Venture Capital Valuation and Ownership (20) 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. Questions:

A. What percent of ownership must be sold to "grant" the 100% three-year return? (3)

B. What is the resulting configuration of share ownership (starting from the 1,000,000 founders 'shares? (3)

C. Suppose the venture investors don 1 buy the business plan predictions and want to price the deal assuming a second round in year 2 of $8,000,000 with a 40% return. What is the final ownership of the first round investor, the second round investor and founders, respectively? How many shares do the first round investor, the second round investor and founders own? What is the ownership of the first round investor at time of investment? (7)

D. Suppose the venture investors agree with the founders' assessment, price the deal accordingly (as in Part B) and turn out to be wrong (an additional $8,000,000 at 40% must be injected for the final year). (7)
1. What is the impact on the founders and round one investors 'final ownership assuming the second round is funded by outsiders?
2. Who bears the dilution from an anticipated round?
3. Who bears the dilution from an unanticipated round?