Walnut Venture Asociates Deal Terms

5105 words 21 pages
Harvard Business School

9-899-097
Rev. November 19, 1998

Walnut Venture Associates (D): RBS Deal Terms
It was Friday, June 5, 1998, and Bob O’Connor was headed home for the weekend. He knew it would be a busy one, for he had many decisions to make. He had been trying to raise capital for his Company – the RBS Group, a software firm – for almost a year. He felt like he was finally nearing the end of this process, but now more issues had arisen. First, his prospective investors wanted to increase the amount of their investment. While he would be happy to have the extra money, he felt that the valuation on RBS was already lower than he had hoped, and he was reluctant to take more money at this price. Second, he had received a draft
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Mid-Atlantic had talked to us, and we had shared our due diligence efforts and perspective with them. Bob had a meeting scheduled with them, and we knew they were going to get to the issue of price. At this point in time, Walnut had not yet had a discussion with O’Connor related to the valuation on which they intended to invest. Wagner knew that RBS’s prior round had been an investment of $400,000 for 10% of the company. The remaining 90% was owned by O’Connor (25%) and two other founders, one of whom was still active in the business (20% each); the remaining 25% was held by a variety of other past and current employees. RBS had made substantial progress since the UST financing, and indeed, had just had a strong quarter ending 3/31/98. Wagner offered his view of the valuation discussion: Everything we had learned about Bob during the process of pulling together the $2 million was positive. Bob was looking for an $8 to $10 million pre-money valuation, and we were at a figure more like $6.0 million. We felt we needed to talk to Bob prior to his meeting with Mid-Atlantic just so he knew where he stood. I explained to Bob our take on the valuation issue, and also that there would be some sort of preferred stock involved. This was not an easy conversation, and I think Bob was both surprised and

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