Dr. Gertrude Stein has obtained a new patent for a
Dr. Gertrude Stein has obtained a new patent for a material to be used in the wastewater treatment industry. Dr. Stein has been working for 10 years on her patent and is a tenured materials science professor at Hoboken University. Under the provisions of her contract, Dr. Stein is entitled to profit from her patent but she must pay the University a royalty of 4% of any sales related to the patent for the first 15 years she applies the patent and earns revenue. During the past two years, Gertrude has been working with the local United States Small Business Development Center, also connected with Hoboken U., to develop a business plan for her proposed company, Water Purity. The business plan shows that if the material can be manufactured at a competitive cost and that if it performs as promised, Water Purity will capture a very large share of the market and sales for the first six years of operation could exceed $30 million. The return on sales will be greater than 14 percent but Dr. Stein needs an initial investment of $2.4 million.
Dr. Stein believes she deserves a large amount of any financial reward because of all the hard work she has invested. A large raw material processor have offered Dr. Stein the $2.4 million needed but need her to pledge all company assets as collateral and wants the money paid back in twelve equal payments over the first three years of operation plus 4% interest to be paid back in quarterly installments starting at the beginning of year two and ending at the end of year three. This processor also wants the right to buy up to 50% of Water Purity's output in the first five at a fixed price (still to be negotiated). A venture capitalist from Denver has offered to buy 45% of Water Purity in exchange for the $2.4 million. The venture capitalist wants to have two seats on the board of directors and an option to buy another 3% of Water Purity at a fair-market rate. Dr. Stein can also generate $1.8 million by using a home equity line of credit, cashing in a life insurance policy, liquidating all of her retirement investments, and agreeing to triple the royalty to Hoboken University.
As Dr. Stein's favorite student, evaluate each option by creating as many calculations as you can. Also, suggest other potential financing options. At the end of the day, what recommendation do you have for Dr. Stein?