Case Study Example on Financing of R.K. Maroon Company
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Introduction
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. Percent of Ownership
| Value to Achieve in 3 years | 100,000,000.00 |
| Initial Financing | 2,000,000.00 |
| Time in years | 3 |
| Rate | 100% |
| Future value | 16,000,000.00 |
| Percent Owned by Investors | 16.00% |
B. Resulting Configuration of Shared Ownership?
| Shares Of founders | 1,000,000.00 |
| Percentage of the investors | 16.00% |
| Percentage left | 84.00% |
| Total of Shares | 1190476.19 |
| Shares to be issued to Investors | 190476.1905 |
C. What if the venture investors don't buy the business plan predictions?
They also want to price the deal assuming a second round in year 2 of $8,000,000 with a 40% return.
| Second Round Money | 8,000,000.00 |
| Second Round E. Return | 40% |
| Money + Return Second Round | 11,200,000.00 |
| Second Round Investor Ownership | 11.20% |
| Founder % of ownership | 72.80% |
| Total Shares Out | 1,373,626.37 |
| Second Round Shares | 153,846.15 |
| First Round Shares | 219,780.22 |
| Founders Shares | 1,000,000.00 |
D. What if the venture investors agree with the founders' assessment?
What is the impact on the founders and round one investor's final ownership assuming the second round is funded by outsiders?
| % Owned by first-round and Founder | 88.80% |
| Total Shares At Exit | 1,340,626.34 |
| Second Round Final Ownership | 11.20% |
| First Round Final Shares Owned | 14.21% |
| Founder Final Shares Owned | 74.59% |
Compare these to your results for Part C.
Compared to the results in part C, the first round of investors will keep more percent of the company IN the results of C than in part D
Who bears the dilution from an anticipated round?
Founders bear the cost of all rounds anticipated by the first round of investors 3. Who bears the dilution from an unanticipated round?
Fist round of investors fails to anticipate a second round. This might cause these first-round investors will bear some of the dilutions
Conclusion
What do you conclude about the impact of anticipated but unrealized subsequent financing rounds?
In the beginning, the first-round investors got share allocations that protected them from second-round dilution, while the founders bore the hedging of the first-round investors. On the other hand, if the second round never arrives, first-round investors will benefit a lot because they didn't bear the anticipated dilution. Meanwhile, founders and first-round would not have an incentive to have a bonus arrangement unless this helps them to avoid a second round.
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