M I N I CAS E Chpter 15:Harvesting the Business Venture Investment MiniDiscs Corporation Brian Motley founded MiniDiscs Corporation at the end of 2011 with a $1 million investment. After nearly one year of de- velopment. the venture produced an optical storage disk (about the size of a silver dollar] that could store more than 500 megabytes of data. along with a mechanism allowing the device to be integrated into a variety of portable consumer elec- tronic devices. including e-books. music discs. and video games. In addition to Brian Motley's role as the venture's CED, Susan Shame, with six years of prior financial management experience at two high-technology ventures. was hired as the CFO. The vice president of marketing was Steven Davis. and the vice president of operations was Sanjay Chavarti. Before being hired by MiniDiscs, Davis had twelve years of marketing experience in the technology area. Chavarti worked in high-tech operations for eight years before pursuing the opportunity with MiniDiscs. Leading electronic manufacturers were eager to incorporate the minidisc in their products. Brian Motley obtained $1 million in financing at the end of 2012 from venture investors in exchange for 43 percent of the stock in the venture. After this round of venture financing. Brian retained 50 percent ownership in MiniDiscs. and the other three members of the management team (Sharpe. Davis, and Chavarti] owned 7 percent of the venture. Over a four-year period (2013-2018}, MiniDiscs moved quickly through its startup and survival stages and is now in the midst of its rapid-growth stage. Brian Motley has recently decided to harvest his investment by selling the firm. However. the other three members of the management team want to continue and proposed a leveraged buyout to Brian Motley. An external valuation rm estimated that $45 million represented a fair price for all of the equity in the MiniDiscs Corporation. An abbreviated balance sheet in thousands of dollars for year-end 2016 follows: Current assets $15.0m Payables and accmels 3 5.000 Fixed assets. net 15.000 Long-term debt 10.000 Common equity 15.000 Total $31.0!" Total 330.000 It is the beginning of 20v. and the management team has $5 million of its own capital. including its share of the sales price, available to purchase all of the venture's existing equity capital. The intent is to retire all of the old stock and issue two million shares of common stock in the new venture to the management team. LBO financiers will put up $20 million in 8 percent, ve-year subordinated debt funds plus 1.9 million warrants that can be converted into 1.9 million shares of common stock. A bank will also offer a $10 million. 14 percent interest rate. four-year fully amortized loan. To make the deal work, Brian Motley was asked to provide seller nancing in the form of a below~market 10 percent. five year seller's note. The amount of the note was to be for the difference between the $45 million selling price and the amount of funds raised from management, the LED financiers, and the bank. In exchange for the seller nancing by Motley. the existing venture capitalists agreed to reduce their ownership rights from 43 to 40 percent. The management team also lowered its claim on the existing venture from 7 to 5 percent. Thus. as the result of agreeing to provide seller financing. Motley's percentage ownership of the $45 million selling price was 55 percent. Motley estimated that the interest rate being paid on similar risk-subordinated seller loans was currently at 16 percent. A. What will be the dollar amount of seller financing that Motley will need to provide to complete the financing of the $45 million selling price? B. How much cash will be available to distribute to the existing owners of the MiniDiscs Corporation? What will be the dollar breakdown for Brian Motley. the management team. and the venture capitalists? What compound rate of return did Motley earn on his 31 million and of 2011 investment? . What compound rate of return did the venture capitalists earn on their $7 million end of 2012 investment? E. After operating for five years as a private venture owing to the L30. assume that the common equity in the MiniDiscs Corporation could be sold for $60 million at the end of 2021. What compound rate of return would the management team earn on its $5 million investment? F. Assume that when MiniDiscs is sold at the end of 2021 for $60 million. the LED financiers will have their debt retired and will sell their share of interest in the venture. What compound rate of return will the LED financiers receive? or