Analysis Start Up Company by Investors Lecturer

AnalysisStart Up Company by Investors

Lecturer:

AnalysisStart Up Company by Investors

Due Diligence

  1. Your judgement about the technology &amp appropriability position of the Newcobusiness idea

  • To what extent is the technology “new” for the incumbentindustry?

Thetechnology is not very new in the incumbent industry because severalother companies have already ventured into the market. Moreover,apart from offering solar powered mobile chargers, they also offersolar powered lamps and lighting systems that have mobile phonecharging capabilities. A quick analysis of the market reveals thatthere several competitors offering similar and even more advancedproducts for as low as $15[ CITATION Jum15 l 2057 ].In fact, some of the company’s future development plans havealready been adopted by their competitors. For instance, M-KOPASOLAR, which offers pay-as-you-go solar energy services in remoterural areas in Kenya ventured into the country in 2012 and hasalready reached more than 250,000 homes across Kenya, Uganda andTanzania.M-KOPA SOLAR’s flagship product is a battery-powered 8Whome system that has three lights, a phone-charging facility and achargeable radio.

DespiteKenya’s potential for off-grid solar power, a 2014 study by M-KOPASolar and Inter Media showed that 14% of the surveyed population usesolar as their primary lighting and charging source. Being one of thefastest growing power providers in the region, M-KOPA connects solarto over 500 new homes each day. This shows that the technology hasalready been largely exploited in the country

  • What are the different “forms of protection” which “Newco” can use? Do you agree with the adoptedstrategy?

  1. Intellectual Property Rights (IPR): All IPR related to design and manufacture should be retained by the NEWCObusiness entity, as agreed upon within the manufacturing specification and agreement. Thisagreement will ensure that the IPR is owned by the firm and remains its property even ifthe manufacturer makes adjustments and additions through the process.

  2. Trademark Registration: This will help to deter counterfeiting.

Thestrategy adopted by the company facilitates both IPR and trademarkregistration and is therefore effective.

Iagree that NEWCO should adopt trademark registration as opposed toIPR reason being that apart from being effective in prevent copiers,it is easily enforceable in Kenya and specifically Africa as opposedto IPR since it’s not an initial innovation and apart from itsenforcement being challenging, the enforcement would most probablyrequire more financial input than the potential recovery.

  • Do the entrepreneurs have “freedom to operate”?

Theentrepreneurs have freedom to operate because, the Kenyan governmentis committed to promoting cheaper and natural forms of ruralelectrification to supplement their rural electrification programme.

  • Does the financial plan allow for a protection strategy?

Yesthe financial plan supports a protection strategy in terms of costcontrol and management. First of all, the R &amp D engineers will bepermanently based in the UK as opposed to travelling to and fro Kenyathereby reducing travelling expenses. In the 2ndand 3rdyear, the company plans to reduce the costs by employing the servicesof freelancers in the R&ampD department as opposed to full-timeengineers. The fact that the manufacturing will be done in China isalso important in cutting down the costs due to the availability ofraw materials and relatively cheap labor.

  • Is there a clear development plan which shows timelines in the development of the product and necessary resources to accomplish tasks?

Althoughthere is a Bill of Materials showing the various components that areused to make the Solaris equipment, there are no timelines set toaccomplish the development tasks.

2A. Your judgement about the financials –.

  • Are the assumptions realistic?

    • Revenues: The revenue assumptions are unrealistic since 2011, the percentage of COGS to revenue is very low at 22% and yet since it’s the first year of operations, fixed costs associated with the setting up of the firm are very high ranging from premises, assets, R&ampD, among others, and sales ought to be quite low. Also the 400% growth in revenue is unrealistic since it should be gradual, considering the firm is newly establishes and it is still trying to establish itself in the market.

    • Costs: Also, the total expenses figure of 160.43 in 2011 is unrealistic given the fact that it is the first year of operations and thus there are a lot of set-up costs associated with the firm, thus the figure should be weigh above the one projected.

    • Investments: This initial investment figure of USD 150 or Ksh 13,000 is realistic for the KIOSKS given the fact that the costs of purchasing a SOLARIS Housing Mould is only USD 50 and the balance can be used to rent premises, and cover other fixed costs especially related to setting up the business.

    • Financial commitments: The Micro-finance loan offered to the potential KIOSK owners is realistic since the repayment period is one year and thus the payment duration of 12 months with payment plans of a minimum of Ksh 1,099 to a maximum of Ksh1, 278, the KIOSK owners can comfortably repay their loans.

  • Is there a realistic view regarding the amount of finance needed for the venture and about the moment at which the finance is needed?

NEWCO’sinvestment of USD 170,000 is realistic during the establishment stageof the firm in Kenya. Te total fixed costs are USD 123.7 and variablecost USD 32.99 which equals to USD 156,000 which is less than theinitial proposed capital of USD 170,000.

    • Is there a realistic view regarding what the valuation of the venture is?

Thereis no realistic valuation of the venture since we do not have thebalance sheet of NEWSCO (UK) and thus cannot determine the value ofassets, liabilities, and capital that are necessary when getting thetrue value of a company.

2B. Measures and alternatives we thinkabout:

1.Writedown your shareholders agreement (Term sheet):

Writeminimum of 30 terms and conditions about the following and use theattached file (term sheet) from theinvestor perspective

  • Amount of the capital increase

  • Final distribution of shares

  • Categories of shares

  • Board room voting power

  • Special conditions: stand still, push or pull options,

ShareholdersAgreement

  1. Liquidation preference: The Preferred has a prior claim to the company’s assets in the event of liquidation

  2. Conversion: The preferred reserves the right to be converted into a common shareholder

  3. Automatic Conversion: Each of the shares held by the preferred will automatically be converted into the common shares at the applicable conversion rate upon the closing of an underwritten initial public offering (IPO) of common shares or the consent of the majority holder of the outstanding preferred shares

  4. General voting rights: Preferred shares have voting rights similar to those of common shares on all matters based on the conversion rate.

  5. Information Rights: Each investor is entitled to inspect the company’s financial statements

  6. Protective Provisions: The consent of the preferred will be required for any action that alters the company’s legal documents that govern the relationships between its stakeholders

  7. Pre-emptive Rights (to maintain proportionate ownership): Each major investor reserves the right to purchase the company’s pro-rata share of any offering of new securities

  8. Co-Sale Rights: Shareholders are banned from selling their shares to a third party, unless the third party offers to buy the investor’s shares on the same terms.

  9. Election of Directors: The preferred should have a representative (Investor nominee) on the board of directors.

  10. Sale Transaction: A sale transaction includes mergers, amalgamations, reorganization, consolidation and any other transaction that entails the transfer of ownership of the company’s assets to third parties.

  11. Optional Pool: The number of Common Shares reserved for issuance under the Corporation’s stock option plan will be increased to equal a certain percentage of shares outstanding after issuance of the Preferred to Investors.

  12. Share purchase agreement: The Investors and Corporation will enter into a share purchase agreement containing standard representations and warranties, with a given survival period.

  13. Founder matters: Each Founder shall have transferred all relevant intellectual property to the Company, entered into an employment agreement with the Company and signed agreements with respect to voting and vesting their Founders shares over an agreed term of a certain number of years, with the terms of such agreements satisfying the Investors prior to Closing Date.

  14. Expenses and fees: The Corporation will reimburse counsel to Investors for legal fees and disbursements, up to a certain maximum limit.

  15. Expiration Indicates the date before which these terms are valid.

  16. Binding Terms: The Company agrees not to solicit offers from other parties for any financing for thirty days.

3A.Guidelinesto think about DealStructure

1.Providean overview of the way you initially would distribute the shares,before externalinvestment. (Pleaseprovide excel file to keep the formulas)

Comment:

The best time to invest in the company is during the first year