1. Venture Capital and the Finance of Innovation [Course number] Professor [Name ] [School Name] Chapter 16 Participating Convertible Preferred Stock

2. Binary Options

3. Binary Option Pricing formulas Plain Binary Option Random-Expiration Binary Option

4. 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?

5. 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?

6. 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?

7. 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. Questions 1)What is the exit diagram for the Series D PCPC. 2)What is the breakeven valuation?