One of my colleagues has asked for my help on a project that his son is working on for an internship. I can’t seem to decipher what is being asked, particularly in the format given. I’ve asked for some feedback but I think that the person who asked is traveling, and the poor kid needs to respond soon. So I’m hoping that one of the many experts here can help me decipher this. I’ve copied and pasted exactly as given:
Please do this in a presentable chart for email or handout.
1.) What is the payout on a 2 year convertible note/loan with an 8%
interest accrual for each year for 25k, 50k, 75k, and 100k?
2.) If they convert that note to equity (interest included) at a
1.3million dollar valuation, what percentage of the company do they get.
- include percentage for 25, 50, 75, and 100k conversion
3.) Company is acquired for 25, 50, 75, 100million, what
is the dollar amount payed to them upon acquisition for percentage
owned.
Note that the SDMB has a long-standing “no homework” rule. If you read the OP carefully, the OP is looking for clarification of what is being asked, not solutions to the homework (which would not be permitted). Please keep that in mind when responding.
I misread the post as asking for “homework help”, because the last part (the numbered list) appears to be the actual “homework” questions.
The part I overlooked, and that engineer_comp_geek is pointing out, is that the numbered list is an actual quote of the task, but Jackknifed Juggernaught is actually asking (first paragraph) for clarification (such as, guidance on what formulas or methods would be appropriate to provide the materials asked for in the quote).
Maybe I’m the only one that misunderstood, or was worried about the pretty obvious “homework” nature of the list of questions. I didn’t think this topic shouldn’t devolve into yelling at someone about homework questions. I’m glad engineer_comp_geek weighed in and made me look again.
If this post from a business professor at Carnegie Mellon, and this threepartarticle on convertible notes as a tool for acquiring start-up capital financing from a lawyer who specializes in representing entrepreneurs, are both correct, then I think the intern needs a few more data points to fully answer the question. See the three part article in particular.
As it is though, I think the answer is fairly easy. Find the amount of simple or compound interest—speaking of another data point that we need—accrued over a two year period and add that to the principal. Divide that combined figure by the given $$ valuation of the company to get the percentage of equity the noteholder is entitled to upon converting the debt to equity, and plug that percentage into the new valuation after the merger.
But the intern might get some brownie points if he brings up some of the subtleties of these financial instruments to his supervisor and tries to apply them to the problem he was given.
That is the third part of the question… where the stock increased in value.
The 2nd part of the question was “at the instant of conversion” where there is assumed to be no stock value change, with no information provided as to any change.
(of course there may be some change in value to the owner… eg tax benefits ? and all that. but we are doing face value in this question.)
My addition was to say " Its not a trick question … It says to do some simple maths that answer the question exactly, no guess work involved… do that."
