Venture Capital And Private Eqiuty Harvard Case Solution & Analysis


Convertible preferred stock has the tendency to default when investors are investing in it and it is slightly different from the default risks of the preferred stock. Convertible preferred stock can delay in paying the dividend to its holder without being in default and it also could be paid in cumulative dividend to its holders, but this payment must be paid before paying the dividend to common stockholders and it is also paid after these convertible preferred stock converted into the common stock but this conversion didn’t affect the dividend payment priority as it had it before conversion.


Prices of the Convertible preferred stock have the tendency of change with respect to the time that is based upon the fluctuation in the interest rate and the demand and supply of the stocks. The price of the convertible preferred stocks decreased by the amount in terms of dividend that determined on the dividend date or on the date of conversion and this is the same feature that is the same with the common stock.



Redeemable Preferred Stock are the instruments that includes a call option and that call option entitles the issuer company to ask the holder of redeemable preference stock to surrender the instrument in exchange of the face value of preferred stock as issued by the company. The redemption of redeemable preferred stock takes place on or after a predetermined date and the redemption would be in the description of the issuing company.


Since the redeemable stock will be repaid on or after a predetermined date, meanwhile, they do not carry any equity ownership rights, therefore, the dividend payments on redeemable preferred stock is a predetermined percentage that must be paid by the issuing company regardless of the financial performance of the company. However, in case if in any period or periods the issuing company does not pay dividends then the issuing company will have to pay the compounded dividends on redeemable preferred stock.


Since the issuer company can raise a lower amount of finance through redeemable preferred stock in comparison of convertible of common stock and this is because of the call option that is attached to the redeemable preferred stock. However, a call option on redeemable preference stock allows the issuer company to protect itself from unfavorable interest rates. Because the call options enable the issuer company to exercise the call option and forcefully redeem the redeemable preferred stock when the interest rate is lower than the agreed percentage of dividend on redeemable preferred stock dividends.


Similarly, since the redeemable preferred stock are also not entitled to the equity ownership and the dividend payments are also fixed in advance, therefore, the holder of redeemable preferred stock is not entitled to any kind of voting right.


The redeemable preferred stock holder is also ranked in priority as same it is prioritized in the convertible stock for the repayment of principle investment, therefore, they are also best suited for raising capital from venture capitalists because they invest in a company when they are in need of finance, hence, a redeemable preference stock will also allow the venture capitalist either to exercise the right to call it back when it is needed and when the venture capitalist call it back it has the fixed price on it and premium has to be paid on it as well. This stock is also callable stock because of the reason that if the company has started to perform more efficiently and generates a good return for common stock holders or the venture capitalist would call it back and the stock holders would get the premium on their invested capital with the fixed dividend.


To illustrate that how redeemable stock work and how it benefits the investor the answers given below has been calculated in the Excel sheet:

A company issued 1 million redeemable preferred stock with the face value of $1 a share with the liquidation preferences around 1x. As these shares are the fixed income security that gives the stockholders a priority in two ways over the common stock holders such as:

  • It receives the dividend before it paid to the common stock holders.
  • It gives the redeemable Preferred Stock holders the priority when the company went bankrupt as a company must have to pay first these stock holders and afterward if enough amount is available after selling all the assets of the company then it would be paid off to common stock holders.

From the excel calculation in worst situation the convertible preferred stockholders would not redeemed below $2 million redeemable Preferred Stock..............................

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