investment amount, then the payout will be 2x investment amount.
Setting the payout to be equal in both cases, we get:
X = 2x Investment amount X = 2 x $10mm X = $20mm
Therefore, the investors will be indifferent between exit valuations below $20mm, where the payout will be equal to the exit valuation, and exit valuations above $20mm, where the payout will be capped at $20mm (2x the investment amount).
but I am not sure
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