Web Tracker Case Study Solution
Summary of the case:
- Web Tracker was formed in the year 2014 by two enthusiastic, energetic and young business minded individuals Julie Stern and Mark Foster.
- Both of them are friends, Mark was a business associate and Julie was a software engineer. Both the friends met in a high school reunion where they shared their common goal for business. It was mutually decided that they will involve in the IT related business because of Julie’s great knowledge in the sector.
- As Julie created the prototype of software for their company both quit their jobs in order to give their entire concentration and efforts to their own business.
- During the initial days, both invested their savings but in order to grow the operations and to get clients they both have to invest significant amount of funds.
- They have contacted many venture capitalists some of which are friends of them to raise finance. Two of the venture capitalist are interested in their company and provided them with their term sheets.
- The name of first and second venture capitalist firms are Regent and Bantam, both these firms are very experienced and expert and have made many successful investments in various start-ups.
- The founders of Web Tracker have requested venture capitalist to provide them with $2.5 million in this round of financing.
- Both the term sheets have their own distinct terms, although there are some differences in the term sheets but there are some terms which are similar in both the term sheets.
- As per the term sheets provided by both the venture capitalist Regent proposes to receive 25.81% equity stake in the Web Tracker.
- On the other hand, Bantam proposes to get 20.71% equity stake in the Web Tracker.
- Detailed calculation regarding the proposed equity proportion for both the venture capitalist is provided in the excel sheet and in exhibit below.
Primary differences in the term sheets of Regent and Bantam:
- It can be said that there are many differences in the term sheets of both the venture capitalist firms, the primary differences lie in the equity stakes and other restrictive clauses.
- Firstly, the equity stake demanded by both the venture capitalist firms are different, Regent requires 25.81% and Bantam requires 20.71% equity stake, thus representing a significant difference.
- Furthermore, Regent have made a target of Sep 30 2014 to close the deal while Bantam didn’t make any target deadline.
- Difference also exist in the employee’s option pool, according to Regent 25% of the employee option will be distributed in the first year and the remaining employee option will be distributed in three years’ time. As contrary to this, the bantam term sheet, the one third of the options will be vest in one year and the remaining 67% of the options will vest in two years’ time in monthly installments.
- In addition to this, the legal and administrative charges limit is also different in both the term sheets, the term sheet of Regent sets the limit of approximately $30,000 whereas the term sheet of Bantam sets the limit of $25,000 in legal and administrative expenses regarding the deal with venture capitalists.
- The amount invested in Web Tracker is also different in both the term sheets, Regent’s term sheet states that the venture capitalist will invest $3.00 million in Web Tracker while according to the term sheet of Bantam, they will invest $2.5 million in Web Tracker.
- The price per share is also different in both the term sheets, the price per share in Regent’s and Bantam’s term sheet is $2.00 and $2.27 per share respectively.
- Moreover, there is also a difference in the pre money valuation of Web Tracker under both the term sheets, the pre-money valuation of Web Tracker is almost $11.622 million. And the pre money valuation of Web Tracker under Bantam’s term sheet is $12.07 million.
- Another significant difference exists in the two term sheets regarding the dividends, series A preferred shareholder are entitled to receive 8% dividend on their investment in case of liquidation event. While the series A preferred shareholder are entitled to receive 3% dividend on their investment in any event of liquidation.
- The minority conversion of shares also contains some differences, although there is no substantial difference in the minority conversion clause of both the term sheets but the price of shares of minority at the time of public offering is changed in both the term sheets. Regent’s term sheet states that the Web Tracker will have to pay ten times of prices to minority holders when the company will be subject to an IPO. However, according to the term sheet of Bantam, the Web Tracker will pay minority holders five times of the original purchase price of shares. In addition to this, the net proceeds from the merger, consolidation and IPO should also have to be not less than $75 million as per the term sheet of Regent. And according to the term sheet of Bantam, the net proceeds of mergers, consolidation and IPO should not have to be lower than $45 million....................
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