Mini Case R.K Maroon
MINI CASE: R.K.MAROON COMPANY
R.K. Maroon is a seed-stage web-oriented entertainment company with important intellectual property. RKM’s founders, all technology experts in the relevant area, are anticipating a quick leap to dot-com fortune and believe that their unique intellectual property will allow them to achieve a subsequent (year 3) $100,000,000 venture value with a one-time initial $2,000,000 in venture financing.
In contrast, similar dot-commers in their niche are currently seeking multistage financing amounting to $10,000,000 to achieve comparable results. The founders have organized with 1,000,000 shares and are willing to “grant” venture investors a 100% return on their business plan projections.
A. What percent of ownership must be sold to “grant” the 100% three-year return?
2,000,000*(1+1)^3=16,000,000
Percent owned by investors = 16,000,000 / 100,000,000 = 16%
B. What is the resulting configuration of share ownership (starting from the 1,000,000 founders’ shares?
1,000,000 / .84 = 1,190,476 total shares
190,476 new shares issued to investors
1,000,000 founder shares
C. Suppose the venture investors don’t buy the business plan predictions and want to price the deal assuming a second round in year 2 of $8,000,000 with a 40% return.
What changes?
8,000,000(1.4)^1=11,200,000
Second round investor final ownership = 11,200,000 / 100,000,000 = 11.2%
Founder final ownership = 1 - .16 -.112 = .728
Total shares outstanding at exit = 1,000,000 / .728 = 1,373,626
Second round shares = 153,846; final ownership = .112
First round shares = 219,780 ; final ownership = 219,780 / 1,373,626 = .16
Founder shares = 1,000,000; final ownership = 1,000,000 / 1,373,626 = .728
D. Suppose the venture investors agree with the founders’ assessment, price the deal accordingly (as in Part B) and turn out to be wrong (an additional $8,000,000 at
40% must be injected for the final year).
1. What is the impact on the founders’ and round one investors’
R.K. Maroon is a seed-stage web-oriented entertainment company with important intellectual property. RKM’s founders, all technology experts in the relevant area, are anticipating a quick leap to dot-com fortune and believe that their unique intellectual property will allow them to achieve a subsequent (year 3) $100,000,000 venture value with a one-time initial $2,000,000 in venture financing.
In contrast, similar dot-commers in their niche are currently seeking multistage financing amounting to $10,000,000 to achieve comparable results. The founders have organized with 1,000,000 shares and are willing to “grant” venture investors a 100% return on their business plan projections.
A. What percent of ownership must be sold to “grant” the 100% three-year return?
2,000,000*(1+1)^3=16,000,000
Percent owned by investors = 16,000,000 / 100,000,000 = 16%
B. What is the resulting configuration of share ownership (starting from the 1,000,000 founders’ shares?
1,000,000 / .84 = 1,190,476 total shares
190,476 new shares issued to investors
1,000,000 founder shares
C. Suppose the venture investors don’t buy the business plan predictions and want to price the deal assuming a second round in year 2 of $8,000,000 with a 40% return.
What changes?
8,000,000(1.4)^1=11,200,000
Second round investor final ownership = 11,200,000 / 100,000,000 = 11.2%
Founder final ownership = 1 - .16 -.112 = .728
Total shares outstanding at exit = 1,000,000 / .728 = 1,373,626
Second round shares = 153,846; final ownership = .112
First round shares = 219,780 ; final ownership = 219,780 / 1,373,626 = .16
Founder shares = 1,000,000; final ownership = 1,000,000 / 1,373,626 = .728
D. Suppose the venture investors agree with the founders’ assessment, price the deal accordingly (as in Part B) and turn out to be wrong (an additional $8,000,000 at
40% must be injected for the final year).
1. What is the impact on the founders’ and round one investors’