Case –Cold Water Circuits Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Case –Cold Water Circuits Case Solution

1) What is the minimum sale price of Coldwater that is required for the Founders, (exclude employees and investors) to get $2 million? Assume all of the shares in the employee option pool are distributed and one year of dividends are paid to the investors.

The current capital structure of Cold water indicates that the major proportion of the stake is held by founders of the company with around 47 % in ownership. Followed by Series A investors with 33% and unallocated option to employees at 20%. This ownership percentage also determines the shared power and management control of different groups of investors in the company.

Since the founders have higher ownership percentages, therefore they have the option to demand higher return and can pressurize the board of directors. At time of issuance of Series A convertible stock, the company conducted a valuation with the help of independent valuation firm. Two results were generated through the valuation, which include pre investment value of $12 million and post investment value of $18 million.

The minimum sale price of $11 million is calculated, which provides the founders $2m of expected return in the case of Liquidation, however the minimum sale price is lower than the pre investment value of the company at time of the issuance of Series A. The breakup of $11m indicates that the employees and Series A investors will get $3 million and $6 million respectively. The founders will leave with $2 million after paying to all investor groups.

The excel file shows the calculation of the minimum sale price of the company inwhich the founders will get $2 million. The assumption of payment of dividend is not reasonable as the dividend is paid on annual earning rather than at the time of liquidation, which is why this assumption is not included in the calculation.

You are the Founder. What would be your negotiation points for the Series A investment? ? How would you make counter-proposals to the investors?

At the time of negotiation on Series A convertible stock with investors, the founders have shown negligence and accepted non-feasible demands of the potential investors, which will affect the company negatively in the future. Although the founders want finances for the growth of the company however,this is not in the best interest of the company to accept the unreasonable demands of potential investors.

There are some examples where the founders have not accepted the terms and conditions of the Series A investors.

Liquidation Preferences:

At the time of liquidation of the company, the preference shareholders will just receive the purchase price of the stock and recover their investment after payment of loan from the bank and payment to creditors. The investors of the preference share will not get the cumulative dividend at the time of liquidation.

Antidilution Protection:

Issuance of capital stock below the purchase price Series A stock will be adjusted. This term will lead towards great loss to the company as it will reduce the possibility of issuance of additional share, which would dilute the ownership of existing shareholders. There might be a higher need of finance for the profitable project of the company; in such a case, the company cannot increase its share capital through the issuance of new equity or right share....................

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