Jonna Vella, Inc. is raising $250,000 in early stage money to fund development of their prototype. The company is still in a very early stage, and doesn't feel ready to put a valuation on themselves. So they are raising this round as a convertible debt round with the following parameters: the debt will convert to equity on the first priced round, at the valuation of the firm in that priced round, plus a 20% bonus. The debt will earn 5% per year until conversion. Suppose that the company raises $1 million in a priced round in one year, and that the round values the company at $10 million.
How much will the debt be worth (in dollars) at the time of conversion?
What % ownership of the company will that represent, at the time of conversion?
What % ownership of the company will the new investors want to own for their $1 million?
If the founders own 100,000 shares, how many shares will the new investors receive?
How many shares will the convertible debt holders receive at conversion?
Make a simple table to show the shares owned, and corresponding % ownership, by each of the three groups (founders, convertible debt investors, equity investors) after conversion.
Suppose that the convertible debt investors try to negotiate a larger "bonus" of 25% to their investment (so they would receive an extra 25% share of the company instead of 20%). Who would benefit from this, and who would lose?
Suppose that the convertible debt investors negotiate a valuation "cap" of $5 million. This means that their debt would convert as if the company were worth no more than $5 million, regardless of the valuation from the priced round. Who wins and loses with this valuation cap?