In June 2014, William Smith and Ashok Gupta started up a company called ExtraIncome.com. Their company developed a website and mobile phone app that enables users to list small jobs that they need workers for and enables individuals who need extra income to find opportunities to earn it. Mr. Gupta realized the need for such a service when he had trouble finding workers for a two-day landscaping project in his yard. Mr. Smith and Mr. Gupta each invested $5000 in the business to start it.
After three months of working on building the website, Smith and Gupta realized that they needed to hire employees to speed the coding process and to develop a marketing plan. These employees (four were hired) were collectively given options for 8% of the company’s equity to incentivize them to come to work for ExtraIncome.com. At this time (September 2014), the founders also got a $50,000 loan from a bank that was secured by portions of Smith and Gupta’s stock portfolios.
At the end of the first year (June 2015), the founders raised $75,000 from a group of friends and relatives, who were collectively given a 20% common equity stake in the company. The money was used to cover operating costs, as the company was not yet profitable, despite finally having a product that was ready to go to market.
By the end of 2015, the company was beginning to develop revenues, but not at the pace that they had hoped for. Ten new employees were hired during December 2015, and were each given options for 1% of the company’s fully-diluted common equity. At the same time, two local angel investors, Brinson B. Wellington IV and Da Qian, provided $200,000 of financing in the form of preferred stock that was convertible into 19% of the company’s common equity.
As a significant number of laborers for hire were added to the website’s database and the company began advertising more heavily, revenues began to grow. The revenue growth accelerated as the company’s service began receiving good reviews on websites such as Yelp. To maintain the rapid rate of growth, the company decided to again significantly increase its staffing. In September 2016, Vawter Ventures, a regional venture capital firm, invested $1 million into the company in exchange for 27% of its equity.
In December 2017, sold a 25% minority common equity stake to TempMaster, a large temporary staffing company. TempMaster paid $5 million for the equity stake, of which ExtraIncome.com received $4.9 million.
1. How much (what %) of the company’s fully-diluted common equity did the company’s founders have after the sale of the minority stage to TempMaster?
How much was the founders’ equity worth at that point in time?
2. How much was the equity of each of the first four employees hired worth after the sale of the equity stake to TempMaster?
3. Name two significant risks to the business.
4. How much was each angel investor’s equity worth after the sale of the minority equity stake to TempMaster?
What was their IRR?
5. Why did the owners of ExtraIncome.com not receive all the proceeds from the investment by TempMaster?
6. Vawter Ventures invested in ExtraIncome.com through its $100 million Vawter Fund IV. The partners of Vawter Ventures invested $5 million of their own money into the fund and raised the rest ($95 million) from a variety of wealthy families, pension funds, and endowments. The investment in ExtraIncome.com was the second investment made by the Vawter Fund IV, and was made only 6 months after the fund was raised. The Vawter Fund IV has a 2% fee and 20% carried interest. What was the IRR achieved by the Vawter Fund IV’s limited partners on their investment in ExtraIncome.com? Calculate the limited partners’ IRR from the time that the fund invested in ExtraIncome.com (September 2016) to just after the minority stake was sold to TempMaster (December 2017).
7. Name two investors (angel investors or venture capital investors) who invested in each of the following companies:
Spotify
Trunk Club