'Memorandum: Net Present Value and Apex Investment Partners\r'

'MEMORANDUM To Apex Investment Partners: According to my epitome of the Accessline’s profferd term sheet, I do non believe that Apex would serve its own interests, or those of its investing partners, by investing in Accessline correspond to the terms proposed. By investing at the proposed valuation, harmonize to the proposed engage and fillip structure, Apex would be shouldering a disproportionate sh atomic number 18 of the risk should Accessline fail to fancy its performance targets, or require fresh inflows of capital of the United States from rising investing rounds.Nor tin can Accessline take the multifariousness of steps necessary to protect its investment in the fact of steering ruin. Should Apex make a counter-offer, I would hint the following terms: evaluation: Accessline’s projected tax incomes in 1999 are $208m. use the average legal injury/revenue dimension of 3com and capital of Massachusetts Technologies, it seems reasonable to expect a n IPO valuation at 3. 67 times revenues, producing gross proceeds of $764m with a state value of $116m (using our 60% discount rate).Assuming that Accessline meets this revenue target, and that no future funding is required, Apex give take a slight loss on its required rate of return, barring the voluntary distribution of the dividend from the board of directors, on which we are not offered a seat. The present price per share at much(prenominal) an exit would be approximately $7. 84. However, given Accessline’s historical burn rate, it seems unreasonable to expect the $16m investment produced in series B to last Accessline until 1999.Assuming Accessline give need another $32m to reach its revenue targets by 1999, Apex takes a much to a greater extent f proper(a)ening loss relative to its required rate of return. The present price per share at such an exit, presume the new shares are also offered at $8 per share, would be $6. 18 per share. I therefore suggest using $6 per share as a point for a new valuation of the company, take for granted the inclusion/revision of terms as draw below. Rights and Preferences Apart from the valuation, other elements of the term sheet must(prenominal) be adjusted to allow Accessline to protect its interests and incite or replace centering in the grimace of performance failure.First and foremost, Apex must insist on the right to elect one director to the board. serial A investors already have one seat, and the real voting clauses allow Series A to in effect retain control of decision making by requiring 2/3rds majority for many key decisions. Should future funding rounds be required, those investors whitethorn insist on seats on the board. Apex must admit antidilution protection from employee shares, as this removes a significant incentive for employees and management to reduce Accessline’s burn rate.However, as Series A investors retain a controvert over the deal, their shares must be allowed to r etain anti-dilution protection. Additionally, we may propose a point at which excess investment rounds (above and beyond $32m of fresh capital) would cause dilution of employee stock ownership plan shares at an accelerated rate. Dividends should be made additive and issuable upon a liquidation event or an IPO. much(prenominal) dividends may be converted, if the holder desires, to common shares. This lead encourage management to seek a speedy exit. Liquidation preference must be built in other ways.In my opinion, the current arrangement allows management and employees to receive unjustified returns in the case of a liquidation. I suggest a ratio of 1. 5 times the Series B purchase price, relevant to Series A shares, with the remainder to be distributed among Series A, Series B, and common shareholders/employee stock ownership plan on an as-if-converted basis. In an IPO, Series B shares should auto-convert at a ratio of one-to-one at a target price of $12 until June thirtieth an d $15 after June 30th 1996. After that, the targets must continue to ratchet upwards.The write consent of 3/4ths of Preferred shareholders could override this fate while preserving Apex’s ability to preclude auto-conversion. This voting ratio should also be employ in the voting clause, since without it Apex lacks any ability to control future funding rounds. Series B must be allowed to redeem all of their shares upon the failure of Accessline to come within 5% of its revenue and income projections for 2 consecutive years. Alternatively, Apex could require that unvested management/ESOP shares be returned to Series A and Series B on a pari passu basis in the case of performance failure.Alternatively, Accessline could insist on a right to replace management in the case of this eventuality. presumption the large number of competitors already present in the market, it is likely that if Accessline’s business fails, it impart do so quickly and drastically. Negotiation considerations It is important to refer that a counterproposal from Accessline that strengthens or enhances any of these provisions in Apex’ favor in exchange for a higher issue price of the Series B shares should be considered.However, there are limits to the premium we should constitute for enhanced control, and firm limits for how far such control can be reduced. A board process and the voting rules are non-negotiable. The dividend and the autoconversion terms, however, are places in which we can demonstrate flexibility. At this price, with these changes to the term sheet, we are exempt exposed. Significant competitive, regulatory, or technological changes in the food market could quickly destroy Accessline’s profitability.This is, as it stands, a strong counterproposal that is bound to meet resistance from management and employees, but provided we preserve Series A’s valuation, I believe Series A investors will be inclined to allow us more control and l atitude provided the performance requirements for management are strengthened. Since I believe our competitors will also propose lower valuations based on a witness of these same numbers, we must act tactfully. Perhaps virtually sort of parachute can be coherent for senior management in the event of a takeover.\r\n'