Sunrise Inc. A Tale of Two Term Sheets Harvard Case Solution & Analysis

Sunrise Inc. A Tale of Two Term Sheets Case Study Solution

Difference and similarities between the two term sheets:

There are many differences and similarities between the two term sheets given by two different venture capitalist. The main similarities in two term sheets are that both the term sheets provide the Sunrise Inc. with the same amount of finance of $4 million. The Series A Preferred stock can be converted into the common stock at any time under both the term sheets and the share price will also base on the prevailing stock price in the market in both term sheets. Furthermore, both the term sheets allows the preferred shareholders to vote in the companies policies along with the common stockholders and both the term sheets entitles the preferred stockholder for the subsequent shares issued in their respective holdings.

Apart from the above-mentioned similarities, there are many differences as well under both the term sheets, the capital structure and types of securities issued of Sunrise Inc. under both the term sheets are very different. Under the Ascent Venture term sheet, preferred shares and escrowed shares are issued while under the Millennial capital partner’s term sheet no escrowed capital will be issued. Furthermore, the compensations and holdings of the founders is completely different under both the term sheets.

Pay-off as a function of sales price:

Under the Ascent Venture Capitalist, the pay-off as a function of sales price is approximately $8,000,000. Whereas under term sheet of the Millennial Capital Partner the pay-off as a function of sales price is approximately $16,000,000. It can be clearly seen that the founders, other shareholders and venture capitalists investors will receive substantial gains in case of an IPO if the term sheet of Millennial Capital Partner is chosen.

Comparison of Anti-dilution and Conversion terms:

The anti-dilution provisions are always to protect the venture capitalist firms from the dilution of control after the subsequent issuance of shares. Under the Ascent term sheet no adjustment will be made until the issuance of new shares exceeds the 2.4 million new shares whereas under the Millennial term sheet the adjustment will be made in the capital structure if the new shares issued are priced less than 100% and greater than 50%. However, no adjustment will be made is escrowed shares and reserved shares issued under both the term sheets. Under both the term sheets, the automatic conversion will arise in case of a qualified IPO but the prices will be completely different, price for conversion should not be less than $5 per share under the Ascent’s term sheet and the price should be not less than $18 per share under Millennial’s term sheet. The significance and importance of the differences is very crucial, under the Ascent term sheet the venture capitalist is less hedged while the risk of Millennial is greatly covered under their term sheet. Same is the case for conversion, the shareholders will receive more premium under the Millennial term sheet as the qualified IPO is only possible at a share price not less than $18 as compare to the Ascent term sheet where the qualified IPO is only possible when the share price is not less than $5.

Recommendation:

It is recommended that the West and Hammond should have to opt the offer of Ascent Venture Capitalist, the term sheet seems to be more favorable for the entrepreneur while the term sheet of Millennial is appears to be more favorable for the investors. However, certain factors are pretty similar in both the term sheets which West and Hammond should have to follow whether they choose Ascent or Millennial term sheet. The liquidation process, information rights and board representations is also seems to be more flexible for the investors and founders under the term sheet of Ascent rather than Millennial..................

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