Ashvale — Down Round or Structure?
A 6-hour Venture Investment Memo case study with a complete model answer
Modeled After
Spark Capital
The single-question prompt Spark Capital is reported to set, applied to a financing decision rather than a new investment, so that the recommendation has to name the structure and the price rather than the company.
Structure and exercise format are modeled after Spark Capital — the single-question prompt and the memo it expects. The company, the holders and every figure in this case are entirely our own.
The Situation
Ashvale Commerce, Inc. sells commerce infrastructure: a single API through which a merchant runs order orchestration, payment routing and settlement across every channel it sells on.
Ashvale Commerce, Inc.
- Sector
- Commerce infrastructure — order orchestration, payment routing and settlement for multichannel merchants
- Size
- Geography
- United States, selling to mid-market and enterprise merchants across every channel they sell on
- Ownership
- Situation
The Prompt
You are a partner at a venture and growth fund.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
The assignment
Both term sheets and the bridge note
Board pack
Certificate of incorporation and stock plan records
Schedule of participation
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 360 minutes.
PART 1
Solve each priced round, rather than reading it off the term sheet
PART 2
Anti-dilution, and the difference between an adjustment and a ratchet
PART 3
Pay-to-play: what it takes, and from whom
PART 4
Build the preference stack under each structure
PART 5
State a distribution of exit values, and solve the waterfall across it
PART 6
Model the outcome to the common as well as to yourself
PART 7
Judge the check on the incremental dollar, not the position
PART 8
Convert the structure into the price it is worth, and name your own
PART 9
Say what you are, and how the round should be run
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished memo is in the solution set below.
- 0:00 – 1:15
read, and reconcile the cap table before anything else
- 1:15 – 2:15
solve both rounds and the anti-dilution
- 2:15 – 3:00
write down the distribution, then solve the waterfall
- 3:00 – 3:45
your own return, and the counterfactual that makes it honest
- 3:45 – 6:00
solve for prices, then write
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
A flat round with a pool refresh is a down round
If the pool is created pre-money, the existing holders fund it, and once room is made for both the new money and the new pool the price per share the round actually strikes is below the headline. That matters twice: the existing holders receive less than the pre-money says, and the round can trigger anti-dilution on a series whose conversion price sits above the price actually struck. A headline pre-money that does not name the pool is not a price.
Structure is price, and it can be converted into one
A participating senior preference, a ratchet and a pay-to-play are all price concessions taken in a form the headline does not have to disclose. The only honest comparison between a structured term sheet and a clean one is to hold the outcome distribution constant and solve for the clean pre-money that pays the new money the same. Do that and a flat headline can turn out to be a far worse price for the company than the lower number sitting next to it.
A preference multiple above one is a claim on capital nobody invested
A 1.0x stack puts exactly the money invested ahead of the common. A 2.0x on the new money manufactures a second turn of preference on capital that has not been contributed, and participation lets the same money take its equity share on top of it. Compare what sits ahead of the common against what has actually been put in — the gap is somebody else's upside, and the somebody is named in the cap table.
A non-participating waterfall has no closed form
Each series takes the greater of its preference and its as-converted share of the residual, and whether converting pays more depends on which other series are sitting on preference and shrinking that residual. It has to be solved to a fixed point at every exit value rather than assumed, and a senior participating tier has to be paid, then set aside, then paid again out of the residual. Ownership multiplied by exit value is the shortcut, and it fails in the scenarios that decide the case.
A full ratchet is not an adjustment
A broad-based weighted average moves the conversion price in proportion to how much cheap stock was actually issued, weighed against the whole fully diluted count. A full ratchet reprices every old share at the new price however little is issued — one share at a cent resets everything. The shares it creates come out of the common, and they are created at the moment the company can least afford to lose the people holding it.
Pay-to-play is a clean-up mechanic and a transfer, and it is a charter question
Converting non-participants to common removes preference the company would otherwise carry to exit, which does help. It also hands the round to the holders who can write a check, which is why an allocation can exceed an ownership percentage. Whether it binds a holder who votes against it is decided by the existing certificate of incorporation — whether the preferred votes as a single class or by series on adverse amendments — and not by anything in the term sheet.
Judge the check on the incremental dollar
Capital already invested is gone whichever way you vote, so the test is proceeds if you fund less proceeds if you do not, over the size of the check. Under a pay-to-play the second term is a different capital structure rather than the same one with your line removed. And a structure that punishes declining raises the measured return on the check without improving the investment by a dollar — decompose the marginal figure into the part that is a return and the part that is a penalty avoided before you act on it.
The mark is not evidence
A venture position is carried at the price of the most recent round, which is exactly why a flat headline is worth paying terms for. It is an accounting convention rather than a valuation, and how far a structure moves it is the most reliable predictor of which structure a fund talks itself into. Print what each proposal does to the carrying value, then say what that fact is worth as an argument, which is nothing.
Model the outcome to the common, because the common is the company
The exit value at which the common receives its first dollar, and what the option pool receives in expectation, decide whether the people who produce the good outcomes are still there to produce them. Check the options already granted against their strike, too: if a common share never reaches it, retention is a question about the new pool and about the stack in front of it, not about how many shares are in the plan.
A recapitalization is not a pay-to-play with better manners
Converting the whole existing stack to common and putting a single preference on the new money removes the overhang instead of re-ordering it. The distinction that matters is who gives something up: a recapitalization asks every holder for the same thing, prospectively and on identical terms, while a pay-to-play asks it only of the holders who cannot write a check and lets the ones who can add a senior preference on top.
An insider round is a conflicted transaction and has to be run like one
When existing holders with board designees price a financing, the business-judgment presumption does not survive it and entire fairness is the standard to plan for. The devices are a properly empowered committee of disinterested directors with its own advice, informed and uncoerced approval by the disinterested stockholders, and, most effective of all, a rights offering open to every holder on the same terms. The board's duty runs to the class that is not in the room.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: memo, built the way a banker would actually build it. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —Clean down round versus structured flat round
- —Liquidation preference stacking
- —Pay-to-play and recapitalization mechanics
- —Effect of structure on employee equity
- —Existing investor conflicts
- —Recommendation as an insider
Memo
The written recommendation and how it was reached
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the memo and the audio walkthrough.
Get StartedDownloads are available to Diamond members
Memo (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Ashvale — Down Round or Structure?
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
Is this a valuation exercise?
No, and building one is the most common way to fail it. Nobody has asked what Ashvale is worth. The question is what each proposed structure does to the money and to the people, and what answers it is a cap table and a liquidation waterfall solved across a stated distribution of outcomes. A discounted cash flow would add a page of apparatus and no information.
Should I just take the structure that pays my fund the most?
Compute it first — you cannot argue about a number you have not produced. Then decompose it. If a structure's advantage over the alternative is made of preference manufactured on capital nobody has contributed, participation on top of it, and preference stripped from holders who cannot fund, that is a transfer rather than a return, and you would be voting for it with a board seat you hold. Whether you take it anyway is the judgment the case is testing; pretending you did not see it is not.
How do I handle the fact that we already own 9%?
Two ways, and keeping them separate is most of the discipline. The capital already invested is a sunk cost and belongs in no decision rule, so judge the check on the incremental dollar. And the ownership is a conflict, so name it, price what your recommendation costs you, and say what you would do with your board seat.
Why does a flat round trigger anti-dilution at all?
Because the option pool refresh is created pre-money. Once room is made for it, the price the round actually strikes is below the nominal pre-money divided by the existing share count — and if that price falls under a series' conversion price, the adjustment triggers. The pool refresh itself is an excluded issuance, so it enlarges the base for the next round without ever counting as cheap stock in this one.
What is the difference between a pay-to-play and a recapitalization?
Who is asked to give something up. A recapitalization converts the whole existing preferred to common: every holder loses the same thing, prospectively, on identical terms. A pay-to-play converts only the holders who do not fund, which means only the ones who cannot, while the holders who can keep what they had and often add a senior preference on top. The economics can look similar and the fiduciary posture does not.
Can I just use ownership times exit value for the payouts?
Not here. With a non-participating stack, a series takes the greater of its preference and its as-converted share of whatever is left after the series that stay on preference are paid — so the answer depends on which series convert, which depends on the answer. The shortcut is close in the outcomes where nothing is at stake and wrong in the ones where everything is.
How precise does the exit distribution have to be?
Not very, but it has to be explicit. It is the most arguable thing in the memorandum, so write it down as scenarios with weights and anchor each exit value to something rather than asserting it. A reader who disagrees can then re-weight it and follow every table through again. A distribution adjusted after the fact to reach a conclusion is not evidence for the conclusion.
Is a bridge ever the right answer?
Sometimes, but say what it buys and what it costs rather than treating it as a way of not deciding. Price the months of runway it adds against the round, the price it converts at once the discount and the accrued interest are in, and the preference it puts in front of everyone before conversion. Then ask what will be known when it matures that is not known now. If the answer is nothing, it re-prices the same decision later with less cash.
What does 'name a price' mean when the case is about structure?
It means the recommendation ends in a number. Convert the structure into the clean price it is worth, then solve for the price at which the incremental dollar clears your fund's own bar under the structure you would sign. A recommendation that says 'not this one' without saying what you would do instead leaves the partnership exactly where it started.
How much of this is really legal rather than financial?
More than candidates expect, and getting it wrong is expensive. Whether a pay-to-play binds a dissenting series, what a full ratchet does versus a weighted average, which issuances are excluded from anti-dilution, what standard of review a conflicted insider round attracts and what cures it — each is a specific claim with a specific answer, and the certificate of incorporation decides several of them rather than the term sheet.
About This Venture Investment Memo Case Study
Venture Investment Memo case study for venture & growth interviews. 360-minute format covering clean down round versus structured flat round, liquidation preference stacking, pay-to-play and recapitalization mechanics. Includes the full prompt, a written memo and an audio walkthrough.
This case study sits in Venture & Growth, under Investment Research Memos. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
360-Minute Format
The time limit a real assessment would give you
Memo
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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