Timothy Li EAS545 Palm Financing

03/18/13

Hawkins and Dubinsky had four options to continue financing Palm Computing. They could either go with Alpha Computers $1MM at $30MM valuation, ABC Ventures $1MM at $9MM valuation, outside international investors, or a USR purchase for $50MM. While it may have been a difficult choice for the founders, I believe there was only one true answer for the founders going forward: USR. Palm had been through a tough time, working on the Zoomer with several partners and trying to manage expectations and restrictions of each of the individual companies proved to be a task beyond their ability. Zoomers failure linked back to disagreements beteween the partners. Because of this history, one of my most important criterions would be autonomy. Palm had a vision and needed to be able to execute that vision without conceding to hardware or software providers or any financing that potentially limited their final product. Yet there were other factors to consider. Hawkins and Dubinksly needed a valuation of Palm that wouldnt give a large portion of the ownership of the company away to another entity and leave the founders with a huge dilution. Taking a hit in valuation now would only create problems down the line if the company were able to successfully launch their new product. Lastly, the amount of cash needed to sustain the company through the product launch was important if they were going to successfully launch Touchdown. Palm needed $2-3 MM to get this done, so my preference would shift to options that could sustain this need. While investment from ABC Ventures would give Palm some much-needed cash, it would be a severely downgraded valuation and still require them to search for another $1-2 MM investment a year down the line. ABC didnt list any restrictive clauses in their agreement but their limited funding and low valuation made their offer undesirable. Alpha Computers gave Palm a much higher valuation, despite the failure of the Zoomer, because of the alignment to their current business needs. However, Alpha and Palm disagreed on several issues: distribution, channel sales, and overall vision. Alpha was more

Timothy Li EAS545 Palm Financing

03/18/13

risk adverse, creating clauses that insulated their brand from possible failure of Palm, instead of maximizing the potential of Palm. Again, the limited cash infusion means that Palm would still need to raise funding a year down the line. Looking for international investors posed a risky option because of the time and cultural differences. While, they could possibly fetch a larger valuation and investment due to more enthusiasm for the handheld computing market, they would have to hold out on current negotiations and they only had $1.5 MM in the bank. This increases the risk of Palm agreeing to unfavorable terms if they were short on cash. This option is too risky, especially for the short-term uncertainty of being able to secure a definitive deal. The USR buyout was an intriguing option because it offered many favorable terms for Palm. It allowed them autonomy as a separate division, a valuation of $50 MM, and no modifications to the initial first generation Palm product. In addition, USR had confidence in the founding team and promised as much investment money as Palm needed to complete the product. USR met both the need for autonomy as well as the financial needs of the company. Across all of the options the USR proved to be the most favorable option for Hawkins and Dubinsky, because it gave them the opportunity to execute their vision with little to no interference.