Question

A VC investor has invested $5 million in the preferred stock of a venture that is now being acquired for $50 million. The investment has a 2X liquidation preference . Alternatively the preferred stock is convertible into 25% of the common shares that would be outstanding prior to the acquisition. What is the best payoff the VC investor can get from the acquisition

Answer 1

Answer: $12.5 million

Explanation:

The best payoff the VC investor can get from the acquisition will be:

From the question, we've two options. The first option using the 2x Liquidation Preference will give a payoff of:

= 2 × $5 million

= $10 million

The second option using 25% of Common Shares will give a payoff of:

= 25% × $50 million

= 0.25 ÷ $50 million.

== $12.5 million

Therefore, the best Payoff is $12.5 Million.