Crothers Ventures (CV) is considering an $8M Series A investment for CP at $1 per share in Lagunita Inc. The founders and employees of Lagunita have claims on a total of 12M shares of common stock (as exercised). Thus, following the Series A investment, Lagunita will have 12M common shares outstanding (on as-exercised basis) and would have 20M shares outstanding upon conversion of Series A CP. Crothers estimates a 25% probability for a successful exit, with an expected exit in four years, and an exit valuation of $300M. The $300M CV II has annual fees of 2.0% of committed capital for each of its ten years of life, and earns 20% of carried interest on all profits after return of committed capital. Assume retention of 50%. A) Using the modified VC method, what is your investment recommendation for CV?
B) How sensitive is your recommendation to different assumptions about the exit valuation and the probability of success?