The data room excerpt
For this exercise define live ARR as annualized recurring subscription contract value for customers already live, excluding one-time projects and contracts not yet started. ARR is an operating metric, not revenue recognized under accounting standards. Actual company definitions and contract terms can differ.
| Item | Information provided |
|---|---|
| Live annual subscription contracts | $1.20m total recurring contract value |
| Paid one-time implementation projects | $0.30m this year |
| Signed annual subscriptions not yet started | $0.30m; begin next quarter |
| Largest live subscription customer | $0.36m annual contract value |
| Unrestricted cash today | $1.00m |
| Current monthly net cash burn | $0.20m |
| Proposed raise | $3.00m at $12.00m pre-money |
| Planned incremental monthly burn after closing | $0.10m |
| Financing assumptions | Immediate close, no fees, no debt, SAFEs, options or other securities |
- Reconcile the founder's $1.8m headline to the provided components.
- Calculate live ARR and largest-customer concentration on that basis.
- Calculate cash runway before and after the financing and hiring plan.
- Calculate new-investor and existing-holder ownership immediately after the raise.
- Decide what to investigate next, rather than issuing a binary investment verdict from limited data.
A one-page diligence memo
Attach a definition to every metric. Ask for customer-level contracts, invoices, collection data, cancellations and implementation obligations. Signed contract value does not establish retention, gross margin or cash collection.
What is recurring today / what is future / what is one-time?
Revenue quality and concentration questions
Cash timeline and financing assumption
Ownership calculation
The next piece of evidence that would change my decision
Use your own notes or the writing space in the downloadable PDF.
Worked answer: three different questions
The $1.8m headline mixes live recurring value, one-time work and future starts. That makes it unsuitable as live ARR under this packet's definition. The future contracts may be valuable evidence of demand, but keep them in a separately dated schedule.
The post-financing runway calculation assumes an immediate close and constant burn. Collections, delayed closing, implementation costs and hiring dates can change the result. The 20% ownership answer depends on the deliberately simple capitalization assumptions.
| Question | Calculation | Result |
|---|---|---|
| Headline reconciliation | 1.20 live + 0.30 projects + 0.30 future | $1.80m |
| Live ARR by case definition | Exclude projects and not-yet-live contracts | $1.20m |
| Largest-customer concentration | 0.36 / 1.20 | 30% |
| Runway before financing | 1.00 / 0.20 | 5 months |
| Runway after immediate close and hiring | (1.00 + 3.00) / (0.20 + 0.10) | 13.33 months |
| Post-money equity valuation | 12 + 3 | $15m |
| New investor ownership | 3 / 15 | 20% |
| Existing holders after financing | 12 / 15 | 80% |
A follow-up: the round closes two months late
Assume current burn remains $0.20m per month until close. The planned extra burn begins only at close. There is no other cash movement and the raise is still $3m. Calculate cash at close and runway after close. Then consider a 10% post-money option pool that must be created entirely from the existing holders' stake, with the investor still owning 20%.
Follow-up answerOpen worked answer
Cash immediately before close is $1m - 2 x $0.20m = $0.60m. Cash after funding is $3.60m. At $0.30m monthly burn, runway after close is 12 months, rather than 13.33. The two months already elapsed are not part of that post-close runway.
Under the stipulated pool allocation, the investor owns 20%, the pool is 10%, and existing holders own 70%. The existing holders' percentage retention relative to their prior 100% stake is 70%. In an actual term sheet, pre-money versus post-money pool treatment and other securities must be modeled from the documents.
A conditional next step
Choose the first three diligence questions you would ask. Explain what decision each answer would inform. A longer request list is not automatically better than a small set of questions tied to the investment thesis.
Source notes
Sources support the underlying concepts. The worked cases, figures and examples are original teaching material with the assumptions stated in the resource.
General capital-raising terminology. ARR, burn and ownership conventions are explicitly defined for this original fictional case; no universal ARR accounting standard is implied.
Questions about this resource
Is ARR the same as recognized revenue?
No. This case defines ARR as a recurring operating metric. Recognized revenue depends on the applicable accounting rules and performance obligations.
Does a $3m investment at $12m pre-money always buy 20%?
Only under the simple assumptions here. Options, convertible securities, fees, secondary sales and negotiated capitalization definitions can change the ownership calculation.
Build on the exercise
More practice for the gap you found.
The full guide adds contrasting investment memos, financing choices, sourcing work and spreadsheet cases.
Preview the venture capital playbookKeep a copy in your inbox.
The PDF is available above without signing up. If you want an email copy and related preparation notes, subscribe here.
Venture capital: test the revenue story
Free resource
Separate a founder's headline from recurring revenue, financing needs and the next diligence decision.