Private Equity 20 Lectures (12) Calculation of PE Project Firm Exits in Step-by-Step Detail

Private Equity 20 Lectures, a legal must for Silicon Valley investors, I'm U.S. lawyer Liu Xiaoxiao .

In the last installment, we introduced the theoretical aspects of private equity exits, so in this installment, let's take a look at how the various rounds of investors in Panda Technologies exited in conjunction with actual numbers.

Panda Kitten founded a company called Panda Technology.

In its first year, it received an angel round of $3m (three million dollars) from Bill Gates, with a Post-Money valuation of $12m (twelve million dollars). The Liquidation Preference is 1X Non-Participating. For those of you who don't understand what 1X Non-Participating means, don't worry, you'll understand after listening to the calculations in this issue.

The following year, in a Series A round of financing from Warren Buffett, Panda Technologies received $24 million (twenty-four million dollars) in New Money. The Post-Money valuation of the company was $72 million ($72 million USD). The Liquidation Preference clause is 1X Non-Participating.

In the third year, Jeff Bezos raised a Series B round of financing for Panda Technologies, with a New Money of $48m ($48m) and a Post-Money valuation of $240m ($240m), with a Liquidation Preference of 2X Non-Participating. The Liquidation Preference was 2X Participating.

In the fourth year, Elon Musk raised a Series C round of financing for Panda Technologies for $160 million ($1.6 billion) in New Money, valuing the company at $500 million ($500 million) in Post-Money, and with a Liquidation Preference clause of 3X Participating. Liquidation Preference is 3X Participating.

In the fifth year Panda Technologies was acquired by Google for $800m ($800m). Haha, $1b (one billion dollars) is the price of a unicorn, and Panda Technologies basically exited as a unicorn. The following to begin to share the money, this time Liquidation Preference (liquidation preference) plays a role in the ~

1. Assuming that there is no Liquidation Preference (liquidation preference) under the conditions of the exit return analysis.

Let's assume that if the company is sold for $800m ($800m), and if all investors' shares are converted 1:1 to Common Stock, then according to their respective equity ratios, their return multiples would be 24.2x, 6.0x, 2.3x, and 1.6x, respectively. This is shown in the chart below:

But the actual situation, of course, will not be so la, really to the exit time, that is the investor from back to front Cash Out (cash), so we have to look at the C round of investors Elon Musk (Elon Musk) choice.

2. The return of the C round investor Elon Musk (Elon Musk).

Elon Musk has two choices for Series C investor, one is to convert to Common Stock at 1:1 ratio, which can only get $256m ($2.56bn), i.e. 1.6x return on investment, which is lower than the 3x liquidation preference multiple he requested at the time of investing, so he will definitely implement Liquidation Preference. Liquidation Preference (Liquidation Preference), so he can first take: 1.6 X 3 = 480 million dollars. The remaining $320m (3.2 billion dollars), the C round Elon Musk (Elon Musk) can also be converted into Common Stock (common stock) after the proportion of equity, with all other shareholders together with the proportionate distribution (Participating). But until then, the Series B Jeff Bezos and Series A Warren Buffett venture capital funds are still preferred shareholders, and will have to decide whether or not to exercise their Liquidation Preference. As a result, the Series C Elon Musk return multiple is 3.0x for now. This is shown in the chart below:

3. Series B Investor Jeff Bezos' Returns

After Series C Elon Musk has taken 3x Liquidation Preference, it's time for Series B Jeff Bezos. If Jeff Bezos (Jeff Bezos) 1:1 conversion into Common Stock (common stock), according to the proportion of equity distribution of the remaining money, can only get 0.9 times the return, is lower than the liquidation preference of 2 times the requirements. Therefore, the B round of Jeff Bezos (Jeff Bezos) will also execute Liquidation Preference (liquidation preference). So, Jeff Bezos in Series B will get $48x2=$96 million, and the rest of the $224 million ($2.24 billion), because Jeff Bezos in Series B will have to distribute it to all the other shareholders in proportion to their shareholdings. But here, too, he has to wait for Warren Buffett, the Series A investor, to decide whether or not to implement the Liquidation Preference. Therefore, the Series B investor's return multiple is 2.0x for the time being. This is shown in the chart below:

4. Returns of Series A investor Warren Buffett (Warren Buffett)

At this time, we can see that Warren Buffett's direct 1:1 conversion to Common Stock (common stock) return of 1.7 times, higher than his preferential liquidation of 1 times the return requirements, of course, he will not execute Liquidation Preference (liquidation preference), so the Warren Buffett will choose to divide the remaining money among the remaining shareholders in proportion to the shares that can be converted to Common Stock.

Similarly, Bill Gates (Bill Gates) angel round is also directly converted 1:1 into Common Stock (common stock).

In other words, after the Series B and C investors have taken the preferred liquidation money, all shareholders will share the remaining $224m ($2.24 billion) in proportion to the shares that can be converted to Common Stock. This is shown in the chart below:

In the end, Series C investor Elon Musk returned a multiple of 3.4x, Series B investor Jeff Bezos returned a multiple of 2.6x, Series A investor Warren Buffett returned a multiple of 1.7x, and angel round Bill Gates returned a multiple of 6.8x, while the entrepreneur ended up with about $60m (zero.6 billion dollars). Bill Gates' angel round returned 6.8x, and the entrepreneur ended up with about $60m (zero point six billion dollars).

Of course, the above case is a very ideal state, simplified a lot of things, such as dividends and options, from the above analysis can be seen, a fairly successful project, the transaction amount of $ 800m (800 million U.S. dollars), the founder of the results can only get $ 60m (zero point six billion U.S. dollars) or less than even 10%, which is the back of the round of rounds of investors Liquidation This is the role of Liquidation Preference (liquidation priority) of investors in the later rounds.

After reading today's calculations, we are not for private equity funds from the startup exit mechanism more understanding?

Private equity fund 20 lectures, Silicon Valley investors of the law must be taught, I am the United States lawyer Liu Xiaoxiao.

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