As one can see the founders of the company have an

This preview shows page 7 - 10 out of 10 pages.

As one can see, the founders of the company have an equal amount of shares while Top Gun grabs 44.44% of the shares according to the term sheet. The details of the term sheet as mentioned earlier are shown below: One main assumption that our team made was that the firm would be acquired for twenty four million dollars the day after the deal was done. There were no details about the timetable in the case, so the team felt as if this was the most logical route to take. The final payout was found by multiplying the acquisition price of twenty four million by the equity percentage. The final payouts on June 15, 2016 are shown below:
Red BaronThe same approach was taken when considering the return for the offer given by Red Baron Ventures. The capitalization table differed slightly due to the fact that Red Baron was splitting the investment with another firm. The capitalization table is shown below with the facts of the term sheet below it as well: The same assumption was taken for Red Baron as well. The acquisition of twenty four million would take place a day after the deal was made with Red Baron and the other venture firm. The one large difference between this term sheet and the return preference. Red Baron has a return preference of 2.5x while Top Gun’s return preference is only 1x. The results are shown below: As one can see, the returns for the founders are significantly less in the Red Baron deal in comparison to the Top Gun deal. This is due to the higher return preference. The founders net
$570,000 more each if they were to take the Top Gun deal. Also there is more than double the return in the Equity Pool, which allows the firm to do much more in the future to grow their company. Overall, the Top Gun deal is better on all ends. Downround with Differing Term Sheets Top Gun Top gun uses anti-dilution provisions to protect investments from the next round of investments. This is even more important when considering a down round. The approach used is a weighted average and this is a more moderate approach for a founder as it takes into consideration both the price of the new share and the number of shares being issued. During a down-round, the entrepreneurs would find that since the weighted average approach takes into account the number of shares issued into repricing that they would lose less than they would when using full ratchet Red Baron Red Baron uses a full ratchet approach for anti-dilution protection – this means that during a downround the conversion price of the preferred shares from the previous round would be reduced to the price at which the news shares are issues, without taking into consideration how many shares are actually issued. A full ratchet approach is more riskier for the entrepreneurs since during a downround the common stockholders bear all of the downside risk. Another factor to evaluate how the entrepreneurs would fare within a downround is to understand the situation proceeding this

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture