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Hotmail Corporation

Please see the attached case and help me so that I can do the following problems:

1. Examine the first-round financing in terms of amount raised and valuation. What concerns, if any, would you have had from Sabeer's and Jack's perspective and from Steve's perspective?

2. Evaluate DFJ's proposed first-round term sheet from Sabeer's and Jack's perspectives. In particular, consider the sections concerning vesting schedule, employee reserve pool, liquidation preference, conversion, right of first offer, co-sale, anti-dilution, lock-up, and any other terms you think merit consideration.

3. What are the advantages and disadvantages of the contingency clause in the third-round financing from the entrepreneurs' perspective?

4. What are the issues Sabeer should consider in deciding among the fifth-round financing options? How should he proceed?

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1. Examine the first-round financing in terms of amount raised and valuation. What concerns, if any, would you have had from Sabeer's and Jack's perspective and from Steve's perspective?
The first-round raised $300,000 paid by DFJ and $15,000, paid by Rex Smith. DFJ got 15% of the shares of the company and Rex Smith got 0.75% of the shares. This was the post money evaluation of their shares. The post money evaluation for the entire company was $2 million.
From the perspective of Sabeer and Jack there were two concerns. First, they did not want to give away a large portion of the company. Second, they did not require $600,000 at this stage. From the perspective of Steve there were two concerns. First, he wanted DFL to have between 25% and 40% of a company's equity to justify the time that he would be spending. Moreover, he expected his share to decline in future when more funding was required by the project. Second, he wanted adequate fund for JavaSoft to be ready for product launch in three months time.

2. Evaluate DFJ's proposed first-round term sheet from Sabeer's and Jack's perspectives. In particular, consider the sections concerning vesting schedule, employee reserve pool, liquidation preference, conversion, right of first offer, co-sale, anti-dilution, lock-up, and any other terms you think merit consideration.
From the perspective of Sabeer and Jack, they lose a portion of their shares if they leave the company before 36 months. This term has specifically been included in the term sheet to ensure that Sabeer and Jack should stick with the company for 36 months. The repurchase price has been kept ...

Solution Summary

Hotmail Corporation is discussed very comprehensively in this explanation.

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