Case 055Portfolio management and follow-onsCore

Hastavik Crafts asks its insiders for a Rs 15 crore bridge and your share is Rs 5 crore. Compare the expected value of funding with not funding.

The situation

Hastavik Crafts sells handmade home goods online. Your fund owns 14% of it, bought for Rs 10 crore with a 1x liquidation preference. Across all investors there are Rs 45 crore of preferences, all ranking equally, ahead of the common shares.

Hastavik needs a Rs 15 crore bridge from insiders, and your share is Rs 5 crore. The bridge is a convertible note: it converts at a 20% discount to the next round, and in a sale it is repaid first. With the bridge, there is a 40% chance of a Series B raising Rs 60 crore at Rs 240 crore pre-money, Rs 300 crore post-money, with the note converting inside the pre-money. Otherwise the company sells for Rs 40 crore. Without the bridge it sells now for Rs 40 crore.

Your task

What does the fund expect to collect under each choice, and what single estimate does the decision rest on?

Quick check

If there were no chance of a Series B, would funding the bridge still help the fund?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Funding is worth about Rs 16.2 crore net of the new cheque against Rs 8.9 crore for not funding, but only because of the Series B branch. Without a round, the note sits ahead of the preferences and the fund ends up worse off. The decision breaks even if the chance of a Series B is about 12.5%, so it rests on whether that round is a real prospect or a hope.

Step 1What does the fund collect if it walks away?

Start with the base case, because a bridge is always a choice against something. A sale at Rs 40 crore is below the Rs 45 crore of preferences, so every rupee goes to preferred holders and common gets nothing. Preferences rank equally, so your Rs 10 crore collects 10 over 45 of Rs 40 crore, Rs 8.89 crore. Your 14% ownership is irrelevant in this branch; only the preference counts.

Fund the bridge or not: what the fund collects on each branch, Rs croreDo not fundcompany sells nowSale at 40 against 45 of preferences: all 40 to preferredFund's share: 10/45 x 40 = 8.89Fund Rs 5 croreexpected 21.22 gross16.22 net of the cheque40%60%Series B at 300 post: note converts at a 20% discount14% of 221.25 + note 5/0.8 = 30.98 + 6.25Worth 37.23 at the round priceSells later for 40: the Rs 15 crore note is repaid firstNote back 5 + 10/45 x 25 = 10.56Worth 10.56, only 5.56 net of the cheque
Not funding returns Rs 8.89 crore from the preference; funding returns Rs 37.23 crore at the Series B price with a 40% chance and Rs 10.56 crore in a later sale with a 60% chance, an expected Rs 21.22 crore before the Rs 5 crore cheque.
Step 2What is the stake worth if the Series B happens?

The note converts at a 20% discount, so Rs 15 crore buys shares worth Rs 18.75 crore at the Series B price. Because the note converts inside the Rs 240 crore pre-money, existing holders share Rs 221.25 crore of it, and your 14% is worth Rs 30.98 crore. Your own Rs 5 crore of note is worth Rs 6.25 crore. Together that is Rs 37.23 crore, a paper value at the round price, not cash.

Step 3What happens in a sale if you have funded?

Here is the part people miss. The note is debt, so all Rs 15 crore is repaid before any preference, and only Rs 25 crore is left for Rs 45 crore of preferences. You get your Rs 5 crore back plus 10 over 45 of Rs 25 crore, Rs 5.56 crore, for Rs 10.56 crore in total. Net of the cheque that is Rs 5.56 crore, less than walking away.

Rs croreProbabilityFund collectsWeighted
Do not fund: sale now100%8.898.89
Fund: Series B at Rs 300 crore post40%37.2314.89
Fund: sale later at Rs 40 crore60%10.566.33
Fund: less the new cheque(5.00)
Fund, net expected value16.22
Funding the bridge is expected to return Rs 16.22 crore net of the Rs 5 crore cheque against Rs 8.89 crore for not funding, a gain of Rs 7.33 crore that comes entirely from the 40% Series B branch.
Step 4What single estimate does the decision rest on?

Plot the net value of funding against the chance of a Series B. It crosses the do-not-fund line at about 12.5%, so the 40% estimate has plenty of room, but only if the round is real. The Series B value is a mark at the round price; if you haircut it by 30% because a later exit may come in lower, breakeven rises to about 21.5%. The honest judgement: fund it if the company can name the Series B lead's conditions and a route to meeting them, and decline if the 40% is the founder's optimism written as a number. Remember too that a bridge often becomes a second bridge.

Funding wins only through the Series B branch: breakeven chance of a round01020300%25%50%75%100%Chance of a Series BDo not fund: 8.89Fund the bridge, net of Rs 5 croreBreakeven at 12.5%At 40%: 16.22
The net value of funding rises from Rs 5.56 crore with no chance of a Series B to Rs 32.23 crore with certainty, crossing the Rs 8.89 crore value of not funding at a 12.5% chance.

Where candidates lose it

The usual mistake is valuing the bridge as if it only adds upside: the note is senior, so candidates assume the fund is fully protected. It is not, because the other insiders' notes also rank ahead of your preference, and in a sale your preference collects less.

The second is comparing the Series B mark with the sale proceeds as if both were cash. The Rs 300 crore round sets a price, not a payout; say that you would haircut it.

What the interviewer asks next

  • The other insiders refuse to fund. Would you fund the whole Rs 15 crore alone?
  • How would a 2x repayment on sale in the note terms change your answer?
  • What conditions would you attach to the bridge before signing?

Company names and figures are illustrative.