Reference no: EM131160193

Background:

Structure:

Parent Company ("Parent") is a Delaware C-Corp, capitalized with 7 million shares of Common Stock, 2 million shares of Seed Preferred Stock, 1 million shares of Special Preferred Stock, and a vesting-dependent option pool of 1.5 million shares of which some have been granted.

Excerpts of the Company's articles of Incorporation have been provided as Exhibit 1. The Company's cap table has been provided as a separate excel spreadsheet.

Business:

The Company operates in only two units: Operating Unit ("OPS") and R&D Unit ("R&D"). The financials for each of these units are provided as a separate excel spreadsheet.

OPS is comprised of 45 team members across executive and operations, sales and marketing, and product, and is engaged in providing a Software-as-a-Service ("SaaS") solution to SMBs for managing HR/Payroll compliance and processing.

R&D is comprised of a team of 9 Ph.D. members focused mainly in technology exploration. The team was assembled in 6/13/2014 from MIT, and they have been solely focusing on a machine-vision project capable of reading non-legible PDFs related to the insurance-claim processing industry. The project is in beta and has some small insurance processors using it. However, it is not currently generating any revenue and Parent has not decided how to monetize this business unit.

Funding:

Parent was incorporated on 1/1/2010 and thereafter funded on 5/24/2010 through an investment by one investor ("Investor") where she invested $3M by purchasing all of 2 million share of Preferred Stock. In 9/15/2012, the Investor invested an additional $3.5M by purchasing the 1 million share of Special Preferred Stock

Issue 1:
A Private Equity firm wants to bring a new management team and is looking to make an offer to Investor to buy Parent, spin-off OPS, run OPS with their new management team, and sell the R&D Unit to Adobe (ticker ADBE). They want to make sure that the offer is reasonable (not too high, not too low). As of 6/30/16, what is a narrow range of offers that the Private Equity firm should consider ("Parent Range"), and what amount is the most likely figure within that range ("Parent Offer").

Issue 2:
As of 6/30/16, what should the Private Equity firm expect to sell the R&D Unit to Adobe for?

Issue 3:
As of 6/30/16, based on your conclusion on Parent Offer, and given the rights of the Preferred Stock, Common Stock, and the various strike prices of the option holders, what is the payout to each security holder?

Exhibit 1: Excerpts from Parent's Articles of Incorporation

ARTICLE IV: AUTHORIZED SHARES.
A. The total number of shares of all classes of stock which the Corporation shall have authority to issue is (a) 10,000,000 shares of Common Stock, par value per share ("Common Stock"), and (b) 3,000,000 shares of Preferred Stock, $0.0001 par value per share ("Preferred Stock"). The Preferred Stock may be issued from time to time in one or more series, each of such series to consist of such number of shares and to have such terms, rights, powers and preferences, and the qualifications and limitations with respect thereto, as stated or expressed herein. As of the effective date of this Restated Certificate of Incorporation (this "Restated Certificate"), 2,000,000 shares of the authorized Preferred Stock of the Corporation are hereby designated "Series Seed Preferred Stock" and 1,000,000 shares of the authorized Preferred Stock of the Corporation are hereby designated "Special Preferred Stock." The following is a statement of the designations and the rights, powers and privileges, and the qualifications, limitations or restrictions thereof, in respect of each class of capital stock of the Corporation.

1. Liquidation, Dissolution or Winding Up; Certain Mergers, Consolidations and Asset Sales.
Payments to Holders of Series Seed Preferred Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation or any Deemed Liquidation Event, before any payment shall be made to the holders of Special Preferred Stock or the Common Stock by reason of their ownership thereof, the holders of shares of Series Seed Preferred Stock then outstanding shall be entitled to be paid out of the funds and assets available for distribution to its stockholders, an amount per share equal to the greater of (a) the Original Issue Price (as defined below) for such share of Series Seed Preferred Stock, plus any dividends declared but unpaid thereon ("Series Seed Liquidation"), or (b) such amount per share as would have been payable had all shares of Series Seed Preferred Stock been converted into Common Stock immediately prior to such liquidation, dissolution or winding up or Deemed Liquidation Event. If upon any such liquidation, dissolution or winding up or Deemed Liquidation Event of the Corporation, the funds and assets available for distribution to the stockholders of the Corporation shall be insufficient to pay the holders of shares of Series Seed Preferred Stock the full amount to which they are entitled under this Section 1.1, the holders of shares of Series Seed Preferred Stock shall share ratably in any distribution of the funds and assets available for distribution in proportion to the respective amounts that would otherwise be payable in respect of the shares of Series Seed Preferred Stock held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. The "Original Issue Price" shall mean $1.5 per share, subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to the Series Seed Preferred Stock.

Payments to Holders of Special Preferred Stock. After payment of the full Series Seed Liquidation Preference to the holders of Series Seed Preferred then outstanding, the holders of the Special Preferred Stock then outstanding shall be entitled to be paid, pro rata, out of the Available Funds and Assets, prior and in preference to any payment or distribution (or setting apart of any payment or distribution) of any Available Funds and Assets on any shares of Common Stock or any other issued capital stock, other than the

Series Preferred, an amount equal to the quotient of (i) the product of (A) the lesser of (x) the remaining Available Funds and Assets, or (y) ten percent (10%) of the funds and assets available for distribution to the Corporation's stockholders and (B) the quotient of the total number of shares of Special Preferred outstanding on the date of such distribution (the "Outstanding Special Preferred") divided by the total authorized number of shares of Special Preferred, divided by (ii) the Outstanding Special Preferred (the "Special Preferred Liquidation Preference").

Payments to Holders of Common Stock. In the event of any voluntary or involuntary liquidation, dissolution or winding up or Deemed Liquidation Event of the Corporation, after the payment of all preferential amounts required to be paid to the holders of shares of Series Seed Preferred Stock as provided in Section 1.1 and all preferential amounts required to be paid to the holders of shares of Special Preferred Stock, the remaining funds and assets available for distribution to the stockholders of the Corporation shall be distributed among the holders of shares of Common Stock, pro rata based on the number of shares of Common Stock held by each such holder.

Attachment:- Valuation Exercise.xlsx