In September 20X4, Giovanni Lorenzoni purchased a 40 hectare grape vineyard in southern Ontario. Giovanni is a successful restaurateur who owns and operates a familyoriented restaurant that offers fine cuisine at reasonable prices. As a restaurateur, Giovanni had always been interested in wines and had developed a discerning palate. He had become increasingly fascinated by the prospect of developing his own wines, and when a vineyard became available, he quickly purchased it before the land became yet another suburban housing tract.

Giovanni had two sources of financing for the purchase. First, he borrowed money from the bank, using his ownership of the restaurant as collateral. Second, he convinced a retired wine master to lend him money for the land. The wine master also agreed to contribute his expertise for developing the vineyard and the wine that would be produced from the hybrid grapes.

It now is early \(20 X 5\). Giovanni wishes to establish a corporation to own and manage the vineyard and the winery. He must incorporate in order to obtain a licence to produce wine; otherwise, he is considered simply a farmer. Before he establishes the corporation, he must decide on the share structure that is most appropriate for his purposes. The main factors that he must consider are as follows:

- The wine master's loan will be converted to shares. However, the wine master is not a young man any more, and he does need regular income in addition to his retirement pension from the large winery for which he used to work.

- The wine master will be responsible for developing the wine, with Giovanni's assistance and participation as a restaurateur and as a knowledgeable consumer. There is no immediate prospect of a positive cash flow, however, as it will take at least two years before any drinkable wine is produced and much longer before quality wine can be produced and sold in any reasonable volume.

- The manager of the venture capital arm of a large pension fund is interested in investing some of the fund's money in Giovanni's venture. The fund investment would repay Giovanni's bank loan for buying the vineyard, pay for wine-producing equipment, and possibly pay to acquire adjacent land for extending the vineyard. The pension fund wants to have high priority for a reasonable return on its investment, while also being able to maintain a long-term equity interest that enables the fund to participate in future success of the venture.

- Giovanni has a wife, two sons, and a daughter. He wants all members of his family to have an equity interest in the corporation, with hopes that perhaps his children will become interested in the wine business and in building it further after Giovanni retires from active participation.

- Giovanni has hopes of eventually establishing a restaurant at the vineyard, as some other wineries in the region have done. The region's summer "wine tour" has become a popular tourist attraction for visitors from both Canada and the United States, as well as from abroad. A well-known and highly reputed sous chef from another restaurant has already expressed interest in participating in such a venture. The menu for the restaurant would be based around wines of the region, but not on Giovanni's wines until they are well developed.

- An opportunity must be available for investment from other equity participants in the future, as the company's need for capital increases.

- Giovanni's income from the restaurant has placed him in a high tax bracket. He will not need dividends from the winery in the foreseeable future.

- Giovanni wishes to retain voting control of the venture.

Giovanni will consult with a lawyer who specializes in corporate start-ups. Before going to the lawyer, he would like to obtain some informal advice. For this purpose, he has asked his younger son, Paolo, to give his views on the appropriate capital structure to use. Paolo is well on his way to becoming a chartered accountant and has some experience with small business corporate structures. At the minimum Paolo should be able to advise his father on the types of shares that are appropriate for satisfying the above factors and laying the groundwork for the company's future growth and development.
Required:
Assume that you are Paolo Lorenzoni. Prepare a report for your father in which you outline and explain a corporate share structure that will satisfy Giovanni's needs.