Term Sheet Solution Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

QUESTION – 1

ANSWER 1:

Please refer the Sheet Comparison of Exit Scenario given in Excel and also EXHIBIT 1 given in Appendices Below.

QUESTION -2

ANSWER 2:

Basic Valuation:

In basic valuation the pre-money evaluation of Alpha would be $7.35Mat a $1.05 per share price with the investment of $5M. In this 4M are the common share and 3M are the option pool share. The post money valuation is around $12.35M and from these total market shares Escrow shares would be reduced by the 501,253 as there is a provision if company could not achieve its targeted revenue for the fiscal year 2000 of $500000.

In term sheet of Mega, there is no such kind of provision that is given in the Alpha such as Escrow. At the given share price of $1, there would be pre-money valuation of $7M with the investment of $5M that makes it equal to the $12M. Furthermore, there are 2.5M share which are reserved for the employees and it is addition to the 4.5 M shares for common stock holders. For founders, Alpha is the better option to deal in the basic valuation.

Liquidation

In liquidation perspective, Alpha allows the investors to choose from the equity returns while it has the liquidation preferences. From this liquidation preferences, it triggered such events that would lead towards mergers as part of the transfer of control. In the case, the company could receive returns that is three times of their invested capital and it would result in terms of $15M as payoff. On the other hand, there would be a conversion ratio clause in which company would require aqualified IPO that would be offered at-least about $15M. If this IPO would face downfall than where everyone wants to exit out from this investment.

For the Mega Fund, the features allows the investor to receive 1.25 times of return on their invested capital. From this feature, investor could also gain the benefit to make more ownership into it such as 8%.

Anti-dilution

If it is assumed that, per share price would be $0.65 than series B shares would account for $6.5M and from this the anti-dilution feature under weighted average approach would protect the investor through offering the series A shares about 735,608.

In Mega Fund, anti-dilution would give the investors a chance to increase their ownership in series A through offering additional series A shares.This would create the problem for founders and these founders would stop seeking the new investments into the firm rather these investors would seek the investment into the Alpha Fund.

Vesting

In Vesting there is no difference between Alpha Fund and Mega Fund.Founders would go for vesting the 25% of their investment if they would purchase and this purchase would be longer enough such as more than 36 month period. On the other hand, Employees would get a 25% cliff but in terms of 12 months period and they would spread it over the 48 months. If there would be an IPO than, the standard expectation in terms of lock is around 180days. As far as the Entrepreneurs are concerned, they would get return earlier than the employees and also these entrepreneurs have the shorter investment cycle.

Governance

Both terms sheet has the identical structure for board of directors as each of these funds have 5 board members and from these board members, one member of each fund is the CEO, two members of each fund represent the series A convertible preferred stock and the remaining two members of each fund are nominated by the shareholders and also by the board.

Compensation committee also is the part of the governance as with respect to the Alpha Fund, it requires the 3 members in it but these members are chosen by the VCs but in Mega Fund convertible stockholders did not require the compensation committee and they are free to choose anyone as a committee member.

Furthermore, with respect to the Alpha Fund, it seems that Alpha needs more control over the governance of the company and by doing this it ties with the policy of reducing the risks that is followed by the term sheet.

Please Refer the Terms Comparison Sheet in EXCEL and Exhibit 2 in Appendices Given Below:

QUESTION -3

ANSWER 3:

From the both terms sheet Mega is the better choice. In this valuation is lower and anti-dilution would affectin terms of issuing the additional series A stocks those would be offered to the investors with the participating rights. For Mega Fund, investor could make 10% return on their investments under worst scenario and also in the case of IPO every investor would exit out if the return would be lower than the $15M..................

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