Web Tracker Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

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Question No:7

The analysis of these two term sheets indicates that the document proposed by Bantam Ventures is more beneficial for Stern and Foster, because of its less strict conditions. However, while referring to the factor of the investors’ reputation; it is possible to choose Regent Capital as the venture capitalist and concentrate on the negotiations, in order to change some of the formulations mentioned in the document.

From this point, the choice of the term sheet is based not only on the analysis of the actual conditions, but also on the analysis of the venture capitalist’s reputation and the potential of providing further funding, if it is required. In this context, Regent Capital has the higher potential. However, the task for Stern and Foster is to negotiate the term sheet aspects, in order to follow the pattern proposed in the Bantam Ventures.

Thus, the first point to discuss is the pre-money valuation and the employee option pool, which should be counted within the post-money valuation, as proposed by Bantam Ventures. While following the term sheet; the second option to discuss is the no-shop provision periods. The period of eight weeks proposed by Regent Capital can be viewed as rather limiting for the founders; therefore, it is relevant to negotiate on the 30-days term proposed by Bantam Ventures.

The next important point is dividends. Regent Capital points at the typical 8% annual dividends, which are cumulative. This option is protective for the investors, but the founders can negotiate to follow the pattern proposed in the term sheet of Bantam Ventures, where dividends are 3% and accruing.

Protective provisions presented by Regent Capital are also rather limiting, and it is possible to negotiate the exclusion of some points from the list, in order to address the founders’ interests. In this case, the protective provisions need to be correlated with the liquidation’s preferences.

Anti-dilution provisions should be analyzed by Stern and Foster in details, in order to decide whether or not the formula proposed by Regent Capital is based on the same aspects as the principle of the weighted average anti-dilution mentioned by Bantam Ventures. From this point, by selecting Regent Capital; the entrepreneurs can expect the improvement of the conditions provided in the term sheet as the result of negotiations.

Question No: 8

The procedure associated with the Initial Public Offering (IPO) for start-up companies is rather problematic because of the related expenses. Despite of the fact that Foster can see the IPO as an effective strategy for the company; it is important to pay attention to the prerequisites and restrictions associated with this process.

The barriers to the IPO include the unrealized plan regarding the regularly increased revenues, the high competition in the industry and increased risks. The advantages of the IPO are potential of expansion and an intense increase in revenues, but such development requires many resources. The services proposed by Web Tracker could be discussed as unique and having the potential for the increased customer base.

On the other hand, the information technology industry is one of the most actively developed sectors in the United States, where the competition is significant. In this context, another existing strategy could be chosen. The merger can be discussed as the most viable strategy for Web Tracker,whichcould develop the customer base and improve its brand recognition in the industry. The merger with any other software company or the industry leader, could result in increased revenues,but the founders’ control will be limited in this case.

Question No: 9

Considering the lost popularity of dealing with accruing dividends (53% in 2008 and 9% in 2013), Stern and Foster can attempt to get rid of accrued dividend rights for both the term sheets. This would benefit them,as by doing so theycould decrease the liquidation preferences of the VC firms, i.e. Bantam and Regent.

Regent’s “Pay to Play” - Provision on its term sheet is clearly aimed at diluting the founder’s stake in theircompany. Given that Stern and Foster have used their own personal savings during the developmentphase of WebTracker, and it might not be fair to include this provision.

The misconceptions that arise when considering term sheet elements one at a time, should be avoided carefully. We need to look at the bigger picture and reason out whether the contract seems fair or not.

Question No: 10

Given how all VC firms got back to WebTracker within 48 hours, a “donkey negotiation position” could beassumed. This means that Stern and Foster have more power over the VC firms due to the market’sappreciation of their business idea, and they could stubbornly demand a lower dilution.

If Stern and Foster argue for lower liquidation preferences thenit wouldindicate that they themselves are notconfident about the success of their venture.Based on prevalence of selected VC deal terms, there is:

Downward trend on participating preferred stock.
Downward trend on deals with accruing dividends.
Downward trend on pay-to-play provisions.

Question No: 11

After a thorough analysis of the various clause lists; our team has decided to accept Bantam’s clause list as it relates to less diluted equity, which allows us to maintain a greater control over the company. The company used to compare terms in a table of terms side by side (green = good for Web Tracker). Regent’s dilution is higher and a higher investment can be achieved ($ 3 million vs. $ 2.5 million Bantam) in investment cycle A,because start-ups often incur unexpected costs, and this additional support can give Stern and Foster more breathing space in the first 18 months.

Question No: 12

As described in this case; Regent brings additional contacts, experience, knowledge, and streamlined processes to the lesson, which can be of great value for Web Tracker. However, its downside is that it doesn’t look like I bantam. With regards to the stock options offered to employees; Bantam allows Stern and Foster to maintain more shares in their pay-per-click purchase plan. This could give Stern and Foster better protection against their business interests. In the case of Regency; the expiration of purchased options is slower and it is gradually increasing, which meansthat Regent’s goal is for Stern and Foster to get more in the business than Bantam does. Given the long- or short-term position of the two founders; this may be an important consideration to be considered................................

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