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ENGRI_127_Homework__5_answers

ENGRI_127_Homework__5_answers - ENGRI 127 Homework#5...

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ENGRI 127 Homework #5 Suggested Solutions 1. Charlotte Brontë starts a business, Rochester Vision Systems Inc., with a business partner, Jane Eyre. Ms. Brontë and Ms. Eyre each own 50% of the stock in the corporation. On June 2, 2002, Joel Gabriel, an angel investor, buys 30% of the company for $500,000. On August 4, 2004, VC firm Kleiner Perkins Caufield and Byers purchases 50% of the company for $4.2 million. Find the post money valuations on June 2, 2002 and August 4, 2004, and find Ms. Brontë’s and Ms. Eyre’s stock value on August 4, 2004. Their stock is fully vested. Ownership Percentages: Start: Brontë: 50% Eyre: 50% June 2, 2002: Brontë: (50% of remaining 70%) 35% Eyre: (50% of remaining 70%) 35% Gabriel : 30% August 4, 2004: Brontë: (35% of remaining 50%) 17.5% Eyre: (35% of remaining 50%) 17.5% Gabriel (30% of remaining 50%) 15% KPCB: 50% Total Post-Money Valuations: June 2, 2002: Since Gabriel pays $500,000 for 30% of the company, the post-money valuation (PMV) is such that 30% of it is $500,000. 0.30 × PMV 1 = $500,000 PMV 1 = $1,666,667.
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August 4, 2004: Since KPCB pays $4.2 million for 50% of the company, the post-money valuation is such that 50% of it is equal to $4.2 million. 0.50 × PMV 2 = $4,200,000 PMV 2 = $8,400,000 Brontë’s and Eyre’s Share Bronte and Eyre each own 35% of the company after the first round of financing. Stake = 0.35 × PMV 1 = 0.35 × $1,666,667 = $583,333 each Bronte and Eyre each own 17.5% of the company after the second round of financing. Stake = 0.175 × PMV 2 = 0.175 × $8,400,000 = $1,470,000 each 2. Kevin Brown is hired by Stonewall Software at the beginning of September 2004. He receives options for 80,000 shares of Stonewall stock. This stock will vest at the rate of 25% per year. Microsoft buys Stonewall in March 2006 for $60 million. There are 10,500,000 vested shares at the time of sale. Find the value of Kevin Brown’s stock at the time of the Microsoft deal.
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