# 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 Alphaâ€™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 Alphaâ€™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 wouldnâ€™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 theÂ 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 Â \$Â Â Â  7,350,000.00 Â \$Â Â Â  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 Â \$Â  12,350,000.00 Â \$Â  12,000,000.00

Thenumber of shares to investors each option held is:

 NUMBER OF SHARES TO INVESTORS Â Â Â Â Â Â Â  4,761,904.76 Â Â Â Â Â Â Â  5,000,000.00

Â ………………….

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