Metapath was a hi-tech company providing software products for wireless carriers. It had a revenue of 22 million and was emerging as the premier company in its market space. The ultimate goal of the founder, Hansen, was to see the Metapath go IPO in two years. However, this company confronted two main obstacles for that goal: concentrated customers and fluctuant quarterly revenues. To expand his business and also solve these problems, Hansen need to again raise more money. Like most of the software companies, Metapath demands continuously money supply during the premature period of its life. The main financial strategy of Metaph was to raise several rounds of money by turning to venture capital investors: get money from them in exchange for Metapath’s preferred stock and a promise to redeem or convert to commom stock in event of IPO. It had raised $ 9 million in four rounds of financing before 1997, in which STI and Bessemer participated in the first two rounds. Unlike the following standard convertible preferred stock instruments, these first two rounds had a structure called “straight redeemable, cheap common”, which required a principal payment in the future, making the two classes of preferred stock more like debts.
Therefore, by paying yearly (or quarterly) dividends and guarantying the safety of principle value to venture investors, Metapath raised its first four rounds of capital. Selling the company to CellTech could bring Metapath many advantages. First, CellTech offered an attractive price $115 million, relatively large for a premature company with revenue of 25.6 million and negative income -$1.9 million. Second, it was already an public company, which prevented the dilution of possible further financings. Third, by merging with CellTech, Metapath could achieve synergy from expertise of CellTech’s engineers, and the fully-formed marketing and domestic sales organization. However, since the merging was plan to be in stock exchange and CellTech had gone public only few months, information could be limited to value its stock price fairly.
Also in the big environment of late 1990s, too much investments in high-tech companies made this industry overheated, and CellTech could be overvalued by analysts. For the VC option RSC offered, one big advantage was that the immediate cash flow of $11.75 million, which would be very helpful for Metapath’s operation. Another advantage was that it bought time for Metapath to initiate an independent IPO in the future, which had potential to worth more than CallTech offered. But it brought concerns to Metapath as well. RSC brought up the strike term called “participating convertible preferred stock”, at which holder could not only convert from the preferred stock, but also in the event of sale, receive face value and participate in further consideration of common stock. This term could make a sale of Metapath extremely dilutive to the founders.
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