Receive three offers

Some exciting news!

You have just checked your Inbox and have some exciting news for your management team:

VSC has received three fundraising offers from your target investors!

Your three offers

The following is a summary of the key components for each offer received from the three different parties:

Offer from Investor A

The offer comprises $6 million of equity and $6 million of mezzanine debt.

Equity component

Equity of $6 million in exchange for 500 newly issued ordinary shares in the company on 1 January 20X3 at a fully diluted pre-money valuation of $60 million. This will comprise no less than 9.1% of the company on a fully diluted basis.

VSC shall pay the investor’s deal process fees and expenses which are expected to total $120,000.

Mezzanine debt

A convertible loan note with the following key terms:

• Immediate drawdown (planned for 1 January 20X3) with a maturity date of three years (31 December 20X5) at which point the loan note is either repaid or converted into equity.
• Interest is charged at 14% per annum and is calculated on 31 December each year based upon the combined outstanding value of the loan and any accrued interest.  The interest is rolled up and becomes payable when the loan is repaid at the maturity date or alternatively forms part of the conversion into equity.
• Arrangement fee of $45,000 payable upon signing the loan note agreement.
• Conversion: The investor has an option to convert the loan note and accrued interest into ordinary shares:
  • On a later financing event;
  • On the sale of the business; and
  • On the loan note repayment date (i.e. three years after the drawdown date).
• Default conversion price: An amount in USD equal to the lower of (i) the latest subscription price per share (provided within the preceding six months) or (ii) 75% of the share valuation as determined by a qualified independent third party acceptable to the company. Note that VSC is forecast to be valued at $500 million on 31 December 20X5.
• Redemption clause: The loan can be called by the investor prior to conversion if triggered by a company default.  For example, during an insolvency or breach of a financial covenant.
• Financial covenant: Equity Ratio shall be not less than 0.5.  Equity Ratio means the ratio between the total shareholder equity and the total assets of the Borrower according to its balance sheet.
• If the Investor has not exercised its conversion option by midnight on the maturity date (the expiry date of the conversion option), then the loan and any accrued interest shall be repaid in six equal semi-annual instalments.

Offer from Investor B

The offer comprises $3 million of equity and $9 million of mezzanine debt.

The terms of the equity and mezzanine debt components are identical to Investor A’s offer.

Offer from Investor C

The offer comprises $3 million of equity, $3m convertible preference shares and $6 million of mezzanine debt.

The terms of the equity and mezzanine debt components are identical to Investor A’s offer .

Convertible preference shares

The following summarizes the key terms:

• $3 million of funds in exchange for 250 newly issued preference shares in the company priced at $12,000 per preference share.
• Planned for 1 January 20X3 with a maturity date of three years (31 December 20X5) at which point the preference shares are either repaid or converted into ordinary shares.
• Arrangement fee of $25,000.
• Coupon rate: The instrument has a fixed coupon rate at 6% per annum, payable every 12 months after the drawdown date.
• Conversion: The convertible preference shareholder has the option to convert into common shares in full after three years. The conversion ratio is one ordinary share for each preference share held.
• If the Investor has not exercised its conversion option by midnight on the maturity date (the expiry date of the conversion option), then the loan and any accrued interest shall be repaid in six equal semi-annual instalments.

Initial thoughts

These three offers should all provide you with the necessary funds to help deliver the company’s business plan.

This is great news as it shows that there is a strong appetite towards investing within VSC and that you should be able to create some competition throughout the deal process in order to negotiate a good agreement!