3 Pages Posted: 7 Apr 2010
A small start-up company must make additional investments to maximize its firm value. But the company owner will not make this investment unless she can renegotiate outstanding debt claims. Solving this "debt overhang" problem through negotiation is the focus of the case. In this context, students are exposed to a variety of issues: the nature of financial claims, bargaining and negotiation fundamentals, and agency costs of debt.
Rev. Apr. 16, 2014
Jessica Kelly was learning to deal with disappointment. In early May of 2010 her start-up was poised to sell its designs and related patents to a large manufacturer of solar equipment. This was to be the culmination of two years of hard work developing a new product from a series of patents she had purchased through her fledgling company, Kelly Solar. That product, a major improvement in the reflector lenses used in solar power generation, had just proven out in a series of tests. But all her excitement turned to dread as she learned of a competing technology that promised to match all the advantages of the Kelly Solar designs. It was clear the equipment manufacturer would back only one of the technologies and the other would become worthless.
The Solar Energy Parts Business Opportunity
The “green technology” opportunity Jessica Kelly was exploring with Kelly Solar actually had its roots in her grandfather's “old technology” auto parts business. Jessica had spent many summers working in her grandfather's manufacturing facility, and when she graduated from college, her first job was in the accounting department of that business. After a few years, she obtained a business degree and began working for a small regional investment bank. She loved the bank job and advanced quickly, but she stayed close to her manufacturing roots and often dreamed about starting her own business. It all suddenly came together as she read an article about the use of Fresnel reflector technology in solar-energy power plants.
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Keywords: debt, agency cost, bargaining, renegotiation, entrepreneur, financial claims, debt financing, debt overhang
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