# If Carl’s targeted rate of return is 40% per annum (compounded), what share of XL (i.e., what % of the company) must he acquire in November 2020 if he funds the full \$1,500,000 Series A round? How many new shares of XL stock should he acquire? What should be the price per share? What are XL’s pre-money and post-money valuations at this first round?

Question #1a. If Carl’s targeted rate of return is 40% per annum (compounded), what share of XL (i.e., what % of the company) must he acquire in November 2020 if he funds the full \$1,500,000 Series A round? How many new shares of XL stock should he acquire? What should be the price per share? What are XL’s pre-money and post-money valuations at this first round?

Question #1b. If TVC funds the entire Series B round, what share of XL must TVC acquire in November 2022? How many new shares of XL stock should TVC acquire? What should be the price per share? What are XL’s pre-money and post-money valuations at the second round?

Question #2. At the planned “liquidity event” at November 2024, what will Susan’s XL shares be worth? What annual rate of return (compounded) on her original \$20,000 investment does this represent? What will each of the other co-founders’ shares be worth? What annual rates of return (compounded) on their original \$20,000 investments does this represent? What will Meg’s converted shares be worth? What annual rate of return (compounded) on her original \$500,000 investment does this represent? Finally, explain the reason for any difference between the return earned by Susan and that earned by each of her other two co-founders.

Question #3. Susan briefly considered the alternative of eliminating the Series B round and, instead, raising the total amount of \$12,500,000 in the Series A round. She assumed the investors in this priced round would require a 40% per annum (compounded) rate of return. After analyzing this alternative, Susan did not pursue it. Why did she decide this?

Question #4. Based on their prior experience, both Carl and Leslie believe that stock options will be needed as incentives to recruit a senior management team for XL. They convince Susan to plan for the future creation of a pool of new XL shares for incentive stock options equal, in total, to 12% of the company at the time of the liquidity event at November 2024. Given this plan to create a future pool of incentive stock options immediately prior to the liquidity event, recalculate your answers to Questions #1a, #1b and #2.

Question #5. Immediately before the Series B round, it becomes apparent that the liquidity event will be delayed two years until November 2026 and that an additional \$1,000,000 (i.e., a total of \$12,000,000) will be needed in Series B, still scheduled to occur in November 2022. Despite the delay, the estimated terminal value of XL remains unchanged. At the time when this delay becomes apparent, Carl’s Series A investment is already a done-deal and cannot be renegotiated. The future stock option pool, as described above, is included in XL’s plans. Recalculate your answers to Question #4. Also, given this delay scenario, what compound annual rates of return are actually realized on the Series A and Series B investments?
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Question #6. During TVC’s term sheet negotiations, it is agreed that TVC will receive convertible preferred XL stock in return for their investment in Series B. The founders’ shares, Carl’s Series A shares and the option pool shares remain common stock. The difference between common and convertible preferred shares is that convertible preferred shareholders receive a fixed annual dividend payment equal to a prescribed percentage of their investment. In this case, TVC negotiates for a cumulative non-cash non-compounding dividend of 8% per annum. At the time of the liquidity event at November 2024, each preferred share is convertible into one new XL common share and the accumulated dividends are convertible into new XL common shares at the original price per share paid by TVC.

TVC priced the XL deal assuming that it received non-dividend-bearing common stock and that an option pool would be created at the time of the liquidity event (i.e., the same assumptions used for Question #4, above). Note: the option pool equals 12% of the company, including the new converted dividend shares, at the time of the liquidity event in November 2024. What compound annual rate of return will TVC realize on its Series B investment as a result of using convertible preferred stock? What compound annual rate of return will be realized from Carl’s Series A investment, which is not convertible preferred stock? What will be the cash distributions realized by the founders and Meg? (In answering this question, ignore the delay scenario of Question #5).

Question #7. During TVC’s Series B term sheet negotiations, TVC also proposed using a hybrid security called participating preferred stock for its investment. This security is like the convertible preferred stock described above, but it has an additional benefit in that, at conversion (i.e., at the liquidity event) the entire original purchase price is also repaid to TVC on a priority basis before any other distributions are calculated. Susan and Carl reject this proposal. What compound annual rate of return would TVC have realized on its Series B investment as a result of using participating preferred stock? What compound annual rate of return would Carl have realized under this proposal on his Series A investment? What will be the cash distributions realized by the founders and Meg? (In answering this question, ignore the delay scenario of Question #5).

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