Assignment6-Trendsetter-PhucDang

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May 29, 2024

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Entrepreneurial Finance Individual Assignment (50 points) 15 points 35 points Read "Term Sheet Negotiation for Trendsetter, Inc." and complete this assignment. On part one of this assignment, you are asked to create valuation tables based on information provided in the case. On part two of this assignment, you are asked to summarize the listed items on the two term sheets in your own words and evaluate the terms from the founders' persective. Capitalization Table Comparison

Term Sheet Negotiations for Trendsetter, Inc. Alpha Ventures, without releasing escrowed shares Pre-money Post-money # of shares value % ownership # of shares value % ownership Founders 4761905 $ 5,000,000 61.35% 4761905 $ 5,000,000 61.35% ESOP 3000000 $ 7,350,000 38.65% 3000000 $ 7,350,000 38.65% VC (Alpha) Total 7761905 $ 12,350,000 100% 7761905 $ 12,350,000 100.00% Alpha Ventures, with the escrowed shares released Pre-money Post-money # of shares value % ownership # of shares value % ownership Founders 4761905 $ 5,000,000 90.48% 4761905 $ 5,000,000 90.48% ESOP VC (Alpha) 501253 $ 500,000 9.52% 501253 $ 500,000 9.52% Total 5263158 $ 5,500,000 100.00% 5263158 $ 5,500,000 100.00% Mega Fund Pre-money Post-money # of shares value % ownership # of shares value % ownership Founders 4500000 $ 500,000 56.75% 4500000 $ 500,000 56.75% ESOP 2500000 31.53% 2500000 31.53% VC (Mega) 929889 11.73% 929889 11.73%

Total 7929889 $ 500,000 100.00% 7929889 $ 500,000 100.00%

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Share Price $ 1.05 Share Price $ 0.95 Share Price $ 1.00

Assignment: Trendsetter, Inc. Term Alpha Ventures Comparison Amount $5,000,000 = Investors (who) = > Price per share > Thoroughly review the term sheets provided by Alpha Ventures and Mega Fund. Sum Ventures and Mega Fund, clearly identifying key terms and conditions. In Column C, (Wendy Borg and Jason Kushdog) in one term sheet compared to the other. Use the •">" if the term is better for the founders in the Alpha Ventures term sheet •"<" if the term is better for the founders in the Mega Fund term sheet •"=" if the term is equally favorable (or unfavorable) for founders in both term sheet •"???" if you are unsure or cannot determine the relative favorability The investors are Apha Ventures (investing $2.25 m), Silicon Valley Investors ($2.25 m) and other mutually agreeable investors ($0.5 m). Number of shares issued in Series A There are 4,761,905 shares issued in Series A. The price per share will depend on whether the Escrow share is released to the investors. With Escrow released the price per share is $0.95 and without the weighted average issue price is $1.05.

Security Type > > Liquidation terms > * The securities are series A convertible preferred stock. They can be changed from their initial form to common stock and in the event of liquidation, the holders will have a preference over the common stockholders. * Escrow shares. This type of security are held into a secure account pending the achievment of the 500,000 in revenues in FY 2000. Dividend information Since the preferred securities have noncumulative dividends, with an as-converted basis, there will be no obligations to pay past dividends. The security holders will be entitled to 8% dividend payment on outstanding preferred shares in priority over common shares. *In the event of a merger, reorganization, or other transaction in which control of the company is transferred, the preferred holders will receive an initial issuance pay price + declared and unpaid dividends on each share of series A preferred stock. *The preferred stock and common stock on an as-converted basis will be allocated until Series A preferred has received 3x the initial pay issuance price.

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Conversion ratio ??? > Anti-dilution terms > The series A preferred shares are convertible at a 1:1 rate at any time with an option of their holders. Auto-conversion conditions The automatic conversion of the series A preferred stock into common stock will occur at a conversion price in the event that at least the majority of holders of such stocks agree on the conversion and upon the closing of an underwritten IPO shares of the company common stock at a per share price of not less than $5 per share and for a total offering of no less than $15 m. * Broad-approved antidilution protection: The series A preferred shares are subject to an anti-dilution provision on shares issued with no adjustment made for the issuance of up to 3 m shares of common stock to employees, directors, or consultants pursuant to broad- approved equity incentive plans.

> > Redeption terms n/a > Series A voting rights Series A votes in an as-converted basis. It requires the approval of at least a 60% of the series for the creation or issuance of any senior or pari pasu security, an increase in the number of authorized preferred shares, and Composition of board of directors There are 5 members within the board of directors. Series A will be entitled to elect 2 representatives (1 nominated by Alpha), the common stock will be entitled to elect 1 representative ( CEO and founder's representative Wendy Borg) and the common stock and series A preferred will be entitled to elect 2 representatives (1 outsider recommended by Wendy and acceptable to investors & 1 additional director acceptable by the board). Both representatives will vote on an as-converted basis.

Other rights > *Right of the first refusal: investors have a pro- rata right based on their equity ownership of preferred stocks to participate in the equity financing of the company. in the case of shares sales, they must offer them first to series A shareholders. *Co-sale rights: in case of transfer of ownership, series A preferred holders can participate in the sale on a pro-rata basis. *Information rights: the company shall deliver financial documentation as long as investors hold 250,000 or more shares *Registration rights: Same as Mega Fund Part II: After carefully analyzing the term sheets provided by Alpha Ventures and Me Borg and Jason Kushdog regarding which offer they should accept. However, it's imp entrepreneurs had any experience in analyzing term sheets." Therefore, your recom understandable for individuals without formal financial training. Treat the Cap Table them in your recommendation. You will send these tables together with your recom Following a careful study of Alpha Ventures' and Mega Fund's term sheets, it is clear Trendsetter, Inc. Alpha Ventures not only provides a higher valuation and better own provisions and strict anti-dilution protection ensure greater financial stability and de to voting rights and employee stock reserves increases transparency and provides in identifying scenarios in which Series A Preferred stockholders participate in decision possibly, more control over their company's operations. On the other side, Mega Fun their authority. Furthermore, if Escrowed Shares are released, Alpha Ventures' lowe $1.00 per share, resulting in a better valuation for Trendsetter. Furthermore, Alpha V with the preservation of 3,000,000 common stock shares, matches more closely with ratchet provision, which largely benefits early investors. While both term sheets hav Directors, Alpha Ventures gives the founders more leeway in proposing outside direc

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Directors, Alpha Ventures gives the founders more leeway in proposing outside direc Furthermore, Alpha Ventures provides more favorable vesting terms, including a larg event of termination without cause, offering superior security for Trendsetter's foun structure and shown flexibility in talks reflect their commitment to facilitating Trend difficulties. Overall, taking dividends, voting rights, anti-dilution provisions, board sel term sheet is the better alternative for Trendsetter, Inc.

sheets Comparision Mega Fund $5,000,000 Mega Fund is the only investor. mmarize each item listed in the term sheets for both Alpha indicate whether the term is more favorable to the founders following symbols: ts There are 4,500,000 s hares of series A preferred. The price per share is $1.00 .

*The securities are series A convertible participating preferred stock. They can be changed from their initial form to common stock and in the event of liquidation, the holders will have a preference over the common stockholders and have the right to participate in the additional earnings of the company. *The preferred stocks have cumulative dividends with a rate of 10% in an as-converted basis, starting on trhe first year anniversary of the issuance of the series A. *They stop accruing when the per share amount of the accrued dividends total 25%. In the event of liquidation, the preferred holders will receive in preference to common shares the sum of one-on-one quarter * the series A purchase price and all unpaid but declared dividends.

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*The preferred convertible shares = Series A Purchase Price/the conversion price of Seies A preferred. * Initial conversion price = Series A preferred Purchase Price and subjet to adjustment. Automatically converted at any time at application conversion price in the event of an underwritten IPO shares of the company at a public offering price no less than $20 in an offering with aggregate proceeds to the company of not less than $25 m. * Weighted average dilution rights if 100% > Price>50% of the Series A Purchase Price. * Adjustment will be full ratchet if series A preferred holders invests its pro rata share.

* Series A and common shareholders vote together in an as- converted basis. * Series A preferred holders are entitled to vote as a separate series. *Common stock elects 1 representative. *Series A Preferred elects 2 representatives *One outsider company is nominated *One outsider Company is nominated and acceptable to all. *Redemption price = Purchase Price Series A + unpaid but declared dividends. *No redemption upon acquisition of the company or a qualified public offering.

* Information rights: the company shall deliver financial documentation as long as the series of preferred shares are outstanding. * Registration rights: Same as Alpha Ventures * Preemptive rights: investors have the right to purchase the shares of the company based on a pro-rata basis. ega Fund, you now need to make a recommendation to Wendy portant to keep in mind that, as stated, "Neither of the mmendation should be presented in a manner that is easily e and Comparison Table as appendices - feel free to refer th mmendation to Wendy and Jason. r that Alpha Ventures offers a more attractive offering to nership retention for founders, but its clear dividend evelopment potential. Furthermore, Alpha Ventures' approach ncentives for long-term success. Alpha Ventures' clarity in n-making offers Borg and Kushdog with transparency and, nd's broader strategy may result in greater interference with er share price of $0.95 per share compares to Mega Fund's Ventures' weighted average anti-dilution protection, along h Borg and Kushdog's interests than Mega Fund's complete ve comparable requirements for selecting the Board of ctors, increasing their power over business governance.

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