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Kelly Solar, a small start-up, is looking into making additional investments to maximize the value of the company. But Jessica Kelly, the owner, is constrained to go ahead with the investment until she can renegotiate outstanding debt claims. Solving this "debt overhang" problem through negotiation is the focus of the case study.
Marc Lipson; Kenneth C. Lichtendahl; Samuel E Bodily
Harvard Business Review (UV4278-PDF-ENG)
January 29, 2010
Case questions answered:
- Does this additional investment make sense for Kelly Solar?
- Assuming Jessica could get the money herself with no attendant liabilities, does it make sense for her to make the entire additional investment herself?
- Does it make sense for Barkley to make the entire additional investment himself under the terms of the current contract?
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Case answers for Kelly Solar
Introduction – Kelly Solar
After hard work of two years along with huge costs in purchasing patents and doing research & development, sometime in early May, Jessica Kelly was still unclear about any potential returns from selling her product Kelly Solar. This is due to the fact that she does not want to remain in this business and wanted to sell the technology along with patents to the industry’s sole manufacturer.
Moreover, uncertainty has increased due to the emergence of new similar technologies, which means there is an equal probability that her newly developed product will pay off a handsome return of $22 million or become worthless because manufacturers will back only one technology.
In such a scenario, only adding improvements to her already developed technology can increase the chances of its acceptance by 70% and receive a payoff of $22 million. Otherwise, if not accepted, it will bring her nothing, and most probably Kelly Solar will default.
An additional investment of $3.2 million is required and she had just two sources to finance this additional improvement into her technology.
Under such conditions, does the additional investment in Kelly Solar make sense? Should Jessica invest all the required money herself for the additional improvements? Does it make sense for Barkly to provide all additional investment required by Kelly Solar under the terms of the current contract?
Under such circumstances, does the additional investment in Kelly Solar make sense?
Since all the previous efforts and invested money are at the stake due to the emergence of new technology, adding some more value to the product by doing additional investment is inevitable in such circumstances.
If improvements were not made, there are equal chances of failure and success, where the costs associated with the failure are very huge i.e. loss of $22 million along with huge debt, a burden to be paid for by Kelly Solar. And if accepted, the product and pay off will gather…
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