TRENDSETTER INC. Case Solution & Answer

TRENDSETTER INC. Case Solution

Q2) For the Alpha side, build a way to show what happens if the escrow shares are released

In Alpha, there is a provision of escrow shares of 501,253 shares, which are to be released if the company has not achieved revenue of $500,000 in the fiscal year 2000.

If the escrow shares are released in Alpha’s case, then it will affect the ownership of the new investors as well as the founders of the company as it can be seen below:

			VALUE IF ESCROW RELEASED	OWNERSHIP% IF ESCROW RELEASED
SHAREHOLDERS
WENDY BORG			$1,900,000.00	16%
JASON KUSHDOGS			$1,900,000.00	16%
				33%
EMPLOYEE OPTIONS			$2,850,000.00	24%
NEW INVESTORS
ALPHA			$2,035,714.29	17%
SV			$2,035,714.29	17%
OTHERS			$452,380.95	4%
SERIES A ESCROW SHARES			$476,190.35	4%
				43%
MEGA
			$11,649,999.87	100%

Q3) Use the cap table to show what impact the escrow shares has in the Alpha scenario

Impact of Escrow Shares on Alpha scenario

In Alpha, there is a provision of escrow shares of 501,253 shares, which are to be released if the company has not achieved the revenue of $500,000 in the fiscal year 2000.

If the escrow shares are released in Alpha’s case, then it will affectthe ownership of the new investors as well as the founders of the company.

• Total ownership of the new investors goes up from 40% to 43%.
• Total ownership of the founders of the company goes down from 34% to 33%.
• The escrow clause allows Alpha to replace the outsider chosen by the board by one chosen by the investor. As a result, this tilts the board in their favor.
• As a founder, one wouldn’t want the escrow clause because their ownership would fall by 1% while the ownership of the investor would rise by 3%.

Q4) Figure out the difference between the two term sheets in what they assume about the founders shares (this is tricky – look at the pre-money valuation)

No assumption as in the case of Mega whereas, in the case of Alpha there is a restriction on the common shares transfers of 180 day lock up in IPO scenario. By looking at the pre-money evaluation of the two options Alpha and Omega, it can be seen that:

	ALPHA	MEGA
PRE MONEY VALUATION	 $    7,350,000.00	 $    7,000,000.00

On the other hand, in order to look at the post-money evaluation, it can be seen that

POST MONEY VALUATION

 $  12,350,000.00

 $  12,000,000.00

Thenumber of shares to investors each option held is:

NUMBER OF SHARES TO INVESTORS

        4,761,904.76

        5,000,000.00

 ………………….

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