Venture Capital and the Finance of Innovation[Course number]

Professor [Name ][School Name]

Chapter 16Participating Convertible Preferred Stock

Binary Options

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Binary Option Pricing formulas

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Plain Binary Option

Random-Expiration Binary Option

Example 1

Suppose that EBV offers the employees of Newco a bonus pool of $5M upon any exit where firm value exceeds $200M. Currently, the firm value of Newco is $40M, and base-case option pricing assumptions (Series A) apply.

Problem What is the current value of this bonus incentive?

Example 2

EBV considering $6M Series A investment in Newco

PCP ($6M APP) for 5M shares, with a QPO threshold at $6 per share.

Pre-money shares = 10M

Question: What is the breakeven valuation?

Example 3

Talltree is considering a $12M Series B investment in Newco

5M shares of PCP, with a QPO at $12 per share. Employee shares = 10M EBV (Series A) has 5M shares of PCPC ($6M APP)

a $6 per share QPO, and a 4X cap.

Questions: 1) What is the exit diagram for the Series A?2) What is the breakeven valuation?

Example 4

XYZ ventures is considering a $20M Series F in Newco for 10M shares of PCP with a QPO threshold of $6 per share.

Employees have claims on 20M shares of common Series A: 10M shares of CP ($6M APP) Series B: 10M shares of CP ($10M APP) Series C: 10M shares of CP ($4M APP and 3X liquidation preference) Series D: 10M shares of PCPC ($10M APP) with 3X cap and $5 QPO Series E: 10M shares of CP ($10M APP) All venture investors have $250M committed capital and $50M in

lifetime fees.Questions1) What is the exit diagram for the Series D PCPC.2) What is the breakeven valuation?