Academic journal article Journal of the International Academy for Case Studies

FantasyNet Venture Capital Term Sheet negotiation.(Instructor's Note)

Academic journal article Journal of the International Academy for Case Studies

FantasyNet Venture Capital Term Sheet negotiation.(Instructor's Note)

Article excerpt

CASE DESCRIPTION

In this New Venture Finance case, Tim Bayliss, founder, CEO, and sole shareholder of FantasyNet, has received a term sheet from Ann Davenport, a General Partner in the venture capital firm of Chestnut Ridge Ventures (CRV), for an investment of $8 million in his company. Tim had never seen a term sheet before and felt he needed advice in evaluating that document in preparation for his upcoming negotiation with Ann. Tim engaged the services of his accounting firm to advise him on the implications of the provisions in the term sheet and to assist in the negotiation. That engagement resulted in a memorandum to Tim that included explanations and recommendations for each element of the term sheet. Tim planned to use those recommendations as a basis for his negotiation with Ann to reach agreement on CRV's investment in FantasyNet.

Keywords: Financing, Venture, Entrepreneurship, Governance, Valuation, Equity

CASE SYNOPSIS

This entrepreneurial finance negotiation case was written to be used in both undergraduate and graduate courses. The rigor and depth of material may be adjusted to reflect the skill and background of the student audience. However, the issues are meaningful and relevant to the learning experience of both undergraduates and graduates. This case primarily is designed to be used in 1) a case course in Entrepreneurial Finance or Entrepreneurship or 2) as a supplemental exercise in a non-case course in Finance or Private Equity, or 3) in a negotiations course in a business or law school. It is an experiential learning exercise based on the application of sound integrative negotiating techniques. If the case is used in a finance course, students will negotiate using their instinctive negotiating skills. The instructor can assign one or more of the following readings on basic negotiating skills: Bartlett, 1999; Landstroem et al., 1998. A short primer on negotiating technique also is included in the PowerPoint Slides Section of this Teaching Note. If the case is used in a negotiations course, the instructor can assign the following venture finance basic understanding readings from the list of references: Bartlett, 1995; Berlin, 1998; Pearce and Barnes, 2006; Smith and Smith, 2000; Zider, 2000. Students who have had a fundamentals course in finance will be able to understand the valuation elements of this case.

INSTRUCTOR'S NOTES

CASE ISSUES

The two major categories of emphasis in the case are entrepreneurial finance and negotiations. Within the entrepreneurial finance category, the case covers the professional funding phase of a venture's life cycle, the structure and implications of the professional funding term sheet and, within the context of the term sheet, the valuation of a private company. Within the negotiation category, the case covers the goals of the entrepreneur and venture capital in coming to an agreement on the funding transaction, and the negotiating approach each takes in achieving those goals.

Entrepreneurial Finance.

The New Venture Life Cycle. This case puts the student at the stage of the new venture life cycle during which the entrepreneur requires significant funding and attempts to acquire that funding from professional investors. The diagram below shows the funding sources available to the entrepreneur at the various stages of venture development (Gompers and Lerner, 2004; Parker, 2006). Initially, the venture is funded by the entrepreneur and, potentially, family and friends. These funds are not large amounts and are used to provide cash in the initial stages of the venture. However, to progress up the value curve, infusions of cash are needed. Yet, in the early stage of the life cycle, the risk/return tradeoff is not favorable enough for venture capitalists. The entrepreneur may be able to secure interim funding from angel investors (Sohl and Sommer, 2006), who are individuals who have high net worth and invest their own money into ventures they believe have the potential for value creation (Holaday, Meltzer and McCormick. …

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