Question Description
- A founder owns 100% of her startup. She is offered an equity investment by a VC investor, accepts, and eventually, undergoes two more rounds of financing, each time by another VC investor. The financing events are as follows: VC investor 1 steps in with $0.5 million at a pre-money value of $2 million; later, VC investor 2 contributes $3 million at a pre-money of $7 million; and, finally, VC investor 3 coughs up $5 million at a pre-money of $20 million. At that point, i.e. Round 3, what is the worth in stock of the founder, of VC1, of VC2, and of VC3? What percentage of the company does each own?
- All things being equal, why is a high pre money valuation good for the entrepreneur? Does this mean she should negotiate only for the best price? Why or why not?
- In “Silicon Valley”, HBO’s TV series, the founder of Pied Piper has two conflicting offers from different investors: $200,00 for 5% or $10,000,000 in cash. He chooses the first offer. What does that tell you?
- Explain briefly why the labels could not apply demand based pricing in recorded music sales before Apple iTunes. Source: Alhadeff, P., “The Value of Music and the Trappings of the Marketplace, 1990-2005”; MEIEA Journal, Vol. 6 No. 1, 2006, pp. 13-27; please find the PDF here.
