An investor received a term sheet from a venture capitalist, the key terms of which are summarized in the following table: Amount and Securities: 4,000,000 shares of Series A Preferred Stock. Price Per Share: $1.00 per share (the “Original Purchase Price”). Current Outstanding: 6,500,000 shares of Common Stock. In addition, the company has reserved for issuance under its stock option plan an aggregate of 1,500,000 shares of Common Stock (Reserved Shares). Liquidation Preference: In the event of any liquidation, dissolution or winding up of the Company, the proceeds shall be paid as follows: First pay 1.0 times the Original Purchase Price on each share of Series A Preferred. Thereafter, Series A Preferred participates with Common Stock pro rata on an as-converted basis. Optional Conversion: The Series A Preferred converts 1:1 to Common Stock at any time at the option of the holder. Pre-Money Valuation $8,000,000
Calculate the payoff at maturity to Series A Preferred Stock as well as Common Stock as a function of liquidation value. Complete the table below that summarizes the allocation of the liquidation value between preferred stock and common stock:
Transcribed Image Text:Amount and Securities:
4,000,000 shares of Series A Preferred Stock.
Price Per Share:
$1.00 per share (the "Original Purchase Price").
Current Outstanding:
6,500,000 shares of Common Stock. In addition, the company has
reserved for issuance under its stock option plan an aggregate of
1,500,000 shares of Common Stock (Reserved Shares).
Liquidation Preference:
In the event of any liquidation, dissolution or winding up of the
Company, the proceeds shall be paid as follows:
First pay 1.0 times the Original Purchase Price on each share of Series
A Preferred. Thereafter, Series A Preferred participates with Common
Stock pro rata on an as-converted basis.
Optional Conversion:
The Series A Preferred converts 1:1 to Common Stock at any time at
option of holder.
Pre-Money Valuation
$8,000,000
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Transcribed Image Text:Liquidation Value ($)
Payoff to Series A Preferred
Payoff to Common Stock
2,000,000
4,000,000
10,000,000
50,000,000
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Definition Definition Type of stock which is granted priority over dividend distributions as compared to common stockholders. Preferred stocks also do not carry any voting rights. Notably, in a case where a company is going to be liquidated, preferred stockholders have a priority claim on the value of assets of the company as quoted in the balance sheet, as compared to the common stockholders.
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