Considering all the information provided in the Case Study, which Investor/Partner option would you consider to be the best for NatuRi Corporation? Would it be the Angel Investor, Strategic Investor, Waltham Partners, or Westlake Partners? Please justify your response. To conduct a comprehensive evaluation, we will discuss each investor/partner choice separately, highlighting their positive and negative aspects.
The Angel Investor is a wealthy individual who is willing to personally invest in the venture. One advantage of choosing this investor is that Kartik has previous familiarity with him, as he has provided consulting services in the past.
The individual investor is willing to invest $1,000,000, but the drawback is that the equity that Kartik and Aravind will have to give up and the added value from this investor are uncertain due to NatuRi not being valued yet. On the other hand, Proteon, a large European food company, sees potential in NatuRi’s technology and product and is interested in investing for both financial gain and a long-term partnership.
They presented a license agreement to NatuRi so that they can personally distribute Rice-Active. Proteon, however, prioritizes their own business (integrating NatuRi’s product into their own business) rather than aiding in NatuRi’s development. Kartik and Aravind believe that Proteon would be open to accepting a smaller equity position than other firms/investors, given these objectives. Waltham Partners is a respected Venture Capital firm known for investing in biotech but not typically in the natural products industry.
This investor provides the advantage of significantly enhancing NatuRi’s reputation among scientists. Waltham Partners offers a total of $500,000 in initial funding, split into two $250,000 portions, and the option to invest in a $4.5 million Series A round at a predetermined valuation. Once NatuRi receives this initial investment, they must demonstrate to Waltham Partners that the funds are being put to good use by reaching specific milestones. However, a drawback of this offer is that it is only available for 24 hours, placing pressure on Kartik and Aravind to make a prompt decision. Westlake
Westlake Partners is a smaller VC firm that was less well-known in the investment community. They provide $2,000,000 in seed money at the same valuation as Waltham’s Series A round. 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 the importance of raising capital as the primary goal for Kartik and Aravind. To continue progressing, they require a minimum of $500,000 within the next six months.
In our opinion, considering the points mentioned above, the angel investor is the most preferable option for NatuRi. This is because the angel investor provides a significant amount of funding, which is double the amount needed by NatuRi in the next six months. Moreover, choosing the angel investor allows Kartik and Aravind to have full control over running the business according to their vision, without any additional requirements. On the other hand, the alternative choices restrict NatuRi’s freedom on its journey towards success. Specifically, we believe that selecting Proteon as an option is risky since it attempts to acquire NatuRi through a license agreement.
This is evident from their early consideration of purchasing NatuRi before it even began. Additionally, Kartik’s concerns about being trapped in an agreement with Proteon reinforce the negative perception of them. Both Waltham Partners and Westlake are also unfavorable options due to their excessive demands, which restrict NatuRi’s autonomy. The requirements set by Waltham Partners and Westlake for achieving milestones are problematic for Kartik and Aravind since it is difficult to carefully design them to ensure NatuRi’s readiness for the Series A investment.
While Waltham Partners does enhance NatuRi’s credibility, this is not as important as the research collaboration and FDA approval, which would increase their market value in the long run. Furthermore, Westlake lacks the advantage of being well-known, making it unable to provide any credibility benefits. Assuming NatuRi Corporation’s management has chosen Waltham Partner’s investment proposal, and I am the legal counsel for NatuRi Corporation, the management seeks my advice regarding the two term sheets received from Waltham Partners.
Please provide a brief memo addressing the following points: (a) Identify the provisions in both term sheets that NatuRi should reject and renegotiate; and (b) Explain the reasons and methods by which the rejected provisions should be modified for NatuRi’s approval. According to the seed note term sheet, NatuRi should seek renegotiation of two aspects: the ‘maturity date’ section and the ‘option to invest’ section. The ‘maturity date’ section currently allows Waltham Partners to convert the note into 12.5% of NatuRi’s outstanding common shares on the maturity date.
If Waltham Partners chooses not to exercise this option, the note will become due and payable on the maturity date, along with any accrued and unpaid interest. This scenario is unfavorable for NatuRi as it can have negative repercussions. For instance, if NatuRi experiences significant growth in the coming months, its value will greatly increase. Consequently, Waltham Partners will convert the note into 12.5% of shares. Conversely, if NatuRi’s performance is poor and its value decreases, Waltham Partners will not take the same action and will not exercise the option.
Both of these scenarios are harmful for NatuRi because Waltham Partners will always choose the most profitable option for themselves, which will negatively affect NatuRi. Instead of simply granting Waltham Partners this option, NatuRi should negotiate and discuss this matter. One possibility is to have Waltham Partners decide between the two options before the closing date. Alternatively, a better solution for NatuRi would be to have the right to choose for Waltham Partners themselves. However, this option is not feasible as Waltham Partners would face the same problem as NatuRi. Option to invest
The text emphasizes that in this section, NatuRi authorizes Waltham Partners to invest as they choose. However, it is suggested that NatuRi should negotiate for Waltham Partners to have the freedom to decide whether or not to invest. This is because the new investment, Series A Financing, brings significant changes to NatuRi’s company structure. By simply granting Waltham Partners the right to invest at their discretion, NatuRi relinquishes all control over investments. Consequently, it is advisable for NatuRi to aim for a situation where they retain some degree of control. From the Series A term sheet, there are two aspects that NatuRi should renegotiate: the ‘valuation’ section and the ‘redemption’ section.
Valuation: After selling the Series A Preferred, Kartik and Aravind’s ownership in NatuRi will be reduced to 25% of the remaining capital. This means they will no longer have a majority stake and will lose control of the company. Kartik is worried that partnering with Proteon might limit their ability to sell NatuRi to future buyers. Therefore, Kartik and Aravind must negotiate how many shares they will keep in order to preserve the option of selling NatuRi later on. Redemption.
According to this section, if holders of at least 66.67% of the Series A Preferred shares request it, NatuRi is obligated to redeem these shares in three equal annual installments. The redemption process can start after five years from the purchase date. However, NatuRi may not have enough time within the three-year period to completely redeem the shares. Therefore, it is recommended that NatuRi discusses with Waltham Partners the option of choosing a more appropriate timeframe for redemption.
