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Memorandum: Net Present Value and Apex Investment Partners Essay

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MEMORANDUM

To Apex Investment Partners:

According to my analysis of the Accessline’s proposed term sheet, I do not believe that Apex would serve its own interests, or those of its investing partners, by investing in Accessline according to the terms proposed. By investing at the proposed valuation, according to the proposed control and incentive structure, Apex would be shouldering a disproportionate share of the risk should Accessline fail to meet its performance targets, or require fresh inflows of capital from future investment rounds. Nor can Accessline take the sort of steps necessary to protect its investment in the case of management failure.

Should Apex make a counter-offer, I would suggest the following terms: …show more content…

First and foremost, Apex must insist on the right to elect one director to the board. Series A investors already have one seat, and the current voting clauses allow Series A to effectively retain control of decision making by requiring 2/3rds majority for many key decisions. Should future funding rounds be required, those investors may insist on seats on the board.

Apex must remove 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 veto over the deal, their shares must be allowed to retain anti-dilution protection. Additionally, we may propose a point at which additional investment rounds (above and beyond $32m of fresh capital) would cause dilution of ESOP shares at an accelerated rate.

Dividends should be made cumulative and issuable upon a liquidation event or an IPO. Such dividends may be converted, if the holder desires, to common shares. This will encourage management to seek a quicker exit.

Liquidation preference must be strengthened 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, applicable to Series A shares, with the remainder to be

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