4 years ago, Ravi and Jamelle, started RightPack to development and sell an APP they developed to optimize luggage selection for travelers.
In setting up the company they decided to simultaneously establish an employee stock option plan equal to 20% of the initial total shares outstanding knowing that they needed to hire several employees immediately. One benefit to setting up the plan when they founded the company was to establish a low exercise price. (They knew from their entrepreneurial finance class that exercise prices for options needed to reflect the most current value of the company at the time of the option award.) As a result, an outside accounting firm set an initial exercise price for the options of $0.02 per share. RightPack granted options on 50,000 shares to 5 employees (collectively referred to as the “Initial Employees”). The options vest monthly over 4 years with a 1 year “cliff” and are options for common stock – one share of common per option.
On the first day of year 2 they closed a Series A Convertible Preferred round for $2,000,000 at $2.00 per share. The preferred shares have a 1x preference (of the investment) and do not participate if the investor keeps the preference. However, Series A shares do enjoy full-ratchet (100%) antidilution protection. This protection is achieved through through issuance of additional shares if necessary.
At the same time (1st day of year 2), they hired a Chief Technology Officer (CTO) and awarded him options on 25,000 common shares. In keeping with the requirement to set the exercise price based on the current value of the company, the Board awarded the options with the same terms (4 year vesting and 1 year “cliff”) as the initial options but with an exercise price of $2.00 per share.
A pandemic then shut down global travel for a while severely hurting company growth. The same Series A investor, not wanting to give up on the idea, agreed to fund a Series B round on the first day of year 3 but at a reduced price per share. The investor purchased 1,000,000 shares of Series B Convertible Participating Preferred stock for $1,250,000. The Series B shares have a preference of 1.5X the invested amount. After being paid the preference the Investor will receive its “as-if Series B preferred converted to common” percentage (fully diluted) of proceeds available to common shareholders.
On the same day as the Series B funding, the investor and the company agreed that they needed a more seasoned CEO and hired Igor as CEO. The terms were the same as other grants but with an appropriate exercise price established by the Series B round pricing.
(A history of the option awards and option terms are described in lines 66-74 on Answer Spreadsheet)
On the last day of 4th year since founding MEGATravel purchased RightPack for $7,000,000 in cash.
QUESTIONS:
A) Calculate and Fill in the highlighted cells (yellow) in Columns B through H (Cells B9:H59) of the Stacked bar diagram for stacked bar in Problem 4 tab of the Answer spreadsheet.use formaulas to fill in highlighted cells. You can insert hard values calculated in head/by hand but I may not be able to follow if error. Any reference to “ownership interest” is the percentage of fully diluted shares (all converted to common). (note: you may get a circular reference error in cell H27 depending on how you calculate. Input the hard value if you get such an error).
B)
a. Calculate and fill in highlighted cells (yellow) in column K regarding ownership percentages of sale proceeds. (You need to determine values for all yellow highlighted cells in Column K to determine fully diluted ownership percentages. For clarification, “fully diluted” is the ownership interest if converted to common stock.)
b. What is price per share of common stock available to common stock shareholders in this transaction? Indicate answer in cell D77 (highlighted in yellow). (5 points). (Hint: consider what the appropriate number of shares should be and consider the pool available to pay common shareholders after paying preferences.)
c. Complete the Waterfall (Payout) table (Fill in highlighted cells D82-D87). Please show dollar amounts received by shareholders. For Founders, CTO, CEO and Initial employees please record the NET amount received (e.g. the amount received after subtracting cost of exercising options). (IMPORTANT NOTE: By agreement the value of any unexercised options and the proceeds from payments to exercise options on the date of the acquisition are returned to the balance sheet of the company for use by the new owner and not split with other common shareholders (in other words these adjustments/proceeds are factored into the purchase price and benefit the acquirer. They are not redistributed/reallocated to the other common RightPack shareholders as sales proceeds)