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Organizational Form Case

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Organizational Form Case
1) What issues are likely to be of concern to the venture capital firm with this structure?
a) In an all common stock structure, MONEYBAGS would not be able to recover their remaining funds if NEWBIZ is deemed a failure midway through.
b) MONEYBAGS does not want to hold a 49% stake in the net worth of the company but in the profits of the company.
c) If it succeeds, the VC firm still may not make a profitable return if they are paid based on net worth of NEWBIZ.

2) Do you think the venture capital fund will accept your proposal?
a) The venture capital firm will likely not accept the proposal because of the all-common stock structure.
b) In order for MONEYBAGS to recover their investment, NEWBIZ would have to be sold for about $20.41 million. (20.41M*49%=10M)
c) With TEAM not investing any money into NEWBIZ, they don’t have much to lose if the company fails.

3) Are you pleased with the proposal?
a) With a 51% stake in the company, TEAM may be legally liable to pay taxes on$5.1 million of ordinary income.
i) Tax law states that if an individual exchanges services for equity they must recognize that equity as income.

4) What alternative proposals for NEWBIZ can you think of?
a) The venture capital firm may want their investment to be in the form of debt rather than common stock.
i) Tax deductions for NEWBIZ
b) MONEYBAGS may want some preferred stock to ensure they get paid before the common stock holders in the event of NEWBIZ failing.
c) May want TEAM to invest money into NEWBIZ so they have more incentive to keep the company...

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