Case Study Example on Financing of R.K. Maroon Company

2 pages
422 words
Carnegie Mellon University
Type of paper: 
Case study
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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.

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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


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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