bCase Scenario

Smarty Aleck, together with Roger Moore and Taylor Swiftor $($all engineering students$)$ have

decided to go into business together to commercialize a very innovative product that the three of

them have developed $($hereafter these three founders will be referred to as the "Founders"$).$

The product the Founders have developed is a compact and attractively designed $3$D printer for

home use that they believe will revolutionize the market. The printer has several proprietary

features that have never been used before in $3D$ printers which gives it a wide range of functions

given its size. It is also attractive with a sleek and creative design. The Founders have been

working on developing this product for several years. The product is intended to be sold to

consumers and when released will definitely be better than any other home use $3$D printer on the

market.

The Founders have put together a very comprehensive $3-$year business plan and they have

determined that they will need $$10$ million to get the business to the point where it would be self$-$

funding through its own revenues. Their business plan includes acquiring an existing $3$D printer

business called Presto Inc $("$Presto$").$ The reason for this is that Presto has an existing facility.

some of the equipment the Founders will need for the product and a few trained employees the

Founders would like to hire. The Founders have been informed by the owners of Presto that for

the right price they would be willing to do a deal with the Founders. The Founders are confident

they can acquire the Presto business they need for $$5$ million, which was included in their $3-$year

business plan.

The Founders have enough money saved up to fund $$3$ million of the capital needed. They intend

to invest on an equal basis $($that is $\frac{1}{3}$ each$).$ They have secured bank financing for $$3$ million.

This means that they will need an additional $$4$ million to implement their business plan.

Buck Ritchie, a private equity investor has expressed an interest in investing the remaining

$$4$ million through his company Big Investment Co$.$ The Founders are willing to do a deal with

Buck but the Founders have two conditions. The first is that they do not want to give up control

of the business. The second condition is that they want to be fully engaged in the management of

$-2-$ the business and work in the business. Buck is fine with these conditions and is willing to invest

in the business. He is looking for an $8\%$ annual return on his investment and is willing to be a

passive investor.

The Founders are excited about this opportunity and decide to retain an accounting firm called

Money & Baggs to seek some advice. The Founders meet with Charlie Baggs, one of the partners

to discuss some accounting and personal tax planning. During the meeting, the Founders shared

some of the confidential information about their product and their business plan so that Mr$.$ Baggs

could get a better sense of how good the product is and to help Mr$.$ Baggs provide the appropriate

advice. The meeting was productive and the Founders and Mr$.$ Baggs decide to meet once more

to finalize the advice.

Mr$.$ Baggs was very impressed with the Founders and the product and the next day told his partner

Mr$.$ Bill Money all about the product and this great opportunity. As it turned out, Bill Money also

had a very good client that manufactured $3D$ printers called Structure $3$D Inc, that he was meeting

with that day. Mr$.$ Money could not maintain his excitement about the Founders' product and told

the management of Structure $3$D Inc. all about the Founders' plans and the information about the

product. When the management of Structure $3$D Inc got back to their plant, they decided to make

some improvements to their product based on the information they received. These improvements

would make Structure $3$D more competitive with the new product the Founders were planning to

introduce into the market.

Assignment Questions:

What business entity would you suggest that the Founders use to carry on their business?

Explain why you would suggest this structure.

Describe how the Founders could approach the management and governance of their

business.

How could the Founders and Buck Ritchie structure their respective investments in the

business? What capital structure would you suggest and why?What alternatives would the Founders have in structuring the acquisition of Presto Inc.?

What intellectual property strategy would you suggest the Founders consider for their

product?

Discuss whether the Founders have