Metapath Case Report Essay

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The purpose of this briefing note is to provide recommendations for Metapath Software Corp. (“Metapath”) on its financing offers received in September 1997.
These two offers came from 1) a fund consortium led by Robertson Stephens Omega Fund (“RSC”) and Technology Crossover Ventures (“TCV”) and 2) CellTech Communications (“CellTech”), a vendor of wireless technology which had recently gone IPO.

Metapath has made good progress in developing its business since its inception – generating $6.4m revenue in the September quarter of 1997 with representation of three large customers. However, with the ambition to win a good
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Strategic/Business fit between CellTech and Metapath.

Comparing the term sheet of the offer from RSC and TCV consortium to that of CellTech, RSC and TCV’s PCPT had a much more dilutive impact to Metapath upon exit.

Under liquidation, the term sheet stipulates that the Series E investors is entitled to claim its initial investment of $10.75 million plus any accrued but unpaid dividend. Any proceeds after this claim will then be distributed to all common and Series E Preferred shareholders on an as-converted pro-rata basis. This double dipping means that RSC will not only recover its initial investment of $5 millions, but also enjoys the convertible benefits.

As a result, if the sale occurs before 2000, the profitability for A-D tranches will be negatively impacted by the ‘preferred’ characteristic in the Series E. However if the sale occurs after 2000, A and B tranches will be gradually redeemed on an annual basis, which will leave C and D tranches to be mostly impacted adversely by the preferred characteristic in the Series E stock.

Under the circumstance of an IPO, tranches C, D and E will convert to common at their negotiated prices while A & B will be redeemed.

However, on the flip side, the price offered by RSC and TCV consortium was $6, which was significantly higher than the first three rounds of financing (tranches A,B and C) at
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