domingo, 24 de febrero de 2008

capital riesgo: full ratchet

blah blah blah MBA...

Investor A purchased 1,000,000 shares of Series A Preferred Stock of Company X at $1.00 per share at a pre-money valuation of $3,000,000 for a 25 percent stake, on a post-financing basis ($4,000,000), in Company X (we assume as is usually the case each share of Series A Preferred initially converts into one share of common stock). One year later, Company X sells 1,000,000 shares of Series B Preferred Stock at $0.50 per share (again convertible one-to-one into common) at a pre-money valuation of $2,000,000 for a 20 percent stake, on a post-financing basis ($2,500,000), to Investor B. With no anti-dilution protection, Investor A would own 20 percent of Company X after the sale of the Series B Preferred Stock (1,000,000 shares out of 5,000,000 shares). However, the full ratchet anti-dilution provision in Company X's charter provides that the conversion price for the Series A Preferred Stock that Investor A purchased for $1.00 per share will be reduced to $0.50 per share, such that upon conversion, Investor A would be entitled to receive 2,000,000 shares of Company X common stock upon conversion rather than 1,000,000 shares. What will really happen is that Investor B will take into account this anti-dilutive effect into its term sheet to allow it to maintain its percentage interest at 20 percent, thus further crushing Company X's founders and holders of common stock (including optionees). However, the real issue here is that full rachet adjusts the Series A Preferred Conversion price regardless of the number of shares of Series B Preferred actually sold at the dilutive price. Therefore, the issue is one share of Series B Preferred issued at $0.50 per share will have the same impact on the Company from an ant-dilution adjustment standpoint.

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