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In April 2016, Mark Parker, an experienced private-equity investor, is considering an investment in MedMetric, LLC (MedMetric), a seed-stage health care information technology company. The company has a Software-as-a-Service (SaaS) product that facilitated reimbursement for Medicare Advantage companies (MAs), private firms that provided an alternative way for senior citizens in the United States to receive Medicare coverage. The Centers for Medicare and Medicaid Services (CMS) reimbursed these companies using risk-adjusted metrics submitted by the MAs that increased their payments for higher-risk patients. Since 2012, CMS had been transitioning from a simpler data-entry process to a more complex data system called the Encounter Data Processing System (EDPS). Smaller and medium-sized MAs struggled to adjust to EDPS and MedMetric’s product targeted these MAs to facilitate the transition to EDPS and ensure accurate reimbursement from CMS. MedMetric’s product is in development and has several contracts pending, but no revenues are expected until July 2016. Based on the difficulty of valuing the company at this stage, Parker is considering making a $1 million convertible note offering to bridge the company to a later Series A venture round. The terms of the note seem relatively standard to Parker, but he is unsure whether they will provide him with the equity stake and influence he is seeking from the company. Students are asked to evaluate whether the terms of the note are sufficient to grant him the 10%-to-15% equity ownership he is seeking. Seed-stage convertible notes have increased in recent years as a form of financing for early-stage companies. This case provides an introduction to convertible note offerings, their terms and structure, and how the equity ownership can be estimated when the valuation of the company is delayed until a later round of financing. An accompanying technical note, "Convertible Notes: A Form of Early-Stage Financing" (UVA-F-1925), can be assigned with the case to help students prepare the analysis.
The case is appropriate for courses that cover the financing and valuation of early-stage companies, such as those typically covering topics on entrepreneurship, venture capital, or private equity.