Securenet, Inc.: Series a Round

Abstract

This case is designed for use in JD/MBA programs or in contexts where mutual understanding of legal and financial issues is required. The case focuses on an entrepreneur in the security-software industry who is attempting to raise a first round of financing in October 2000. The firm was unsuccessful in attracting funding from venture capitalists and has relied on a small seed round and bridge loan from angel investors. The angels have now proposed investing $1.4 million in Series A convertible preferred stock. The entrepreneur must decide whether to accept the angel investors' proposal or revisit the issue of seeking venture capital. The case incorporates the Stockholder Agreement for the proposed Series A round, the capitalization of the company after the seed round, and five years of cash-flow projections for the firm. The case can be used in a law-school setting as a contract-drafting exercise and as an introduction to valuation. In a business-school setting, the case can help students understand the complex contract terms associated with a "plain-vanilla" form of venture capital. Valuation can be taught at an introductory level, or it can be made more complex if students are asked to incorporate "what-if" contract conditions into their analysis.

Excerpt

UVA-F-1396

SECURENET, INC.: SERIES A ROUND

First there is a mountain, then there is no mountain, then there is.

—Zen proverb

In the fall of 2000, Richard Goodson reflected on his experiences over the past six months since his company had merged with another Internet startup to form SecureNet, Inc. Goodson became CEO of the combined company and was in the process of seeking additional financing. To date, Goodson had been unsuccessful in attracting venture capital funding and had instead focused his efforts on local investors. In July 2000, he raised $ 250,000 in seed capital followed, in September 2000, by a bridge loan of $ 250,000 from Trio LLC, a group of angel investors. The bridge loan was straight debt and repayment was contingent upon completion of a Series A round of financing, which was necessary to keep SecureNet afloat until several deals with key customers closed. In October 2000, Goodson received an offer from the same angel group to purchase $ 1.4 million in Series A convertible preferred stock. While Goodson welcomed the offer, he was uncertain whether the terms of the proposed agreement and the amount offered met his company's growing needs. First, Cyrus Maston, who headed Trio LLC, did not possess a great deal of experience in venture investing. With a successful seed round behind him, Goodson considered whether it might be a good time to revisit some venture capitalists and attempt to bring in a more experienced investor. Second, with only $ 1.4 million coming from the Series A round, SecureNet would again need to find additional funds to build its sales force and revenues. Thus, two key issues needed to be resolved before Goodson could make a decision on Trio's offer: whether $ 1.4 million was enough for nearly 40% of the firm's equity and how the proposed contract terms would play out in the likely event of subsequent funding.

Company

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Keywords: investing, entrepreneurial finance, valuation, private equity