Brackleigh — Pro Rata or Pass?
A 5-hour Venture Investment Memo case study with a complete model answer
The Situation
Brackleigh Health, Inc. sells prior-authorization and revenue-cycle automation to outpatient specialty practices.
Brackleigh Health, Inc.
- Sector
- Healthcare software — prior-authorization and revenue-cycle automation for outpatient specialty practices
- Size
- Geography
- United States, selling to outpatient specialty practices and the payers they bill
- Ownership
- Situation
The Prompt
You are staffed on a Venture Investment Memo engagement for Brackleigh Health, Inc. You have 300 minutes to work through the materials and produce a memo.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
The assignment (material-1.pdf)
Term sheet and round mechanics (material-2.pdf)
Four years of board packs (material-3.pdf)
The fund's reserve ledger and reserve policy (material-4.pdf)
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 300 minutes.
PART 1
Price the round before you price the decision
PART 2
Ownership maintenance, which is not what the pro rata right buys
PART 3
The two cost bases, and which one is a decision variable
PART 4
The preference, and what the new shares actually own
PART 5
The outcome distribution for the marginal check alone
PART 6
Run the requirement backwards to an operating claim
PART 7
Rank the reserve, and find the hurdle that is actually binding
PART 8
Size the check, and price the signal
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 the ledger before you read the company
- 1:15 – 1:45
settle the ownership arithmetic
- 1:45 – 2:15
build the waterfall and the distribution
- 2:15 – 2:45
rank the reserve and find the binding hurdle
- 2:45 – 5:00
write, and name a size and a policy
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Judge the marginal check, never the blended average
After a follow-on, the average price per share falls and the position reads as though it were bought at a fraction of the current post-money. Every one of those numbers is true. None of them is a reason to invest, because the earlier check is sunk: it is not recoverable, it is not at risk in this decision, and it does not change what the next dollar buys. The tell is never an explicit claim — nobody writes 'we should invest because our blended basis is low'. It is a sentence three pages later that leans on it.
A pro rata right does not maintain ownership
The contractual right is normally struck on the new money: your percentage multiplied by the primary. But a round that also creates an option pool out of the pre-money dilutes you by more than the new investor's stake, and nothing in a pro rata right pays for the pool. So taking your full pro rata still leaves you below where you started. Holding ownership flat is a bigger check, it usually needs the lead's consent, and it is a different decision with a different answer.
The marginal dollars buy a different instrument
The new shares are a new series with their own liquidation preference sitting pari passu with the old one. So the follow-on's payoff is not the position's payoff scaled down — the two diverge at every exit value, and most violently in the outcomes that decide whether the fund returns capital. Run the new money through the waterfall on its own. Quoting the position's multiple in a memo about the marginal check is the same error as the blended basis wearing different clothes.
The hurdle is the claim you displace, not the best one
A reserve dollar competes with the other claims on the same reserve, so its opportunity cost is the MARGINAL claim — the one the budget runs out on — and not the top of the list. Ranking the claims and funding down until the money is gone is what makes that visible; a hurdle stated as a policy number cannot. And a policy hurdle written for a new check with ten years to compound is usually the wrong bar for a reserve dollar with five, which is worth saying out loud.
A ranking is only as good as its weakest number
Every claim on a reserve ledger carries an underwritten multiple, and they are not equally knowable. A live round you have diligenced is one kind of number; a placeholder for companies you have not met, carrying a prior fund's realized average, is another kind entirely. Print the basis beside every multiple. When the decision turns on a comparison between two numbers of unequal confidence — and this one does — the memo has to say so rather than treating the ledger as though every cell were measured the same way.
The return per dollar does not move with the size
Same instrument, same price per share, same waterfall: doubling the check doubles the proceeds and leaves the multiple exactly where it was. So the size question is a portfolio question — concentration, budget, and what else the dollars could do — and separating it from the returns question is what lets you answer 'and at what size?' with a policy rather than with a feeling.
A preference is a floor at par, not protection
Below the total preference stack, a pari passu structure shares pro rata by invested amount — so a bad outcome returns less than the money, not the money. Above the stack and below the conversion point, every outcome pays exactly par, which is a wide band in which nothing the company does changes the answer. In a follow-on that band matters more than it does in a new investment, because the follow-on is going into the largest preference in the stack and it is going in last.
Signaling is a number with a threshold, not a gesture
'We have to follow or it sends a bad signal' is the most common way a reserve budget gets spent on the wrong companies. The disciplined version runs the same backwards logic the underwrite uses: what would the signal have to be worth for the answer to flip? That gives a dollar threshold, and then the argument is about whether the board seat, the next round's right of first look and the read a co-investor takes into your other names are worth more than it. Argue both sides. A signal costs most when the money is needed, and a fully subscribed round does not need yours.
Information advantage is real and it is not free
Four years of board packs is a genuine edge, and it is the honest tiebreaker when two claims are level on arithmetic — you can see one of them and you cannot see the other. But it cuts the other way too. Familiarity is why insiders re-underwrite the company they already believe in instead of the one they have not met, and a fund whose reserves always flow to the names in the room has replaced a policy with a habit.
Name a price, not a view
'Good company, wrong price' is a complete answer and often the honest one. Hold the exit constant, solve for the pre-money at which the new money clears the fund's bar, and say how far that sits from the ask. If the answer is still yes at the asked price, say what it is actually buying — because a follow-on taken for a reason other than the price is a follow-on the partnership should be told the truth about.
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
- —Marginal versus average cost basis
- —Reserve allocation across a portfolio
- —Signaling risk of not following
- —Ownership maintenance math
- —Return on the incremental dollar
- —Recommendation with a stated reserve policy
Memo
The written recommendation and how it was reached
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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 Brackleigh — Pro Rata or Pass?
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
Why is there no deck?
Because the format is memo-first. The deliverable is seven to ten portrait pages of argument, and the exhibits sit inside it rather than replacing it. A partnership reading this before a Thursday meeting wants the recommendation, the size and the reserve policy on page one; a slide deck spends its first four pages saying what a masthead says in four lines.
Isn't the blended cost basis relevant to something?
It is relevant to how the position gets reported, and to nothing else. Fund accounting, the LP letter and your own sense of how the position has done are all blended views, and rightly so. The decision in front of you is not one of them. The test is simple: if the seed check had been made by a different fund, would the answer change? It would not, and that is what sunk means.
Should I build a discounted cash flow?
No. There is no discount rate in a follow-on decision, no free cash flow to discount, and no terminal value that would not simply restate the exit assumption. Importing a cost-of-capital debate into this adds a page of apparatus and no information. If you want to test the exit assumption, grid ARR at exit against the multiple it is struck on — those are the two a partner will actually argue about.
How do I decide the probabilities in the scenario set?
You do not derive them; you state them and defend them. What separates a good distribution from a bad one is not the precision of the weights but whether the scenarios are the right ones — in particular whether the set includes the outcomes where the preference stack matters, which is where a follow-on into the largest and last preference behaves least like the position it is being added to. Then say how much of your answer survives moving any single weight.
Why rank the reserve rather than just check the policy hurdle?
Because the policy hurdle is a bar for a new investment with a full fund life ahead of it, and a reserve dollar late in a fund's life is a different instrument. If every reserve dollar had to clear the primary bar, the fund would deploy no reserves at all — and undeployed reserves come back to the LPs at cost. Ranking makes the real constraint visible: whatever goes into this company comes out of something specific, and the memo has to name it.
What if the answer is to pass?
Then write it, name the price at which it becomes yes, and say what you would do with the money instead. A recommendation to pass that also names the claim the reserve goes to is a stronger and more useful answer than a yes manufactured by nudging a probability. And be explicit about the signal you are accepting — a pass with the signaling cost priced is a decision; a pass that ignores it is an oversight.
Should I ask for more than my pro rata?
Only if you can say what it buys that the pro rata does not, and only after the concentration test. The marginal return per dollar is identical at every size, so a bigger check is not a better investment — it is a bigger bet on the same investment. The legitimate reasons to ask for more are ownership targets and board rights, and both of those are portfolio arguments that have to be made as portfolio arguments.
How should the conflict of interest appear in the memo?
Named on the first page, in a sentence, and then not apologized for again. You sit on the board, you led the seed, and the fund's mark depends on this round. Stating it is what licenses the rest of the document; burying it invites the reader to discount everything else you wrote. It is the cheapest credibility available in this format.
Is this format still used?
Constantly, and it is the decision a working investor makes most often. New investments are rare; follow-on and reserve decisions come up every quarter, and they are where a fund's returns are made and lost. A candidate who can reason about a marginal dollar against a budget is demonstrating the part of the job that comes after the part everyone practices.
About This Venture Investment Memo Case Study
Venture Investment Memo case study for venture & growth interviews. 300-minute format covering marginal versus average cost basis, reserve allocation across a portfolio, signaling risk of not following. 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.
300-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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