TE 567 Final Exam Instructor Sanjiv Chopra 1 2 3 4 5 6 This is a take home exam You can refer to all class lecture presentations and course readings You are free to use Excel spreadsheets or calculators for calculating your answers Answer ALL questions on standard 8 5 x 11 paper Maximum points for the exam are 100 Keep your answers short and crisp Keep your papers neat and legible Make and state your assumptions if unclear about something The case Walnut Venture Associates depicts the series of events from initial review of business plan to term sheet for a software firm RBS Group by the Walnut group a set of potential angel investors The A case includes some background on the Walnut Group a Boston area group of angel investors The bulk of the case is a well prepared business plan from the RBS Group a firm that develops accounting software for software firms The case describes the interest that Walnut has in investing in RBS and asks the question What issues need to be resolved prior to writing a check The D case consists of the draft term sheet that Walnut offers RBS Case A is designed to put students in the shoes of potential investors and force them to really dig into a business plan business model It raises the issue of what detailed work needs to be done once a potential investment appears promising Although the case asks students to assume the role of potential investors it is only a short leap of logic to understand as an entrepreneur what you need to prove that your opportunity is worthy of investment by a VC or Angel investor The D case asks students to step into the Entrepreneur s role and negotiate over a term sheet that Walnut has offered The term sheet raises several key issues including valuation type of security control rights of management versus investors and vesting of managerial stock Please read both the cases and answer the following questions Assignment Question for A Case 1 2 Evaluate the potential investment in RBS from Walnut s point of view 10 points As a Walnut investor what critical issues do you see as requiring more investigation due diligence on your part prior to investing List the various categories of issues and the questions that need answered through the due diligence phase and how would you accomplish this task 25 points Assignment Question for D Case 1 What is the post money valuation of RBS in the proposed Walnut deal 10 points 2 Assume that RBS is liquidated after 5 years from the time of investment If the deal proposed in the term sheet is accepted how will the funds received from the liquidation be split between the Walnut round and the remaining investors UST Other shareholders and Management Fill in the values for the various liquidation scenarios as indicated in the table below 30 points Exit Value in Year 5 2 000 000 3 000 000 10 000 000 20 000 000 30 000 000 50 000 000 Total proceeds to Walnut round of proceeds to Walnut round Total proceeds to Other shareholders of proceeds to Other shareholders IRR of Walnut round 1 3 What proposed terms do you find most troubling and why What would you try and renegotiate and what may you be willing to give up 10 points 4 Who will control the company if this deal is done on the terms described 10 points 5 How do the securities proposed by Walnut impact the risk and reward of existing investors 5 points Notes 1 Redeemable Preferred stock is a type of security that carries the provision that the issuer has the right to call in the stock at a certain price and retire it 2 Convertible Preferred stock is a security that includes an option for the holder to convert the preferred shares into a fixed number of common shares 3 As noted in the term sheet dividends accrue on the preferred at the rate of 8 per annum compounded annually That is an investment of 1 000 000 after 2 years will be worth 1 000 000 1 08 2 1 166 400 2