Q1.) Should Cosman accept the offer from Turn to acquire Yieldex?
Cosman was working harder to develop Yieldex software and now he is in a position to start the business using that developed software. He do not have sufficient funds in order to market its software and develop the market for its software by attracting customers, meanwhile, he is a software engineer and do not have any experience regarding the management of a business operations so he cannot launch his software business successfully on his own. Therefore, he is considering to raise finance through series a financing, meanwhile, he has received an acquisition offer from Trun to acquire the early startup company in consideration of $4 million comprising of $2 million in cash payment and $2 million in the form of equity of Turn. Since, Cosman has received the initial funding from angel investors in order to finance the development of software so he is concerned about the reaction of angel investors if he decides to accept Turn’s offer. Furthermore, Washing, who is Cosman’s advisor, also believes that Cosman should not accept Turn’s offer and instead he should go for hiring new CEO and raise the financing through series a financing. In addition to this, Cosman will lose the control of his business that he has developed over a long period of time if he accepts Turn’s offer while on the other hand if Cosman chooses to raise funding through Series A financing, then he will able to retain the control of the business and to hire a new CEO, who will help in developing the market for the sale of his developed software.
However, if Cosman goes for series a financing then this will generate funding equal to $4,966,666/- million ($0.50 per share x9,933,333 total common shares), which is higher than the price offered by Turn. In addition, Cosman can use this financing in the development of market and the newly hired CEO will be able to implement new strategies, meanwhile, Series A Financing will give angel investors an opportunity to get the benefit of acquiring preferred stock in a start-up company and the conversion right attached with proffered stock will let angle investors to become the common stockholders of Yieldex.
Furthermore, after a period of one year Cosman will have an option to further raise the finance through Series B financing in the form of additional issue of preferred stock in order to meet the funding requirement of its growing business and this funding will generate funds of $5.7 million but it will potentially dilute the number of common shares to 15,633,333/- (5.7 million plus 9.933 million). Meanwhile, the business grows and Cosman needs more financing in order to meet the financing requirement of growing business, Cosman will be able to raise finance through additional issue of preferred share stock under Series C Financing at a price of $1.50 per share, which means that the value of Yieldex after a period of two year would be $34.85 million [$1.5 x {15.633.333 + (11.4 million/$1.5)}].
However, after a three year’s period when the value of Yieldex will become $34.85 million. During the period of three years, Cosman and Shield will be able to establish the business and develop the market and relationships with customers. At that time Cosman was not be willing to accept the offer of $4 for Yieldex because his business would have grown to the value of $34.85 million and to some extent Yieldex would have developed its business and its customers base; therefore, Cosman would only be willing to accept the offer price of higher than $34.85 million. Meanwhile, the angel financers, who are not involved in the business operations and have their investment in business , which means that they are a stakeholder of the company because of their trust and relationship with Cosman, so they will be willing to accept the offer price of not less than $34.85.
Q2.) Assuming Cosman rejects the Turn offer, what deal should he strike with Tom Shields?
Currently, the negotiation between Cosman and Shields are for the sharing of equity stock at 50/50% by both Cosman and Shield. This will potentially result in loss of control over business, meanwhile, the devised equity split plan of Wishing states that in general an arrangement of this type has been made using the equity offer of 10% of its common stock to the new CFO. Cosman has been looking for a potential candidate for the post of Chief Executive Officer (CEO) with the technical, marketing and business management skills. Since, Shield is a potential candidate, who have all these skills as shown on his resume and throughout his career he has a proven history; therefore, Shield should be awarded with the 50% of equity shares because it is very much critical for the business .....................
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Yieldex founder, Doug Cosman, faced with the decision to sell their young software start-up for $ 4 million, or hire a CEO (Tom Shields) and conduct a series of venture capital financing. His angel investors and CEO candidate Tom Shields said that he should reject this proposal and focus on building the company into a large enterprise. Cosman tied to financial rewards offered by the prospective buyer. "Hide
by Toby Stewart, Alison Berkley Wagonfeld Source: Harvard Business School 11 pages. Publication Date: January 22, 2009. Prod. #: 809090-PDF-ENG
