Venture Capital and the Finance of Innovation, Second Edition

302 CHAPTER 16 PARTICIPATING CONVERTIBLE PREFERRED STOCK
For the PCP, the QPO of $6 per share occurs at
Series F conversion condition ðQPOÞ: 80M $6 5 WF 5 $480M: ð16:26Þ
At this QPO, Series F will return $20M to the other shareholders and recapture 1/8
$20M 5 $2.5M for themselves, for a net drop of $20M 2 $2.5M 5 $17.5M. With these
calculations in hand, we are almost ready to draw the exit diagram for the Series D. Because
Series D is paid after Series E and F, they receive no proceeds until W 5 $30M, then they
receive the next $10M, and then nothing until the common stock begins to pay off after all
liquidations are complete at W 5 $68M. From that point, Series D has as-if claims on 10M
shares for one-fourth of the proceeds (employees have 20M shares and Series F has 10M as-if
shares). This fraction then falls off as other series convert. At W 5 $190M, the Series D line
goes flat, only increase again after voluntary conversion at W 5 $260. Finally, at W 5
$480M, the Series D investors receive $2.5M from the returned redemption value of the
Series F. We can read this diagram as
Partial valuation of the Series D
5 Cð30Þ 2 Cð40Þ 1 1=4 Cð68Þ 2 1=20 Cð92Þ 2 2=35 Cð112Þ
2 1=56 Cð126Þ 2 1=8 Cð190Þ 1 1=8 Cð260Þ 1 2:5 BCð480Þ:
ð16:27Þ
(b) Note that over the range of 190 , W , 260, the PCPC is capped so the exit line is flat.
Over this flat range for the Series D, all the other common stock holders will receive proceeds
as if the Series D shares did not exist, so their slopes will increase. This can be seen in
the exit diagram for the Series F in Exhibit 16-9.
EXHIBIT 16-9
EXIT DIAGRAM FOR THE SERIES F
Series F
Slope 1/4
Slope 1/5
Slope 1/7
Slope 1/8
Slope 1/7
Slope 1/8
17.5
20 68 92 112 126 190 260 480
$W
Slope 1/8