MINI CASE: MINIDISCS CORPORATION (20 marks)
Brian Motley founded the MiniDiscs Corporation at the end of 2011. After nearly one year of development, 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 electronic devices including e-books, music discs, and video games.
In addition to Brian Motleys role as the ventures CEO, Susan Sharpe, with 6 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 12 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 anxious to incorporate the minidisk in their products. Brian Motley obtained $7 million 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 (2013-2016), 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 on and proposed a leveraged buyout to Brian Motley. An external valuation firm 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 yearend 2016 follows:
Current Assets $ 15,000 Payables and Accruals $ 5,000
Fixed Assets Net 15,000 Long-Term Debt 10,000
______ Common Equity 15,000
Total $30,000 Total $ 30,000
It is the beginning of 2017, and the management team has $5 million of their own capital, including their share of the sales price, available to purchase all of the ventures existing equity capital. The intent is to retire all of the old stock and issue 2 million shares of common stock in the new venture to the management team. LBO financiers will put up $20 million in 8 percent, 5-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, 4-year fully amortized loan. To make the deal work, Brian Motley was asked to provide seller financing in the form of a below market 10 percent, 5-year, sellers 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 LBO financiers, and the bank.
In exchange for the seller financing by Brian Motley, the existing venture capitalists agreed to reduce their ownership rights from 43 percent to 40 percent. The management team also lowered their claim on the existing venture from 7 percent to 5 percent. Thus, as the result of agreeing to provide seller financing, Brians percentage ownership of the $45 million selling price was 55 percent. Brian estimated that the interest rate being paid on similar risk subordinated seller loans was currently at 16 percent.
Required : What compound rate of return did Motley earn on his $1 million end of 2011 investment? 
