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Will Barbella, Louise Jensen, and Han Xin, who were classmates at Virginia Tech, started up a company called Trap Finder in January 2014. The company’s product was an app that contained a database of locations where speed traps were frequently set up by local and state police departments. Their app could be used in conjunction with Waze and other GPS-based automotive navigation systems to identify upcoming speed traps and warn drivers to slow down. Trap Finder’s founders, who were computer science majors, invested $45,000 of their personal savings to start the company.
After three months of working on the software for their app (in April 2014), they realized that they needed to hire employees who could research speed trap locations by doing online research and by traveling around and speaking with local citizens in various communities. They also needed to hire someone to begin working on developing a business plan and marketing strategy. These employees (15 were hired in April 2014) were collectively given options for 10% of the company’s equity to incentivize them to come to work for the company. In July 2014, the founders raised $95,000 from a group of friends and relatives, who were collectively given a 20% stake in the company. The money was used to pay their employees and the expenses associated with their need to travel around to various towns to collect information for the speed trap database.
In October 2014, the company released its first version of the app to a group of people who agreed to test it. The initial version of the app only included data for four states (VA, MD, WV and NC) and Washington, DC, but was a hit with early users, who believed that it was helping them to avoid speed tickets. As word of mouth grew about the app, the company realized that it needed to hire professionals with e-commerce and marketing experience. The new employees, who were hired in January 2015, were collectively given options for 4% of the company common equity. Although the company finally had revenues coming in, it was still losing money due to its ongoing database and website development expenses. In January 2015, two local angel investors, Qian Da and Javier Fernandez, provided $275,000 of financing in the form of preferred stock that was convertible into 22% of the company’s common equity.
The new money from the angel investors enabled the company to accelerate its growth, adding five new states to its database and building out a more sophisticated IT system for processing orders and tracking its accounting and cash flow data. The revenue growth accelerated after the company’s app was featured on a TV show about fast cars. Because of the accelerating demand, the company needed to significantly expand its infrastructure and hire more people to gather data needed to make its database national in scope. In October 2015, Chantilly Ventures, a regional venture capital firm in Northern Virginia, invested $1.5 million into the company in exchange for senior bonds that were convertible into 35% of the company’s equity.
In July 2017, the company raised an additional $2 million by selling an 11% equity stake to a major Japanese software company.
How much of the company’s fully-diluted common equity did the company’s founders have at the end of July 2017 (after the sale of the minority stake to the Japanese company)?
How much was the company worth at the end of July 2017?
How much was the founders’ equity worth at that point in time?
How much was the equity of the employees hired in April 2014 worth at the end of July 2017?
How much was each angel investor’s equity worth at the end of July 2017?
What was their IRR?
Name three significant risks to the business.
Chantilly Ventures invested in Trap Finder through its $115 million Chantilly Venture Fund IV. The partners of Chantilly Ventures, who serve as the general partners of Chantilly Venture Fund IV) invested $7 million of their own money into the fund and raised the rest from a variety of wealth families, pension funds and endowments (who collectively are the limited partners in the fund). The investment in Trap Finder was the first investment made by Chantilly Venture Fund IV. The Chantilly Venture Fund IV has a 1.5% annual fee and 15% carried interest. What was the IRR achieved by the Chantilly Venture Fund IV’s limited partners on their investment in Trap Finder? Calculate the IRR from the time that the fund invested in Trap Finder (October 2015) to just after the minority stake was sold to the Japanese company (July 2017). Ignore the annual fees in your calculation.
Name two angel or venture capital investors in each of the following companies:
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