Venture Capital and Private Equity – Yieldex

1. Should Cosman accept the offer from Turn to acquire Yieldex? To support your answer, please consider the following optimistic scenario for Yieldex if it declines Turn’s offer:

a) Yieldex completes a Series A financing along the lines described in the case, in which the new Series A shares are priced at $0.50.

b) One year later, Yieldex completes a Series B financing for $5.7 million at a price of $1.00 per share.

c) One year later, Yieldex completes a Series C financing for .

4 million at a price of $1.50 per share.

d) One year later, Yield is sold to another firm, for some exit price.

For what expected exit price in d) will Cosman prefer to turn down Turn and retain his equity in Yieldex? For what expected exit price in d) will the angels prefer to turn down Turn and retain their equity in Yieldex? How do your answers change under a more realistic scenario for the pricing in the various rounds?

2. Assuming Cosman rejects the Turn offer, what deal should he strike with Tom Shields?

3. Can you propose an alternative to the terms of the Series A deal described in the case that would be more attractive to all parties?

Note: Assume that in addition to the three angels mentioned in the text, one additional angel has invested $65,800 in Yieldex. This angel is described as Angel A in Exhibit 4, and the other angels have also increased their investment at the time of the case as outlined in Exhibit

4. The case does not make clear what the angels will receive in the event of a half cash- half equity exit like the one proposed by Turn.

Assume for simplicity that the angels will receive 37.3% of the cash and 37.3% of the equity if the Turn deal is accepted. (This assumption is driven by the fact that the angel’s initial $300,000 investment entitled them to 25% of the payoff in an equity deal (implying an equity value of $1.2 million), so their increased total investment of $535,800 should entitle them to 535,800/(1.2 million+235,800)=37.3%.)

Data for Yieldex case: Treasury yield and comparison firm data are given below.

The 10-year Treasury bond yield is 4.6%. Cosman’s personal discount rate is 35%.