A startup has received one round of funding. The deal with the venture capitalist gave the firm a premoney valuation of $40 Million and a postmoney valuation of $60 Million. The deal gave the venture capitalist a 2x liquidation preference, but no participation rights. Following fundraising, founders select firm strategy to maximize their payoff. There are two strategies available to the founders: "Friendly" and "Aggressive." If the founders pursue the friendly strategy, the firm innovates complementary to existing players in the market, preparing for an exit via acquisition. Thus, if the founders pursue the friendly strategy, the firm will be acquired for $100 Million with probability 1. However, if the founders pursue the aggressive strategy, the firm attempts to become the dominant player in the field, hoping for an exit via IPO. The aggressive strategy is more risky, however: there is a 25% chance that the firm will be sold for $300 Million, and a 75% chance the firm will be worthless. Which strategy is, on average, more profitable for the firm? O A. Friendly Strategy O B. Aggressive Strategy Oc. The Strategies are Equally Profitable O D. It cannot be determined If the firm pursues the friendly strategy, what is the founder's expected payoff closest to? O A. $100 Million O B. $60 Million O C. $70 Million O D. $50 Million If the firm pursues the aggressive strategy, what is the founder's expected payoff closest to? O A. $50 Million O B. $65 Million O C. $75 Million
A startup has received one round of funding. The deal with the venture capitalist gave the firm a premoney valuation of $40 Million and a postmoney valuation of $60 Million. The deal gave the venture capitalist a 2x liquidation preference, but no participation rights. Following fundraising, founders select firm strategy to maximize their payoff. There are two strategies available to the founders: "Friendly" and "Aggressive." If the founders pursue the friendly strategy, the firm innovates complementary to existing players in the market, preparing for an exit via acquisition. Thus, if the founders pursue the friendly strategy, the firm will be acquired for $100 Million with probability 1. However, if the founders pursue the aggressive strategy, the firm attempts to become the dominant player in the field, hoping for an exit via IPO. The aggressive strategy is more risky, however: there is a 25% chance that the firm will be sold for $300 Million, and a 75% chance the firm will be worthless. Which strategy is, on average, more profitable for the firm? O A. Friendly Strategy O B. Aggressive Strategy Oc. The Strategies are Equally Profitable O D. It cannot be determined If the firm pursues the friendly strategy, what is the founder's expected payoff closest to? O A. $100 Million O B. $60 Million O C. $70 Million O D. $50 Million If the firm pursues the aggressive strategy, what is the founder's expected payoff closest to? O A. $50 Million O B. $65 Million O C. $75 Million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A startup has received one round of funding. The deal with the venture capitalist gave the firm a premoney valuation of $40 Million and a postmoney valuation of
$60 Million. The deal gave the venture capitalist a 2x liquidation preference, but no participation rights.
Following fundraising, founders select firm strategy to maximize their payoff. There are two strategies available to the founders: "Friendly" and "Aggressive." If the
founders pursue the friendly strategy, the firm innovates complementary to existing players in the market, preparing for an exit via acquisition. Thus, if the founders
pursue the friendly strategy, the firm will be acquired for $100 Million with probability 1. However, if the founders pursue the aggressive strategy, the firm attempts to
become the dominant player in the field, hoping for an exit via IPO. The aggressive strategy is more risky, however: there is a 25% chance that the firm will be sold
for $300 Million, and a 75% chance the firm will be worthless.
Which strategy is, on average, more profitable for the firm?
O A. Friendly Strategy
O B. Aggressive Strategy
C. The Strategies are Equally Profitable
O D. It cannot be determined
If the firm pursues the friendly strategy, what is the founder's expected payoff closest to?
O A. $100 Million
B. $60 Million
C. $70 Million
O D. $50 Million
If the firm pursues the aggressive strategy, what is the founder's expected payoff closest to?
A. $50 Million
O B. $65 Million
OC. $75 Million
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