What is the value of warrants

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An entrepreneur and a venture capitalist are negotiating a first round of financing and reach an impasse. The entrepreneur believes his company is worth $5 million (equivalent to $1.00 per share given the 5 million fully diluted common shares outstanding before the new round). The venture capitalist is eager to do the deal but believes the correct valuation is only $4 million ($0.80 per share). She wants to invest $4 million at that price and has proposed a simple convertible preferred with weighted average anti-dilution protection. To break the impasse, the venture capitalist proposes to pay $1.00 per share of standard convertible preferred but asks for a 5-year option to invest $3 million in a new convertible preferred stock at a 20% premium (i.e., $1.20 per share).

What valuation is the venture capitalist assigning to the company? What is the equivalent current price per share? If you think of the venture capitalist's option to buy shares in terms of their warrant equivalent, what is the value of those warrants?

Reference no: EM131892230

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