Question

Capitalization Table/Investor Exit ROI Problem Statement:

Two Co-Founders are incorporating their startup, Company ABC, today.  Per the incorporation filing, Company ABC will have 5,000,000 authorized Common Shares and 5,000,000 Preferred Shares.  A total of 500,000 Common Shares and 0 Preferred Shares will be issued and outstanding at formation.  One Co-Founder, the CEO, will own 75% of the equity or 375,000 Shares and the other Co-Founder, the CTO, will own 25% of the equity or 125,000 Shares.

Based upon the Company ABC Business Plan and Integrated Financial Modeling, the Company anticipates after a month creating a 20% Stock Option Pool “set aside” for future hires.  Almost immediately thereafter, the Company needs to raise $200,000 in total equity capital.  The Co-Founders anticipate raising this initial capital from several Fiends @ $75,000 and a single Angel @ $125,000, which one of the Co-Founders has a strong personal relationship with. The plan is to raise this capital via a Common Stock offering at a Pre-Money Valuation of $800,000.  The Company will use this first external capital infusion to complete all software development.

In order to launch a regional sales & marketing initiative and complete the necessary business infrastructure, the Company plans to raise a final $2,000,000 Series A Preferred “Full Participation” equity offering. Per the current financial projections, the Company will be able to successfully achieve financial sustainability with this funding.  The Co-Founders optimistically hope to realize a significant increase in the Pre-Money Valuation to $2,000,000 for this Series A Preferred “Full Participation” funding round.  In an attempt to support this targeted increase in the Pre-Money Valuation, the Co-Founders plan to offer an attractive 10% Dividend Rate and a 2.0X Liquidation Preference on the Series A Preferred.

Based upon in-depth market research, the Co-Founders are projecting a $45 million Exit Value exactly five years after the Series A Preferred Funding is completed.

IF SUCCESSFUL, what % of equity will ALL the owners (i.e. each Co-Founder, the Option Pool, the Common investors, & the collective Series A Preferred) have and what is the anticipated “Exit Proceeds” for each.

What % of equity will the owners have and what is anticipated Exit proceeds?

Answer 1

Please find the solution to the problem as shown: