Having in regard all the information that is given in the Case Study, what is, in your opinion, the best Investor/Partner choice for NatuRi Corporation? Is it the Angel Investor, the Strategic Investor, Waltham Partners or Westlake Partners? Please justify your answers. In order to make a comprehensive review, we will discuss each investor/partner choice separately on its positive and negative aspects. Angel Investor The angel investor is a wealthy individual who is willing to make a personal investment in their venture.
An advantage of this investor is that Kartik is familiar with him, as he has done some consulting work for him.
The individual investor is willing to put up $1,000,000. A disadvantage of this angel investor is that, as NatuRi has not been valued yet, it is not clear how much equity Kartik and Aravind will have to give up. It is also not clear how much value this investor will add besides providing capital. Strategic Investor Proteon, a large European food company, is interested in NatuRi to capitalize on its technology and product.
In addition to the expected return-on-investment, Proteon also pursuits a permanent stake in the business.
They proposed a license-agreement to NatuRi so they can distribute Rice-Active themselves. A disadvantage of Proteon is that they are more concerned with their own business (integrating NatuRi’s product into their own business) than helping in the development of NatuRi. With these goals in mind, Kartik and Aravind believe that Proteon therefore would be willing to accept a smaller equity position than the other firms/investors. Waltham Partners Waltham Partners is a well-reputed V(enture)C(apital) firm which had a history of biotech investment but not typically in the natural products sector.
An advantage of this investor is that they would immensely improve NatuRi’s credibility with scientists. Waltham Partners offers a total of $500,000 in seed funding (in two $250,000 tranches) with an option to invest in a $4,5 million Series A round at a pre-set valuation. Upon receiving this seed investment, NatuRi will have to show Waltham Partners constructive use of the money by meeting milestones. A disadvantage of this offer is that it lasts for 24 hours and that Kartik and Aravind have to decide quickly. Westlake
Westlake Partners is a smaller VC firm that was less well-known in the investment community. They offer $2,000,000 in seed money however at the same valuation as Waltham’s Series A round. Conclusion In the early stages of NatuRi, Kartik and Aravind had funded the company with their own savings. As Aravind states in the case: “…we are at a point where we know that we need to raise outside capital to make any more progress”. This emphasizes that the most important objective for Kartik and Aravind is to raise capital. In order to keep moving forward, they need at least $500,000 in the next six months.
Taking this into account, the angel investor is in our opinion the best choice. It puts up a large amount of money, which is double the amount that NatuRi needs in the coming six months to make progress. Another advantage of the angel investor is that it leaves Kartik and Aravind free in running the business the way they envisioned it, as no further requirements are made. The other options limit the freedom of NatuRi in its path to success. Proteon is in our opinion a dangerous choice, since it (more or less) tries to acquire NatuRi with its license agreement.
This is supported by the fact that they were already thinking about how to buy NatuRi before it had even gotten of the ground. Also Kartik’s worries about locking themselves in by making a deal with Proteon support the negativity regarding Proteon. Waltham Partners and Westlake are not preferred as well as they have a lot of demands and thus limit NatuRi’s freedom. The milestones that Waltham Partners and Westlake require are a concern to Kartik and Aravind as it is hard to structure them so that NatuRi would be well positioned to earn the Series A investment.
Waltham Partners does improve NatuRi’s credibility however, but this is of lower priority since their research with and approval of the FDA would give them a higher market value over the long term. Another disadvantage of Westlake is that it is less well-known and thus does not offer the credibility advantage at all. Question 2 Assume that NatuRi Corporation’s management has decided to choose the Waltham Partner’s investment proposal. Further assume that you are the legal counsel of NatuRi Corporation, and that NatuRi Corporation’s management is asking you for advice on the two term sheets received from Waltham Partners.
Please indicate in a short memorandum: (a) What are the provisions of both term sheets that NatuRi should reject and renegotiate; and, (b) Explain why and how, in your opinion, the rejected provisions should be changed in order to become acceptable for NatuRi. From the seed note term sheet, NatuRi should renegotiate about two things: the ‘maturity date’ section and the ‘option to invest’ section. Maturity date In this section it is stated that at the option of Waltham Partners the note can be converted into 12,5% of NatuRi’s outstanding common shares (on the maturity date).
If Waltham Partners does not exercise this option, the note will be due and payable, together will all accrued and unpaid interest, on the maturity date. This is not preferable for NatuRi as there can be negative consequences for them. For example, if NatuRi flourishes in the next couple of months, its value will increase significantly. This will result in Waltham Partners converting the note into the 12,5% of shares. On the other hand, if NatuRi is not performing well and its value is decreasing, Waltham will not do the same and does not exercise the option.
These two scenarios are both detrimental for NatuRi, as Waltham Partners will always make the most profitable choice for themselves, which will harm NatuRi. NatuRi should therefore negotiate about this matter and not just grant Waltham Partners this option. They could try to change this by having Waltham Partners choose between the two options before the closing date. An even better solution for NatuRi would be that they have the right to choose for Waltham Partners themselves. This is not realistic however, as Waltham Partners would not agree as they would have the same problem as NatuRi. Option to invest
In this section it is stated that NatuRi grants Waltham Partners the right to invest at their option. NatuRi should negotiate that the option for Waltham Partners to invest is their own call, as this new investment (Series A Financing) makes some huge changes in NatuRi’s company structure. By simply granting Waltham Partners with the right to invest at their option, NatuRi loses all its control regarding investments. Therefore, NatuRi should pursue a situation in which they remain (some of the) control. From the Series A term sheet, NatuRi should renegotiate about two things: the ‘valuation’ section and the ‘redemption’ section.
Valuation In this section it is stated that after the sale of the Series A Preferred, Kartik and Aravind will only own 25% of the remaining capital. This means that they will not own a majority in NatuRi and therefore lose control. In the case, Kartik worried that a deal with Proteon would lock themselves in and hinder their chances of selling NatuRi to potential buyers in the future. Therefore, Kartik and Aravind will have to negotiate about the remaining share that they will have in NatuRi in order to still be able to sell NatuRi in the future. Redemption
In this section it is stated that at the request of the holders of at least 66,67% of the shares of the Series A Preferred, NatuRi will have to redeem the Series A Preferred in three equal annual installments commencing at any time after five years from the date of purchase. This time period of three years (three equal annual installments) may not be sufficient for NatuRi to redeem everything. Therefore they should negotiate about this time period. For example, they could discuss the possibility of choosing an appropriate time period together with Waltham Partners in case of a redemption.
Cite this Business Law Case
Business Law Case. (2016, Oct 30). Retrieved from https://graduateway.com/business-law-case-2/