Trendsetter HBS Case Analysis

4327 WordsOct 9, 201318 Pages
2010 [Type text] Emerging Company Finance FNCE 480 - Final Frank Kurupacheril [TRENDSETTER’S TWO ROADS] Trendsetter, Inc – a warehouse and distribution solution software company for clothing retailers is faced with the usual dilemma. They are running out of seed money that the founders contributed. Now they have received two term sheets from prospective VC’s. The ball is in the founders’ court who have to choose one after weighing pros and the cons. Contents Introduction .................................................................................................................................................... 3 Basic valuation…show more content…
There is a reserved section of 2.5M shares in addition to the 4.5M common shares. Dividing the total shares of 12M gives the investors and the founder’s 42% and 38% respective ownership in the firm. Mega Fund Valuation pre-money investment post-money Capitalization common option pool-reserved: of which granted: Series A Total $ $ $ 7,000,000.00 Share price 5,000,000.00 12,000,000.00 Shares 4,500,000 2,500,000 $1.00 Granted before Ownership 38% 21% 929,889 5,000,000 12,000,000 42% 100% From a basic valuation perspective, Alpha is a better deal for the founders. The reverse holds good for the investors. Note that Alpha initially valued the firm at a much lower value and then came back with a better approximation. But from the ownership perspective, the founders have larger control with 38% Emerging Company Finance FNCE 480 –TrendSetter, Inc | Basic valuation 4 in the Mega term sheet. Note that the 350K difference in the pre-money valuation comes precisely from the $0.05 share price difference between the two offers. As a founder, one wouldn’t want the escrow clause because their ownership falls 1% while the ownership of the investors rises by 3%. Liquidation Alpha possesses a liquidation preference which allows the investors to make a choice between the equity returns during liquidation. Trigger events

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