The Michigan Angels Group (MAG) has invested $3M in MotorCity Co. (MCC) in return of 1M shares. This implies that MAG acquired 1M shares at a price of $2 per shares ($3M/ 1M).
It is given that after the transaction the founder owns 70% stake in MCC, implying that the investor, MAG is owning 30% stake, i.e. 100% minus founders' stake.
Answer to (a).
No. of shares held by founders after MAG round = (Shares held by MAG/ Stake held by MAG) * Stake held by Founders = (1M/ 30%)* 70% = 2.33M shares
Answer to (b)
Of outstanding shares in MCC = No. of shares held by Founders + No. of shared held by MAG = 1M + 2.33M = 3.33M
Answer to (c)
To find = Proportion of shares owned by Mobility Ventures after the new (second) round.
No. of shares issued to Mobility Ventures (MV) = Funding supplied by MV/ Price per Share = $1M/ $2 per share = 0.5M shares
Total number of shares outstanding in MCC after the new round = total no. of shares before the new round + no.
Of shares issued to MV = 3.33M + 0.5M = 3.83M
Therefore, the proportion of shares owned by MV after the new (second) round = no. of shares held by MV/ total no. of shares outstanding = 0.5M/ 3.83M = 13.05%
Answer to (d)
Proportion of shares owned by Michigan Angels after the new round = No. of shares held by MAG/ total no. of outstanding shares = 1M/ 3.83M = 26.12%
Answer to (e)
Proportion of shares owned by Founders after the new round = No.
Of shares held by Founders/ total no. of outstanding shares = 2.33M/ 3.83M = 60.83%
Answer to (f)
The full ratchet provision in the term sheet protects the interest of earlier investor from anti-dilution of their stakes in case the new investor buys stake in the company at a lower valuation (price per share) as against the earlier investor.
MAG's purchase price per share = Purchase price/ No. of shares issued to MAG = $3M/ 1M = $3 per share
MV's purchase price share = $2 per share (given in the question)
The inclusion of full ratchet provision in the term sheet will protect MAG's interest and the shares allotted to MAG will get re-adjusted at the pricing given to the new investor, i.e MV
The adjusted shares owned by MAG, Founder and MV will be as follows,
Shares held by MAG = Purchase price/ $2 per share = $3M /$2 = 1.5M shares
Shares held by Founder = 2.33M (No change)
Shares held by MV = 0.5M (calculated earlier)
Total no. shares outstanding at MCC = 1.5M + 2.33M + 0.5M = 4.33M
Proportion of shares owned by MAG after the new (second) round = 1.5M/ 4.33M = 34.64%
Proportion of shares owned by Founders after the new (second) round = 2.33M/ 4.33M = 53.81%
Answer to (g)
Ownership of MAG = 1.5M/ 4.33M = 34.64% [explained earlier]
Answer to (h)
Ownership of MV = Shares held by MV/ Total shares outstanding = 0.5M/ 4.33M = 11.55%