Liquidation Proceeds Exercise—A mature company’s founders and investors are considering several harvest proposals. The company was founded in March 2011 with $ 200,000 in founder funds and $ 300,000 in family loans (8% interest annual interest accrued & due @ HARVEST). The company raised $ 2,000,000 from a Shark Tank Investor in March 2013. The Shark owns 1,000,000 shares of 6% cumulative dividend, participating convertible Preferred Stock, on which no dividends have been paid. The Shark’s interest represents a 45% equity interest in the company. The Shark’s Preferred Stock Investment is subject to a 3 X proceeds CAP; and has a 1.5 X Liquidation Preference.

One buyer has proposed to purchase all equity in the firm for a net payment amount of $11,000,000. How will the $ 11,000,000 be distributed if the Shark does not convert the Preferred Stock (meaning she EXERCISES the Liquidation Preference)? (Think about what must be paid out of the proceeds before equity stakes are calculated and divided).

Questions:

1. Family Lenders Get:

2. Shark gets:

3. Founder gets:

4. What annualized return will the founder have earned if this deal is accepted; and proceeds are distributed in March 2016?

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