MedMetric, LLC: Seed-Round Convertible Note Financing

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. Excerpt UVA-F-1924 Dec. 16, 2019 MedMetric, LLC: Seed-Round Convertible Note Financing Mark Parker, an experienced private-equity investor, had reached the point in his life where he wanted to invest some of his own money in young companies and mentor them (see Exhibit 1 for Parker's biography). He'd been on the lookout for seed-stage companies that were involved in health care technology. In April 2016, a friend and fellow investor passed on a pitch deck for MedMetric, LLC (MedMetric), and asked him to take a look at it (Exhibit 2). The company had a Software-as-a-Service (SaaS) product that helped Medicare Advantage (MA) companies (MAs) with reimbursement for health care services provided to their beneficiaries. Parker had over 20 years of experience in health care investing and had become familiar with MA as part of that. MAs were private companies, such as Humana and UnitedHealth, that provided health insurance to seniors through the Medicare system. 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. In 2012, the CMS required MAs to begin incorporating more detailed and complex data on patient care under the Encounter Data Processing System (EDPS). MedMetric's product helped companies comply with this new data system, where even small improvements in data compliance could mean millions of dollars in additional revenue. MedMetric was currently seeking funding for a seed-stage convertible note financing of $ 1million to continue the buildout of its product line. Usually in cases like these, where friends referred Parker to possible investments, the lead had ended up as a dead end. But in this case, Parker was immediately intrigued by the fact that MedMetric had recently brought on board an experienced "hired gun": CEO Scott Warrick. Because this was unusual for a company at this stage, Parker decided to do some further due diligence of his own before deciding whether this might become his first angel investment. . . .