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Metapath Case Report Essay

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METAPHATH SOFTWARE CORP.

BRIEFING NOTE
FINANCING RECOMMENDATION
SEPTEMBER 1997

1. PURPOSE
The purpose of this briefing note is to provide recommendations for Metapath Software Corp. (“Metapath”) on its financing offers received in September 1997.
These two offers came from 1) a fund consortium led by Robertson Stephens Omega Fund (“RSC”) and Technology Crossover Ventures (“TCV”) and 2) CellTech Communications (“CellTech”), a vendor of wireless technology which had recently gone IPO.

2. EXECUTIVE SUMMARY
Metapath has made good progress in developing its business since its inception – generating $6.4m revenue in the September quarter of 1997 with representation of three large customers. However, with the ambition to win a good …show more content…

Strategic/Business fit between CellTech and Metapath.

4. ANALYSIS
Comparing the term sheet of the offer from RSC and TCV consortium to that of CellTech, RSC and TCV’s PCPT had a much more dilutive impact to Metapath upon exit.

Under liquidation, the term sheet stipulates that the Series E investors is entitled to claim its initial investment of $10.75 million plus any accrued but unpaid dividend. Any proceeds after this claim will then be distributed to all common and Series E Preferred shareholders on an as-converted pro-rata basis. This double dipping means that RSC will not only recover its initial investment of $5 millions, but also enjoys the convertible benefits.

As a result, if the sale occurs before 2000, the profitability for A-D tranches will be negatively impacted by the ‘preferred’ characteristic in the Series E. However if the sale occurs after 2000, A and B tranches will be gradually redeemed on an annual basis, which will leave C and D tranches to be mostly impacted adversely by the preferred characteristic in the Series E stock.

Under the circumstance of an IPO, tranches C, D and E will convert to common at their negotiated prices while A & B will be redeemed.

However, on the flip side, the price offered by RSC and TCV consortium was $6, which was significantly higher than the first three rounds of financing (tranches A,B and C) at

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