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Technology Stocks : General Magic
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To: Strategy who wrote (3152)8/2/1998 3:24:00 PM
From: trust200  Read Replies (1) of 10081
 
Strategy, I also spent some time on the series C and like you, am not sure that I understood this completely. The series C don't seem so negative to me however.

It is true that the investors in series C have the luxury of being able to choose between a fixed conversion price and a conversion that is a function of the market price. They can choose the lower of 19.95 and 135% of the market price at the time of conversion. 19.95 was 135% of GMGC's market price at the time of the transaction. So the investors picked a very bad day. Unusual for such supposedly smart money hedge funds.

It is important to see that the earliest conversion is after 5 months from the transaction date. That is somewhere in November. Shorting now would be lethal for the Series C investors . The actual conversion price could be much higher then the price they shorted at.

The dilution effect is big but not enormous. I calculated that the total dilution of series a, b and c is approximately 10 million shares in total. Series C alone is approximately 3 million shares. To put that into perspective, unexercised employee share options are running at 5 million as far as I know.

So the employees who do the work have stock options for 5 million shares and the guys who provided the key financing for portico get 3 million shares. That balance between the two groups is OK for me.
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