Surya Tutoring: Evaluating a Growth Equity Deal in India

Abstract

The case focuses on two major challenges in deal making in emerging market economies—deal sourcing and negotiation—by focusing on a real (but disguised) Indian private equity deal. In 2010 Surya Tutoring was a fast-growing tutoring academy for high school students aspiring to gain admission to the prestigious Indian Institute of Technology (IIT). Surya’s CEO, R. K. Sharma, wanted to expand its reach beyond Kota (a city of 1 million people in the northern state of Rajasthan), which had become the center of the IIT prep school industry and home to tens of thousands of students studying for the rigorous IIT entrance exam. Sharma knew there was vast untapped potential in the teeming Indian metropolises of Mumbai, Chennai, Delhi, and Bangalore, as well as in foreign markets such as Dubai and Australia. Sharma had received term sheets from two private equity firms willing to finance Surya’s expansion. By the end of the month he needed to decide which to accept: the offer from big bulge bracket fund Blackgem, or the one from ZenCap, a small Indian firm based in Mumbai with which he had become intimately familiar during the past year.

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Resources

Exhibit material for this case study is also available in an Excel spreadsheet.

Exhibit 1: Surya Tutoring Financial Projections (in Rs. crores)

2010

2011

2012

2013

2014

Revenue

        Course fees

133.67

180.45

243.60

304.51

380.63

        Sale of learning material

6.60

9.90

14.85

22.28

33.41

        Entrance exams

3.38

4.56

6.15

8.30

11.21

        Total revenue

143.64

194.90

264.61

335.08

425.25

Operating expenses

        Salary expenses

59.23

74.04

92.55

115.68

144.60

        Short-term lease rentals a

2.35

2.94

3.67

4.59

5.74

        Long-term lease rentals b

7.53

9.41

11.77

14.71

18.38

        Marketing/sales

14.40

17.28

20.74

24.88

29.86

        Other operating expenses

1.40

1.68

2.02

2.42

2.90

        Administration

7.57

9.08

10.90

13.08

15.70

        Total operating expenses

92.48

114.43

141.64

175.36

217.19

Income before interest and taxes

51.16

80.47

122.97

159.72

208.07

Interest expense

0.00

0.00

0.00

0.00

0.00

Interest revenue

5.23

5.75

7.23

8.42

9.57

Income before taxes

56.39

86.22

130.20

168.14

217.64

Tax expected @ 35%

19.74

30.18

45.57

58.85

76.17

Net income

36.65

56.04

84.63

109.29

141.47

Note: In the numbering system used in South Asia, which is based on the Vedic numerical system, one hundred thousand Rupees (Rs. 100,000) is referred to as 1 lakh and denoted as 1,00,000. One hundred lakhs (i.e., Rs. 10 million) is referred to as 1 crore and denoted as 1,00,00,000.

a. Short-term lease agreements range from two- to four-year contracts with building owners.

b. Surya Tutoring had also entered into a long-term lease and purchase agreement. The agreement included the option of purchasing the buildings back from the existing owner at the end of a ten-year lease period at a discount of 15 percent from the market value of the asset.

Exhibit 2: ZenCap Term Sheet

TERM SHEET FOR INVESTMENT IN EQUITY OF SURYA TUTORING PVT. LTD.

MARCH 16, 2010

This Term Sheet summarizes the principal terms of subscription to Shares of Surya Tutoring Pvt. Ltd. (“Company”) by ZenCap Private Equity Fund and ZenCap Army Trust (together called “Investors”) and the terms of sale of Shares of the Company by Mr. R. K. Sharma (“Promoter”) to the Investors. This term sheet is prepared relying on the representations made and information provided by the Company and its Promoters to the Investors.

1. Investor Securities and Investment Amount

For the purpose of this document the term—

“Investor Securities” shall mean and include the following (collectively):

  • Ten Common Equity Shares of the Company each to be issued by the Company at face value at the time of release of funds for the CCPS as mentioned in following sub-clause 2;
  • Compulsorily Convertible Preference Shares (“CCPS”) each to be issued by the company to the Investors at face value (total subscription amount being Rs. 22 Crores). These CCPS are required to be compulsorily converted (along with CCPS obtained post conversion as mentioned in sub-clause 4 below), at the option of the Investors, in as many number of Common Equity Shares of the Company as determined by keeping in mind the valuation in accordance with Clause 2 below;
  • Such number of Common Equity Shares of the Company as purchased by the Investors from the Promoters for an aggregate consideration of Rs. 11 Crores at a price per share which is 20 percent lower than the price per share determined for conversion of CCPS into Common Equity Shares in accordance with Clause 2 below;
  • The “Warrant(s)” to be issued by the Company to the Investors free of cost, at the time of issue of CCPS (as mentioned in preceding sub-clause 2) entitling the Investors to subscribe to Compulsorily Convertible Preference Shares at face value for the total consideration of Rs. 11 Crores. Such option to subscribe to CCPS will have to be exercised from July 1, 2011 to December 31, 2011.

“Investment Amount” shall mean the aggregate amount paid by the Investors for acquisition of the Investor Securities.

2. Pre-Money Valuation and Post-Money Valuation and ESOP

The actual post-money equity valuation will be a 12 times multiple of the audited consolidated FY2010 Profit After Tax, adjusted for any extraordinary items, etc. This is subject to a maximum post-money valuation of Rs. 440 Crores and a minimum valuation of Rs. 340 Crores. Accordingly the minimum pre-money valuation will be Rs. 296 Crores and maximum pre money valuation will be Rs. 396 Crores.

At maximum post-money valuation, Investor Securities (assuming the CCPS on an as-converted basis) will represent 8 percent of the post issued and paid up capital of the Company immediately after the closure of the round and post exercise of the warrants they will represent 12 percent of post issued and paid up Capital assuming all the Warrants have been converted.

The current equity (prior to current funding round) is 100 percent held by Promoters. On or before June 30, 2010, the Promoter will transfer, at a price decided by the Promoter, such number of equity shares to Employees/close associates/friends/relatives such that post investment of Rs. 22 Crores by Investors, and after the above mentioned transfer, the percentage stake held by Employees/close associates/friends/relatives is a maximum of 10 percent and by the Investors is 8 percent (all assuming conversion happens at Rs. 440 Crores post-money).

3. Warrant Conversion Schedule

The Investors would have a right to convert the Warrants into CCPS at face value of Rs. 10 each upon the payment of face value and this right will be valid for conversion from July 1, 2011 through December 31, 2011.

4. Board of Directors

The Investors will have the right to nominate a Director (“Investor Director”) on the Board of the Company. The Investors will have a right to appoint an Investor Director to each subcommittee of the Board. The Company undertakes to give at least a 10 days advance notice in writing or fax or by e-mail (for which a read receipt has been received) regarding the proposed Board, Committee and/or General Body meetings to the Investor Director and the appointed Investor Director is entitled to participate in all these meetings. In spite of this notice and as long as the Company gets an acknowledgment of the invite, by the Investors, if the Investor Director fails to participate in any of the above mentioned meetings, the other Directors shall proceed with the meetings. Regardless of the above, no matters relating to the Affirmative Rights of the Investors shall be taken up and approved without the written consent of the Investors. The Board and the committees will meet at least quarterly. The Board will comprise of maximum of 7 directors.

5. D&O Insurance

The Company will bind D&O insurance with a carrier and in an amount satisfactory to the Board of Directors.

6. Usage of Funds

The usage of Investment Amount will be according to the Business Plan (including creating infrastructure in Kota and/or Jaipur on the land purchased/taken on a long-term lease by the company, repayment of the loan outstanding for acquisition of land, development of new centres, starting of new courses and acquisition/takeover of education businesses and working capital requirements) and it will be detailed and agreed with the Investors. The Company will have the flexibility to effect changes to the items specified in the Business Plan to an extent of 15 percent from the amount specified, with intimation to the Investors about the same.

7. Affirmative Conditions

The Company (and its subsidiaries) would require the written concurrence from the Investors for the following:

  • amending any provision of the Memorandum of Association and the Articles of Association of the Company, except as required by law to give effect to the transaction contemplated in part (b) sub-part (i) below
  • changing any rights of the Investors or authorizing changes in the capital structure of the Company by the following means, inter alia—
    • raise any share capital or common stock or preferred equity (“New Equity”) except where the New Equity is (collectively)
      • issued to a financial investor
      • issued at a price that provides at least a 15 percent IRR on the Investors’ per share purchase price (on an as if converted basis) as calculated on the Investment Amount from the date of investment, and
      • less than 15 percent of the then total Equity Share Capital (on an as if converted basis) of the Company

        It is clarified that, any issuance of New Equity, with or without the Investor Director affirmative vote, is subject to Clause 9.

    • create or authorize the creation of or issue any other security convertible into or exercisable for any equity security, having rights, preferences, or privileges senior to or on parity with the Investor Securities
    • finalize the terms and conditions of an Initial Public Offer (IPO)
    • Creating new or modifying existing ESOP plan
  • purchasing or redeeming or paying any dividend on any capital stock which is in excess of 25 percent of the Face Value of the common Equity Shares of the Company
  • creation of any additional debt security/guarantee that would increase the Company’s consolidated aggregate indebtedness by over Rs. 10 Crores by way of a single loan or a series of loans or guarantees
  • subject to clause 8, entering into related party transactions which are individually in excess of Rs. 15 lakh or if cumulatively such transactions exceed Rs. 1 Crore in a financial year
  • make any further/new loan or advance to, or own any stock or other securities of, any subsidiary or other corporation, partnership, or other entity (such cumulative loans not exceeding Rs. 1 Crore in a financial year)
  • make any further/new loan or advance in excess of Rs. 20 lakhs to any person, including, any employee or director, except advances and similar expenditures in the ordinary course of business or under the terms of an employee stock or option plan approved by the Board (such cumulative loans not exceeding Rs. 2 Crores in a financial year)
  • sell, encumber, pledge, or create a lien on the Promoters shares, or do any other act which has the effect of undermining the underlying beneficiary/fiduciary rights and responsibilities of the Promoters. It is clarified that the transfer to Employees/close associates/friends/relatives, as mentioned in clause 2, will be exempt from approval by the Investors.
  • hiring or terminating or changing the compensation of the senior management—Managing Director, CEO, COO, heads of new businesses and any other employees as mutually decided by the Company and the Investors (names to be finalised). It is clarified that the Company is free to make the above mentioned employment decisions regarding faculty/head of departments/academic staff and junior administrative staff without requiring any approval from the Investors.
  • effecting any changes to the Business Plan which is approved by the Investors, provided that such changes are in excess of 15 percent of the amounts specified in the Business Plan. Changes to the Business Plan that are below the 15 percent threshold would require an intimation to the Investors.
  • subject to clause 9, change the principal business of the Company, enter new lines of business, or exit the current line of business by the following means, inter alia:
    • enter into an M&A transaction or reorganisation
    • acquire a new business
    • sell any assets
    • split up existing business
  • sell, transfer, license, pledge or encumber technology or intellectual property
  • Changes in Statutory and Internal Auditor of the Company with one of the following six firms being appointed as the Statutory Auditor (“Big Six”): KPMG, PwC, E&Y, Deloitte Haskins & Sells, Grant Thornton, and BDO Haribhakti. The total audit expenses not to exceed Rs. 15 lakh per annum.
  • listing of the Company on any stock exchange (however, the decision of choosing the exchange will lie with the Board)
  • such other matters as may be agreed upon at the time of finalisation of the definitive agreements
8. Brand Holding/Promoter Remuneration

The brand of “Surya” is presently held by the Promoter personally, and will be transferred to the Company for a consideration of Rs. 1 at the time of closing. The Promoter’s remuneration as Managing Director will consist of two parts: a fixed component of Rs. 1.8 Crore p.a. total cost to Company and a variable component of maximum Rs. 1.2 crore p.a. in the form of bonus calculated as 10 percent of the amount of consolidated Profit Before Tax (arrived at before charging the above variable component) in excess of Rs. 18 Crore.

9. Transactions with Related Parties

The Company presently has media buying arrangement with a company promoted by the friends and family of the Promoter which presently refunds the Company an amount of 75 percent of the commissions that it receives for media purchase transactions executed for the Company. The Promoter will ensure that the media buying company will execute a contract with the Company formalizing the presently informal commission sharing arrangement. For entering into this contract the Company will not have to seek an approval from the Investors.

10. Creation of Subsidiaries

The Company plans to incorporate subsidiaries for carrying out businesses that are currently being carried out from different divisions presently—for School Management Services and IT/multimedia operations (RediLabs). The Company shall not have to take explicit approval from the Investors for incorporation of these subsidiaries and for transfer of the relevant portion of the existing business into these subsidiaries, provided that the stake of the Company in these subsidiaries is not below 90 percent and that the balance stake is reserved only for ESOPs/equity shares for the employees for these subsidiaries.

11. Minimum Holding

For a period of seven (7) years or such period that the Investors continues to hold Investor Securities in the Company, whichever is lesser, the Promoters shall maintain legal and beneficial ownership of their entire direct or indirect equity share holding and voting interests in the Company at no less than 51 percent of the entire issued Equity Share Capital and voting rights of the Company and Promoters will not transfer any shareholding without written consent from the Investors.

12. Management Information Rights

The Company will provide the following information with the Investors: (a) MIS statement on a monthly basis and detailed financials on quarterly basis, (b) Audited financials at the end of financial year, (c) Business Plans on a yearly basis, (d) Internal audit reports

13. Rights to Participate in Future Round

The Investors shall have the right of first refusal to participate in any subsequent issue of shares/securities to maintain its percentage stake in the company existing at the time of such issue.

14. Right of Co-Sale/Tag-Along

Any sale of shares held by Promoters will be subject to written approval of the Investors and further subject to right of first refusal of the Investors and standard co-sale/tag-along rights.

15. Assignment and Transferability

The Investor Securities will be freely transferable along with all rights and benefits to any Investors’ assign. The Investors undertake not to transfer shares to a list of a maximum of seven companies (“Competitors”) without consent of Promoters. Such list can be revised once annually by the Company’s Board on 1st April.

16. Anti-Dilution Rights

In the event the Company issues additional shares at a price less than the purchase price of the Investors, the Investors will be issued additional shares at lowest possible price to bring down the purchase price for the Investors equal to the share price of the new issue. It is clarified that price of the Investors Securities will be adjusted pro-rata for bonus issues, stock split and/or consolidation of the Company’s shares.

17. Exit Provisions

The Company and Promoters shall endeavor to list its common shares on recognized stock exchanges in India, by way of an IPO/Offer for Sale, no later than four (4) years from the date of initial investment by the Investors. In case of Offer for Sale, the Investors shall be entitled to participate in the offer by offering Investor Securities on pro-rata (fully diluted) basis. The Company shall undertake to bear all the expenses related to the listing of the equity shares. The IPO shall be considered as a “Qualified IPO” for the purpose of the clauses below, only if the following conditions are satisfied:

  • the floor price per share in IPO is such that it gets an IRR of at least 15 percent on purchase price (subject to adjustments for stock dividends, splits, combinations, and similar events)
  • the gross proceeds of the offer to the public by means of a fresh issue of shares are not less than Rs. 150 Crores

In the event that the Company is unable to provide the Investors with an exit via a Qualified IPO, the Investors will have following alternatives:

  • Sale to Third-Party Buyers: If the Investors exit has not happened in the manner contemplated above, within 5 years from the date of initial investment by the Investors, Promoters shall be required to enter into an agreement with the Investors to sell up to a maximum of same number of shares as are held by the Investors at that point in time, along with all of the Investors’ shareholding, to a third-party buyer. It is clarified that for the purpose of this Clause, the Investors shall be entitled to sell to any third party including Competitors.
18. Non-Competition and Non-Solicitation and Agreements

The Promoters and their family undertake not to start any other competing business and will focus their entire efforts on the Company. Any violation of this would trigger the Buyback of Investor Securities by the Company and/or Promoters, at an IRR of 18 percent.

19. Non-Disclosure Agreements

Each Key Employee with access to Company confidential information/trade secrets will enter into a non-disclosure and proprietary rights assignment agreement in a form reasonably acceptable to the Investors and intended to be for a period of three years.

20. Conditions Precedent and Subsequent
  • Key Man Insurance to be in place for the Chairman/Managing Director and other Key Employees (to be finalised after discussion with the Investors) before Shareholders agreement
  • The Investors would review the incentive/stock options of senior teachers and management. If required by Investors, suitable changes will be made to this.
  • Completion of satisfactory financial, business, and legal due diligence of the Company
  • Tying up of any debt as necessitated by the Business Plan, as decided in consultation with the Investors
  • Appointment of one of the Big Six as statutory auditor and internal auditors
  • Appointment of CFO in consultation with Investors within 3 month of investment. The CFO should be a qualified Chartered Accountant with at least 10 years of experience in a company preferably with M&A/IPO experience.
  • Any other matter to be included post due diligence by the investors
21. Representations, Warranties, and Indemnities

The definitive agreements shall contain the representations and warranties and indemnities by the Company and Promoter as are usual to transactions of this nature and such other representations and warranties as are found necessary on conclusion of the due diligence exercise by the Investors.

22. Confidentiality

The Company/Promoters will not disclose the terms of this Term Sheet to any person other than officers, members of the Board and the Company’s accountants and attorneys, without the written consent of the Investors.

23. Investor Protection

The Investors will be indemnified from any legal proceedings initiated against the Company to the extent that there was no negligence or willful misconduct on the Investors’ part. The Company shall take Directors’ Liability Insurance to the satisfaction of the Investors.

24. Fall Away of Rights

Subsequent to the Equity Shares having been listed on a Stock Exchange, all rights available to the Investors will fall away save and except for the rights which are legally and regulatorily permissible to survive including, but not limited to, (i) the right of the Investors to nominate a Director to the board of directors of the Company and each of the Subsidiaries, and/or committees of the above, and (ii) the right to receive information in accordance with Clause 8 above.

25. Exclusivity

The Company and its shareholders/Promoters shall not entertain, discuss, solicit or negotiate any investment in the Company by any party other than the Investors for a period of 60 days from the date of this Term Sheet.

The Confidentiality provision of this Term Sheet shall be a binding obligation whether or not the financing is consummated. This Term Sheet is contingent on the completion of detailed due diligence (financial, business and legal) and documentation that is satisfactory to the Investors. This process is likely to take between 4–6 weeks and the Company will bear the expenses up to a maximum of Rs. 20 lakhs upon successful completion of the transaction (if transaction is not concluded, Investors will bear the due diligence expenses). The definitive agreements will be executed amongst the existing Promoters, Company, and the Investors.

This Term Sheet is valid till March 31, 2010 and we request you to sign and return a copy as a token of your acceptance.

For,

For,

ZenCap Private Equity Fund

Surya Tutoring Private Limited

Nishit Verma,

R. K. Sharma,

Managing Partner

Managing Director

Witnessed by:

Witnessed by:

Ashok Bhatia,

Sunil Gupta,

Advocate

Managing Director, Omkar Investment

Capitalization Table

Pre-Financing

Post-Financing (pre-warrants, max)

Post-Financing (post-warrants, max)

Security

# of Shares

%

# of Shares

%

# of Shares

%

Common—Founder

15,00,000

100

13,36,955

82

13,36,955

78.5

Family

163,043

10

163,043

9.5

Series A Preferred (ZenCap)

1,30,434

8

2,04,545

12

Total

15,00,000

100

16,30,434

100

17,04,545

100

Note: In the numbering system used in South Asia, which is based on the Vedic numerical system, one hundred thousand Rupees (Rs. 100,000) is referred to as 1 lakh and denoted as 1,00,000. One hundred lakhs (i.e., Rs. 10 million) is referred to as 1 crore and denoted as 1,00,00,000.

Exhibit 3: Blackgem Term Sheet

CONFIDENTIAL

SURYA TUTORING

MEMORANDUM OF TERMS

Except with respect to the provisions entitled “Confidentiality,” which are intended to be, and are, legally binding agreements among the parties hereto, this Memorandum of Terms represents only the current thinking of the parties with respect to certain of the major issues relating to the proposed private offering and does not constitute a legally binding agreement. This Memorandum of Terms does not constitute an offer to sell or a solicitation of an offer to buy securities in any state where the offer or sale is not permitted.

THE OFFERING

Issuer:

Surya Tutoring, an India corporation (the “Company”)

Securities:

Series A Preferred Stock (the “Series A Preferred”)

Valuation of the Company:

Rs. 600 crores post-money, i.e., 16x of the audited FY2010 Profit After Tax

Amount of the offering:

Rs. 150 crores

Consideration:

Cash

Number of securities:

5,00,000 shares

Price per share:

Rs. 300

Investors:

Blackgem or affiliated entities, and other investors acceptable to the Company

Capitalization:

See Exhibit A for the pre-financing capitalization of the Company and the pro forma capitalization following the proposed offering.

Anticipated closing date:

Initial closing on or before March 31, 2010, with one or more additional closings within 60 days thereafter

TERMS OF THE PREFERRED

Dividends:

Dividend rate. 8%

Cumulation. Noncumulative

Dividends (continued):

Priority. Senior to common

Participation. Common may not receive any dividends unless Series A Preferred receives a dividend (including the preference amount) equal to the amount it would have received if converted to common.

Liquidation preference:

Amount. Original purchase price plus accrued dividends

Priority. Senior to common

Participation. After payment of preferential liquidation proceeds, the Series A Preferred does not participate in further liquidation proceeds.

Deemed liquidation. A sale of all or substantially all of the Company’s assets or a merger or consolidation of the Company with any other company will be treated as a liquidation of the Company.

Redemption:

Outstanding shares of Series A Preferred will be redeemed on March 31, 2015. The redemption price will be the purchase price plus declared dividends from the closing date plus 4% per annum. If the Series A Preferred is not redeemed on the date or dates set for redemption, the redemption price will increase to the purchase price plus declared dividends plus 10% per annum from the date originally set for redemption.

Conversion:

The Series A Preferred may be converted at any time, at the option of the holder, into shares of common stock. The conversion rate will initially be 1:1, subject to anti-dilution and other customary adjustments.

Automatic conversion:

Each share of preferred stock will automatically convert into common stock, at the then applicable conversion rate, upon (i) the closing of a firmly underwritten public offering of common stock (a “Qualified Public Offering”), or (ii) the consent of the holders of a majority of the then outstanding shares of the preferred stock.

Anti-dilution:

Adjustments. The conversion price of the Series A Preferred will be subject to adjustment, on a broad-based weighted-average basis, if the Company issues additional securities at a price per share less than the then applicable conversion price.

Anti-dilution (continued):

Exceptions. There will be no adjustment to the conversion price for:

  • shares issued upon conversion of the Series A Preferred;
  • shares or options, warrants, or other rights issued to employees, consultants or directors in accordance with plans, agreements or similar arrangements;
  • shares issued upon exercise of options, warrants, or convertible securities;
  • shares issued as a dividend or distribution on the preferred stock or for which adjustment is otherwise made pursuant to the articles of incorporation (e.g., stock splits);
  • shares issued in connection with a Qualified Public Offering;
  • shares issued or issuable pursuant to an acquisition of another corporation or a joint venture agreement approved by the board (including at least one director elected by the investors);
  • shares issued or issuable to banks, equipment lessors or other financial institutions pursuant to debt financing or commercial transactions approved by the board (including at least one director elected by the investors);
  • shares issued or issuable in connection with any settlement approved by the board (including at least one director elected by the investors);
  • shares issued or issuable in connection with sponsored research, collaboration, technology license, development, OEM, marketing, or other similar arrangements or strategic partnerships approved by the board (including at least one director elected by the investors);
  • shares issued to suppliers of goods or services in connection with the provision of goods or services pursuant to transactions approved by the board (including at least one director elected by the investors);
  • shares issued pursuant to other transactions approved by the board (including at least one director elected by the investors); and
  • shares that are otherwise excluded by consent of holders of a majority of the Series A Preferred.

General voting rights:

Each share of preferred stock will have the right to a number of votes equal to the number of shares of common stock issuable upon conversion of each such share of preferred stock. The preferred stock will vote with the common stock on all matters except as specifically provided in the articles of incorporation or as otherwise required by law.

Voting for directors:

The holders of Series A Preferred will be entitled to elect two directors. Any additional directors will be elected by the holders of preferred stock and common stock voting together.

Protective provisions:

Consent of the holders of the Series A Preferred will be required to:

  • alter any provision of the articles of incorporation or the bylaws if it would alter the rights, preferences, privileges, or powers of or restrictions on the preferred stock or any series of preferred;
  • increase or decrease the authorized number of shares of preferred stock or any series of preferred;
  • authorize or create (by reclassification or otherwise) any new class or series of shares having rights, preferences, or privileges with respect to dividends or liquidation senior to or on a parity with the Series A Preferred or having voting rights other than those granted to the preferred stock generally;
  • approve any transaction or series of transactions deemed to be a liquidation of the company;
  • approve any merger, sale of assets, or other corporate reorganization or acquisition;
  • approve the voluntary liquidation or dissolution of the Company;
  • increase the size of the board;
  • encumber or grant a security interest in all or substantially all of the assets of the Company in connection with an indebtedness of the Company;
  • acquire a material amount of assets through a merger or purchase of all or substantially all of the assets or capital stock of another entity;
  • declare or pay any dividend or distribution or approve any repurchase with respect to the preferred stock (except as otherwise provided in the articles of incorporation) or the common stock (subject to customary exceptions); or
  • increase the number of shares authorized for issuance under any existing stock or option plan or create any new stock or option plan.

INVESTOR RIGHTS

Right to maintain proportionate ownership:

Each holder of Series A Preferred will have a right to purchase its pro rata share of any offering of new securities by the Company, subject to customary exceptions. The pro rata share will be based on the ratio of (x) the number of shares of Series A Preferred held by such holder (on an as-converted basis) to (y) the Company’s outstanding securities (on an as-converted and as-exercised basis). The holders exercising this right will be required to purchase all of the new securities to be offered. This right will terminate immediately prior to the Company’s initial public offering.

Right of first refusal:

In the event Mr. Sharma proposes to transfer any common stock or other securities convertible into or exercisable for common stock, the holders of Series A Preferred will have a right of first refusal (on a pro rata basis based on the Company’s outstanding securities (on an as-converted and as-exercised basis)) with respect to the proposed transfer.

The rights of first refusal will be subject to customary exceptions and will terminate on a Qualified Public Offering.

“Co-sale” rights:

To the extent the rights of first refusal are not exercised, in the event Mr. Sharma proposes to transfer any common stock or other securities convertible into or exercisable for common stock, the holders of Series A Preferred will have the right to participate in the proposed transfer on a pro rata basis (as among the transferee and the holders of Series A Preferred). Rights to participate in the proposed transfer will be reallocated to the extent unexercised. The co-sale rights will be subject to customary exceptions and will terminate on a Qualified Public Offering.

“Drag-along” right:

Subject to customary exceptions, if holders of a majority of the Series A Preferred approve a proposed sale of the Company to a third party (whether structured as a merger, reorganization, asset sale, or otherwise), Mr. Sharma will agree to approve the proposed sale.

Voting agreement:

The principal stockholders of the Company will agree to elect to the board:

  • Two Series A designees as the Series A directors. The first Series A designee will be chosen by Blackgem. The second Series A designee will be chosen by Blackgem.
  • Two common stock designees. The first common stock designee will be chosen by Mr. Sharma. The second common stock designee will be chosen by Mr. Sharma.
  • One mutual designee, as approved by (i) founders holding a majority of the common stock held by all founders and (ii) investors holding a majority of the shares held by all investors.

Director liability:

The directors will be entitled to customary indemnification from the Company and reimbursement of reasonable costs of attendance at board meetings. The Company will also obtain D&O insurance reasonably satisfactory to the Company and its directors.

Information rights:

The Company will deliver to each holder of at least 4,00,000 shares of Series A Preferred:

  • unaudited annual financial statements within 120 days following year-end; and
  • unaudited quarterly financial statements within 45 days following quarter-end.

    The information rights will terminate upon an initial public offering.

EMPLOYEE MATTERS

Vesting of founder shares:

Shares and options held by all founders will be subject to a vesting schedule to be mutually agreed upon with the investors. The Company will have the right, upon termination of services, to repurchase any unvested shares.

Vesting of employee shares:

Subject to the discretion of the board, shares and options issued to employees, directors and consultants will be subject to four-year vesting, with 25% vesting on the first anniversary of the commencement of services and the remainder vesting monthly thereafter. The Company will have the right, upon termination of services, to repurchase any unvested shares.

Proprietary information agreements:

The Company will have all employees and consultants enter into proprietary information and inventions agreements.

“Key person” life insurance:

The Company will obtain a “key person” life insurance policy on Mr. Sharma in the amount of 150 crores, with proceeds payable to the Company.

OTHER MATTERS

Purchase agreement:

The investment will be made pursuant to a stock purchase agreement which will contain, among other things, appropriate representations and warranties of the Company and the investors and appropriate conditions of closing.

Finders:

The Company and the investors will each indemnify the other for any finder’s fees for which they are respectively responsible.

Legal fees and expenses:

The Company will pay the reasonable fees and expenses of a single counsel to the investors if the financing closes. Fees and expenses payable hereunder will be payable at closing by wire transfer.

Confidentiality:

Until the initial closing of the financing contemplated by this Memorandum of Terms, the existence and terms of this Memorandum of Terms and the fact that negotiations may be ongoing with the investors shall not be disclosed to any third party without the consent of the Company and the lead investor(s), except as may be (i) reasonably required to consummate the transactions contemplated hereby (provided that any persons receiving the information agree to the confidentiality restrictions contained herein or are otherwise subject to confidentiality obligations) or (ii) required by law.

Conditions precedent:

The investment will be subject to customary conditions, including but not limited to:

  • completion of due diligence to the satisfaction of the investors;
  • negotiation and execution of definitive agreements customary in transactions of this nature;
  • receipt of all required authorizations, approvals, and consents;
  • delivery of customary closing certificates; and
  • the absence of material adverse changes with respect to the Company.

This Memorandum of Terms may be executed in counterparts, which together will constitute one document. Facsimile signatures shall have the same legal effect as original signatures. The legally binding portions of this Memorandum of Terms will be governed by India law, without regard to conflicts-of-law principles.

For,

Surya Tutoring Private Limited

R. K. Sharma,

Managing Director

____________________________

Signature

____________________________

Date

For,

Blackgem Private Equity Fund

Greg Smith,

Managing Partner

____________________________

Signature

____________________________

Date

Exhibit A: Capitalization

Pre-Financing

Post-Financing

Security

# of Shares

%

# of Shares

%

Common—Founder

15,00,000

100

15,00,000

75

Series A Preferred—Blackgem

5,00,000

25

Total

15,00,000

100

20,00,000

100

Note: In the numbering system used in South Asia, which is based on the Vedic numerical system, one hundred thousand Rupees (Rs. 100,000) is referred to as 1 lakh and denoted as 1,00,000.

Exhibit 4: Comparables

Quarterly Data

Educomp Solutions

Everonn Education

Date

31-Mar-10

31-Mar-10

Last traded price

747.85

370.35

Percentage change (from last quarter)

4.81%

-9.65%

52-week high price

4,705.0

467.05

52-week low price

651.1

137.40

Results (in lakhs)

      Sales

27,337.89

29,349.72

      Profit after tax

6,752.48

4,544.61

      Equity (market value)

355,629.93

55,998.40

Ratios

      Operating profit margin

51.15%

25.8%

      Net profit margin

24.7%

15.5%

      Earnings per share

7.11

30.06

Ownership

      Promoter and promoter group

50.08%

26%

      Indian private?

50.08%

26%

      Foreigner private?

0%

7%

Public

49.93%

67%

      Institution

42.23%

45%

      Non-institution

7.7%

22%

Date of IPO

Dec-05

Jul-07

Note: In the numbering system used in South Asia, which is based on the Vedic numerical system, one hundred thousand Rupees (Rs. 100,000) is referred to as 1 lakh and denoted as 1,00,000.

Exhibit 5: Financial Market Data

Interest Rates

5-year Treasury bond

8.19%

10-year Treasury bond

8.33%

30-year Treasury bond

8.67%

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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