Case â€“Cold Water Circuits Case SolutionÂ
Negotiations Point on Series A investment:
Â Â Â Â Â Â Â Â Â Â Â At the time of issuance of preference share, the founders should consider the dilution of the ownership of existing shareholders so that the representation on the board and the company will be not be heavily affected by the issuance. In the case of series A, the founders have sold almost 33% share of the company to the investors.
Â Â Â Â Â Â Â Â Â Â Â The founders of the company have to also consider their personal liability. This statement refers to the point that any effects by the business on any personal damage or loss to the investor should be minimum. Insurance schemes can be beneficial in this case as they tend to reduce the risk.
Â Â Â Â Â Â Â Â Â Â Â The investors in preference or any convertible stock tend to have the option for exit which provides investors to easily realize their investment. The promoters of the company should provide the reasonable benefits to the potential investor rather than paying higher option at a personal loss.
Â Â Â Â Â Â Â Â Â Â Â While negotiating the preferences stock with the potential investor, the founders would have to be very confidential regarding the trade secrets of the company and any related information, which would be important for the companyâ€™s success. There should be a proper mechanism of authorization of information before it is disclosed to the investors.
3. Â Consider the case where the company is able to negotiate for a high valuation cap.Â For example, what if the valuation cap were $20,000,000 and the Series A round is the same as discussed in class.Â What is the resultant cap table?
Â Â Â Â Â Â Â Â Â Â Â Valuation Cap provides the option for a potential investor to convert their investment into the companyâ€™s equity. Companies also take many benefits from the use of valuation Cap as it provides subsequent financing available for the company. This subsequent financing provides assistance in future profitable projects. Valuation cap provides the proxy value for the company, which is why higher cap is suitable for some promoters. However, this is not the case for all founders as the founders believe that the valuation cap is not suitable for the company sinceit provides major benefits to the investor. At the valuation cap of $20 million, the calculation indicates the cap table of the cold water circuits before and after series A investment.
4. Consider the case where the company performs poorly after receiving the Note and before the Series A.Â For example,
â€¢Â Â Â the valuation cap is $3 million
â€¢Â Â Â the pre-money valuation of Series A is $2 million (not $12 million)
â€¢Â Â Â $1 million invested for 33.33% of the company (not $6 million)
Â Â Â Â Â Â Â Â Â Â Â The cumulative interest rate on the note is LIBOR +2 or 8%, which indicates that the cost of financing will increase and the profitability of the company will be reduced. Although on the interest payment on debt, the company will get the tax savings however,the net effect of these will ultimately reduce the profits. This situation, as a result, would lead towards poor performance of the company.
Â Â Â Â Â Â Â Â Â Â Â Compliance cost is another issue,which increases the companyâ€™s costing. As stated in the terms and conditions, the company has to pay reasonable fees to the investors, which shows clear signs of lower profits. Cap table is provided in excel file after taking assumptions and the data is given in the question…………………
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