Metapath Software Case Note
Metapath Software
OUTLINE
• What happened.
• The broader themes:
– The interplay of terms.
– Options in private equity.
WHAT HAPPENED (1)
• The Company turned down Cell
Tech:
– Offering 30% of their capitalization indicated that their base business had limited upside.
– Clearly there were ongoing financing risks and liquidity issues.
– The fit was not compelling.
• Cell Tech stock fell $9 --> $3
– After 3 years and several acquisitions, it rebounded. WHAT HAPPENED (2)
• Accepted RSC Participating Preferred, later had to raise a $12mm Ser F Rd at $8/shr, had to keep participation.
• Merged with UK based MSI Dec ‘98:
– 65% MSI, 35% Metapath, both private cos. – Grey area since preferred carried over to merged company.
– Mezzanine investors insisted on participation. WHAT HAPPENED (3)
• Much rancor between late investors and early investors plus Management:
– Ser E (and Ser F) had defined “liquidation” to include any change of control event.
– Management maintained all rights could be preserved in capitalization post-merger.
– Late stage investors knew company worth more than their ~$24mm liquidation preference, so were willing to vote down deal (votes were by class)--they won.
WHAT HAPPENED (4):
Lessons Learned
• Metapath used too much money:
– Despite continual progress, ran out of cash. • Metapath too price focused:
– $4/shr w/ no participation possible?
– $4/shr still a good step up from $1.62.
• RSco and TCV fundamentally different kind of investor from BVP & Norwest:
– Trading terms for price.
– Good trade when you perform but leaves no room for error!
THE INTERPLAY OF TERMS:
Trading price for terms
• Trend in price/share often only outside gauge of company progress.
• Price/share affects employee options and morale.
• Fancy terms tend to put boundaries on the downside.
• Term-laden deals often play on entrepreneur's optimism (screening?).
THE INTERPLAY OF TERMS:
OUTLINE
• What happened.
• The broader themes:
– The interplay of terms.
– Options in private equity.
WHAT HAPPENED (1)
• The Company turned down Cell
Tech:
– Offering 30% of their capitalization indicated that their base business had limited upside.
– Clearly there were ongoing financing risks and liquidity issues.
– The fit was not compelling.
• Cell Tech stock fell $9 --> $3
– After 3 years and several acquisitions, it rebounded. WHAT HAPPENED (2)
• Accepted RSC Participating Preferred, later had to raise a $12mm Ser F Rd at $8/shr, had to keep participation.
• Merged with UK based MSI Dec ‘98:
– 65% MSI, 35% Metapath, both private cos. – Grey area since preferred carried over to merged company.
– Mezzanine investors insisted on participation. WHAT HAPPENED (3)
• Much rancor between late investors and early investors plus Management:
– Ser E (and Ser F) had defined “liquidation” to include any change of control event.
– Management maintained all rights could be preserved in capitalization post-merger.
– Late stage investors knew company worth more than their ~$24mm liquidation preference, so were willing to vote down deal (votes were by class)--they won.
WHAT HAPPENED (4):
Lessons Learned
• Metapath used too much money:
– Despite continual progress, ran out of cash. • Metapath too price focused:
– $4/shr w/ no participation possible?
– $4/shr still a good step up from $1.62.
• RSco and TCV fundamentally different kind of investor from BVP & Norwest:
– Trading terms for price.
– Good trade when you perform but leaves no room for error!
THE INTERPLAY OF TERMS:
Trading price for terms
• Trend in price/share often only outside gauge of company progress.
• Price/share affects employee options and morale.
• Fancy terms tend to put boundaries on the downside.
• Term-laden deals often play on entrepreneur's optimism (screening?).
THE INTERPLAY OF TERMS: