Phantom Medical

Phantom Medical C (VC Fund): Your VC fund has recently solicited Phantom Medical (PMC) to see whether you could strike a deal for their $1.5 million in Series A capital raise (1st round capital raise). Currently the management team owns 100% of the company and there are no outside investors. Your fund in particular would provide great synergies with PMC, so PMC would likely embrace a deal. PMC’s management team is relatively inexperienced and unfocused, and you may look to replace some of the team during the course of the business. Their plan seems ad hoc and in disarray, but the market shows great potential, the company could very well be a stunning success despite the management. Current companies in the sector are receiving pre-money valuations between $2M and $5M, and you require a minimum 10X return on your investment. You are in the early stages of your fund and could wait for a liquidation event to occur in Year 5, however, seek any additional concessions as applicable. Fact Pattern One: Phantom Medical C: * Team: * Inexperienced team * Smart, but insider employees (many friends and contacts of founders) * Inexperienced CEO * Plan: * Good technology * Plan/Strategy lack fundamentals * Forecasts bear little resemblance to current operations * Market * Huge upside * Right mixture of plan and team can overtake even the forecast * Financing * Your VC fund is very early in its ten-year cycle * Your VC firm is indifferent to the liquidation preference valuation tradeoff. Additional Notes:
Typical pre-money valuations within industry sector tend to fall between $2 million to $5 million.
Income statement (operations through year three) should suggest a need for roughly $1.5 million.
No outside capital invested, yet.
Assumes any further financing would come from the VC currently negotiating to fund the company.

Your task is to negotiate a sensible