The Scenario

As urban areas become more congested, new companies seek to solve the problems associated with millions of people in a small area. Recently, a number of ride-sharing technologies have emerged and become wildly successful. From traditional taxi disruption businesses to food delivery, each new company comes with the promise of a new solution, or at least a "better way" of doing things than its competitors.

In the last few years, a new technology has become particularly popular: the electric scooter-sharing company. Presenting themselves as an eco-friendly alternative to cars, scooter sharing companies can connect the so-called "first mile" and "last mile" of urban transportation networks with the public. Typically, the scooter-sharing company develops a smartphone application and provides its users with electric scooters to travel any number of short distances across a city. In exchange for a minimal base fee and a per-minute charge after a certain amount of time, the user has a speedy and clean ride to their destination without worrying about a parking spot. The scooters are equipped with Global Positioning System ("GPS") trackers for both safety and data-collection.

Questions about the long-term viability of these companies remain. Scooters have been stolen, defaced, or destroyed, and the capital investment for these companies is significant. Additionally, most scooter-share companies do not provide charging stations for the scooters, instead relying on users to charge them at their own homes in exchange for a minimal reimbursement. Beyond technical issues, investors remain skeptical about a business model that relies solely on short-length transportation and tourists. Some local governments have banned the scooters altogether because of their tendencies to clog up sidewalks when in or out of use.

Pigeon is a scooter-share company based in Gotham, New Dover. Users can log into the Pigeon app to rent any available scooter on a minute-by-minute basis. Pigeon has successfully grown its scooter-sharing business over the last two years and is looking to continue overall growth. Starting in January, 2018, Pigeon expanded by adding a food delivery service, Delivery Pigeon, in addition to maintaining the recreational scooter-share business.

Pigeon's scooter-share business was an immediate hit in Gotham. A user only needs to download the app, scan their driver's license, and pay a small fee to use a Pigeon. The scooters help reduce street congestion in urban areas and provide simple, straightforward means of alternative transportation. When the Gotham subways are packed and millennials are short on time to get to the office, Pigeon is there -- ready to zip along the 12-block commute without a hiccup.

When a user logs into the Pigeon app there are three options: Order, Ride, Deliver. All users have access to the Order and Ride features, but only verified delivery riders may access the Deliver feature through unique login information. The Ride feature is used by recreational scooter users. When logging into the Order feature, users can pick from a variety of local restaurants to have meals quickly delivered to their door.

Since the expansion in 2018, the Delivery Pigeon service has had mixed success. Pigeon utilizes both independent contractors and normal recreational scooter users to power Delivery Pigeon. The viability of the delivery service requires both. Originally, Delivery Pigeon grew from recreational users who wanted to make deliveries while they were already out and using the app. Before long, the demand for Delivery Pigeon outpaced its ability to get users to make deliveries. As a result, Pigeon pivoted to hiring independent contractors to fill the demand gap. But this decision presented its own problems. Long- term usage of independent contractors is costly, unreliable, and ultimately unsustainable.

The independent contractors use the scooters to make deliveries of meals from local restaurants. Pigeon puts each potential delivery rider through a thorough background check before allowing them to make deliveries. To deliver, the user only needs to open the app, swipe over to the Delivery Pigeon tab, and activate their delivery signal, much like Uber or Lyft drivers activate their ride-sharing app. Moments later, orders fill the queue, and deliveries can begin.

Pigeon has spent a significant amount of time developing and refining its app technology. The aspect of the app that requires the most labor is the mapping feature for the delivery workers. Pigeon has been told Sahara is most interested in this mapping technology.

The CEO of Pigeon, Lawrence Byrd, wants to look into expanding Pigeon into cities outside of Gotham. Without additional capital, this is not possible. Byrd is concerned about Delivery Pigeon's long-term prospects without more business. He thinks that Pigeon could be utilized as a grocery delivery service in areas suffering from heavy car congestion. Byrd envisions the grocery delivery as a critical time-saving service for people who only need a few things at the store and do not want to spend time waiting in traffic. Pigeon's Head of Engineering, Eliza Beta, has been tasked with developing a technology to allow groceries to stay cold during the delivery process, but has not been very successful. Byrd has pitched Pigeon's expansion ideas to larger companies, including Sahara, a large online distributor.

Sahara is the world's leading company in business logistics -- a status it garnered after starting as an online bookstore in its owner's garage. Primarily, it is an online "everything store" with fast, reliable delivery to its customers. But in reality, the company has business lines in everything imaginable: nearly every sector of consumer goods, online video, customer pick-up locations, and web hosting services.

Three years ago, Sahara acquired Eat-A-Lot, a large grocery store chain. Following Sahara's logistics plan, Eat-A-Lot uses its grocery store employees to deliver groceries from Eat-A-Lot, but finds that delivery is not cost effective during peak traffic times. Sahara knows that mastering grocery delivery holds the potential to dominate all delivery services. Its competitors are aggressively moving to create their own grocery delivery models. Sahara would like to continue its grocery delivery service but must develop a delivery mechanism other than cars for metropolitan areas. In the last six months, Sahara broke through by developing an autonomous delivery drone to be used on sidewalks. While Sahara has a license that provides mapping services for cars, it lacks mapping and traffic data for city sidewalks.

Jeff Chef, Sahara's CEO, has reached out to Byrd to discuss a partnership between the two companies. Chef and Byrd have met multiple times in the last few weeks. The two companies have agreed that Sahara's investment will total $30 million, but found that they are not able to come to final terms of a deal. They have discussed the general terms of the tie-up, how much capital to invest, the valuation of Pigeon's business, what the company's leadership and Board of Directors would look like, and other associated terms. In prior negotiations, they have agreed on conservative, moderate, and aggressive financial projections for Pigeon's future. However, they cannot resolve how to incorporate those benchmarks into a potential contract for Byrd as CEO.

Outside of the specifics for this pending investment and Byrd's contract, the two companies have largely resolved the issues of their tie-up. While there are certainly more terms to discuss about the strategic direction of the business and its further development, both parties agreed to leave those out of today's negotiation -- instead focusing on the financing and general deal structure. They agreed to hire you as representatives to push this deal across the finish line.

Pigeon Confidential Facts

For the first year of its existence, Pigeon operated at a loss. Finally, after the second full year, CEO Byrd was happy to see that the company was generating a very small profit. But, other companies recognized the potential of the scooter sharing business and soon hopped into the market. Byrd saw this as a sign to expand, but ended up stretching the business too thin. Byrd and Head of Engineering Beta were on the verge of creating a cooling box that would allow cold food delivery, but have not been able to complete the project. In a desperate attempt to implement Byrd's expansion visions, Beta called an old friend at Narwhal Refrigeration Systems ("Narwhal").

Narwhal is a trendy cooler and tumbler company with its technology that keeps foods and liquids cold for up to 24 hours. Beta explained to her friend that Pigeon is looking for a cooler box that can attach to its scooters without much augmentation. Ideally, the Narwhal collaboration would provide a relatively easy solution to the uncertainty around the Delivery Pigeon program. Narwhal was so enthused by the potential of the cooler that they entered exclusive negotiations with Pigeon on a licensing contract. The contract would include exclusive rights to use of Narwhal's name in grocery delivery and creation of a custom cooler box for Pigeon scooters.

Beta and Byrd have high hopes and remain optimistic about the Narwhal deal, but were unable to solidify the details before sending you into the meeting with Sahara's representatives. Narwhal has made it very clear that it did not intend for any other company to have access to its technology, but because of Beta's connection to the company, Narwhal is willing to execute this partnership. Narwhal has insisted that if the contract between Pigeon and Narwhal is executed, the technology will remain with Pigeon. You expect that this means Pigeon cannot maintain the Narwhal contract if it is absorbed by another company. Narwhal has also stipulated that as long as Pigeon uses this technology, the name of the company must stay as Pigeon.

Byrd explained to you that the potential Narwhal contract is the most important growth opportunity. Byrd has specified that if Sahara cannot comply with Narwhal's stipulations, Pigeon is not willing to make a deal. Pigeon has discussed investment opportunities with other large companies including Wally World and SaveCo, but has not informed those companies about the potential Narwhal contract. Despite having had previous negotiations with these companies, Pigeon has learned from previous negotiations that Sahara will want an exclusive right to negotiate with Pigeon for sixty (60) days starting today, which would expire after that time if no investment agreement is signed. Pigeon would prefer to exclude such a "no-shop" provision, as it is overly restrictive and would impede Pigeon's ability to gauge market interest, but would be amenable to such a provision if the parties could finalize at least a substantial portion of the terms negotiated today.

Part of Pigeon's vision includes expanding to other cities. The initial cost for launching in a new city are expensive, but Pigeon has done an independent research study to determine the next best city. The study showed that City X would allow Pigeon to grow and be profitable. After researching City X, Pigeon discovered that Sahara was in the process of building a very large distribution center on the outskirts of City X with a completion date six months from now.

Byrd thinks Sahara's distribution centers could be a key asset for Pigeon. The scooters could potentially charge at distribution centers, saving costs out in the field. Additionally, Pigeon struggles to maintain a reliable and cost-effective workforce for Delivery Pigeon. At first, delivery demand and supply were about equal. Lately, this has been a serious drain on Pigeon's financial well-being. Entering these negotiations, Pigeon completes 25% of its deliveries through recreational users. It supplements this with independent contractors for the other 75% of the deliveries. To be successful, Pigeon needs to dramatically reduce its reliance on independent contractors for deliveries.

Sahara may be able to solve this problem. Beta recently found a study of Sahara's workforce and was surprised to learn of their concerns with inefficiencies at local distribution facilities. She thinks that Pigeon can utilize some of these employees and ultimately operate in the black. Pigeon will consider today a success if it walks away with an agreement to supplement its deliveries with Sahara's employees. Ideally, at least 50% of the deliveries will be completed by Sahara employees. This will stabilize Pigeon's delivery force by ensuring deliveries can be completed at all hours of the day.

Sahara will receive an equity stake in Pigeon for its investment of $30 million in the company. Ideally, you would like to minimize Sahara's equity percentage. In previous meetings with Sahara, you have agreed that Sahara's investment will total $30 million. The only remaining question is what percentage ownership $30 million equals.

To determine the approximate equity percentage Sahara will receive, you have considered the valuation of Pigeon. The higher the valuation you attach to Pigeon, the lower the equity percentage Sahara will receive for its $30 million investment. Pigeon suspects Sahara will look to outside projections to value Pigeon; however, from a variety of detailed internal revenue projections and comparison to similar companies, you have concluded that Pigeon deserves a post-investment valuation of between $75 million (40%) and $100 million (30%).

In your view, such a valuation is more than reasonable, given Pigeon's projected growth over the next five years. In fact, these valuations may be on the conservative side given Pigeon's positioning for growth and expansion, but you recognize the risks present in scaling up. Further bolstering your valuation is the pending Narwhal contract, which promises to be a valuable asset on its own, but it should also drive growth in Delivery Pigeon's business moving forward. Furthermore, the company has already moved through its most vulnerable stages, having developed the app and mapping technologies. Now, it is just a matter of using the resources Sahara can provide to expand Pigeon's operation.

Though you may be willing to negotiate a package for Sahara that yields an equity percentage higher than 40%, you will not give up control of the company. Pigeon's bylaws provide that for governance issues requiring a shareholder vote, only a simple majority is required for approval. Also recall that for the Narwhal contract to close, Byrd cannot give up control of Pigeon and Pigeon must maintain its name and autonomy. Therefore, you cannot give up more than 49% of Pigeon, or you risk losing your most valuable prospective asset. The lower the equity percentage you can negotiate with Sahara, without damaging the future relationship, the better.

Pigeon understands that Sahara will most likely request a right of first refusal provision. If Pigeon requires additional capital in the future, Sahara will most likely want the right to buy those additional shares of equity before they are offered to other parties. While some companies in Pigeon's position may be hesitant to agree to such a provision, Pigeon believes this provision will foster a long-term relationship with Sahara, and that if it were to over-dilute Sahara's shares, Sahara would be less inclined to consider Pigeon a priority for its non-financial resources.

Byrd recognizes that asking for an investment in his company will force him to give up some of his ownership and independence. It likely means that he will have to sign a contract that somewhat rests on Sahara's terms. At a minimum, Byrd would like to maintain his position as CEO of the company, as well as his position as Chairman of the Board of Directors. He also expects that Sahara will have certain expectations for the Board's composition, including appointment of at least one of their own.

Currently, Pigeon's Board of Directors is made up of Byrd, Beta, and Byrd's dear old college friend, Magic Johnstone, who has an expansive knowledge of basketball, but often lacks understanding of inner business workings. Beta has been fundamental to Pigeon's early success and Byrd is fairly adamant that she remains on the Board. Byrd is similarly strong on maintaining control of the Board of Directors and would like for the board to be no larger than five members, if other conditions are met in this negotiation.

With regard to his position as CEO, Byrd is aware that Sahara has some reservations with him maintaining his title. In previous negotiations, Sahara has suggested that Byrd remain CEO on a conditional basis contingent on Pigeon meeting annual performance benchmarks over the next five years. If an agreed upon annual benchmark is not met, Sahara wants to reserve the right to immediately replace Byrd as CEO. For today's negotiations, you are determining which benchmarks will be used to decide whether Byrd is replaced. Both parties agreed to use the revenue projections that Pigeon provided to Sahara in previous negotiations. These projections were categorized as conservative, moderate, and aggressive projections over the next five years.

Ideally, Pigeon would like no CEO replacement provision whatsoever. Byrd has done an excellent job as CEO of Pigeon to this point, he knows the intricacies of Pigeon's app technology and business model better than anyone, and is beloved by the entire Pigeon workforce. However, Pigeon would be willing to accept the conservative projections as a benchmark. It would be uneasy accepting even the moderate projections, as all of those projections were admittedly aggressive. Furthermore, certain market forces outside of Byrd's control could cause revenues to be slightly below target levels, and Pigeon does not think Byrd should be held fully responsible for all of those variables.

Overall, Byrd has given you a significant amount of freedom in negotiating the above terms. Byrd has indicated that he does not intend for these issues to be negotiated in a vacuum, but really for this deal to be a give and take.

Negotiation Summary:

1. What equity % does Sahara get in exchange for the $30 million investment?
2. Right of first refusal?
3. Size and composition of Board of Directors
4. CEO replacement benchmarks: conservative, moderate, or aggressive?

Can I get help with the terms to this negotiation prompt?