Question 2: Beechwood Spouts Term Sheet Analysis
1) Security: Series E Convertible Preferred Stock
In an entrepreneur’s point of view, the investor will gain an advantage of acquiring preferred stock, unlike the entrepreneur who holds common stock. Since Preferred stock is senior to common stock (but subordinate to bonds) in terms of claim of the assets of the company in an event of liquidation. Also, although preferred stock usually carries no voting rights, but it may carry a dividend and may have priority over common stock in the payment of dividends.
Moreover, since it is convertible preferred stock, it allows the investor to exchange preferred stock to common stock at a specific price and at the discretion of the shareholder. So, the convertible preferred shareholder has the advantage of receiving a higher dividend payment than common stock affords, while at the same time owning the ability to convert to common stock to take advantage of capital appreciation.
2) Price per share
At the price $4.60 per preferred share will be beneficial to the entrepreneur if it is higher than the initial price. The investor is willing to pay for the higher price if the stock price tends to increase in the future from the growth of the company.
3) Closing date
Closing date is the last day that the investors can buy stocks
The entrepreneur limits the maximum investment from an investor at $4.5 million in order to protect the ownership and controlling power of the company.
For conversion from preferred stock to common stock, the company has to receive more than $5 million and the price per share is at least 300% of the conversion price. With Full Rachet anti-dilution protection, it will be beneficial to the investor rather than the entrepreneur because Full-ratchet allows the investor to have his percentage ownership remain the same as the initial investment. The company has to bear all the downside price risk where there is no...
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