Assignment task:
Adewale Ogunleye was the founder and CEO of Fintop Advisors (Fintop), a technology development firm that specialized in supporting early stage financial technology (fintech) companies. Fintop provided outsourced software development services that fintech start-ups could leverage in lieu of building their own product development teams. With annual revenues of approximately $60 million, the firm supported a broad client base and employed more than 100 software engineers, data scientists, digital solutions architects, and product managers. Ogunleye had recently met with the founder of Periscope Labs (Periscope), Leya Ahmed. He found the charismatic entrepreneur to be sharp and confidence inspiring. Equally importantly, he believed that Periscope's digital payment technology, which sought to revolutionize the e-commerce checkout experience, had a real chance of succeeding in the marketplace. If engaged, Fintop would support the Periscope team in building critical elements of its beta platform. Ogunleye was confident that Fintop could complete the work within eight months. He estimated that his cost to provide all necessary labor and services would be $2.75 million. He generally priced such services to generate a 38%-45% contribution margin. Given the high potential for follow-on engagements with Periscope, he was comfortable pricing this project at the low end of that range. As such, he proposed to Ahmed that Fintop would complete the project for $4.5 million.
Ahmed was a savvy negotiator and disciplined capital allocator. She immediately countered his proposal, explaining that if the engagement cost more than $3.75 million in fixed fees, she would rather hire her own team of developers and build the product internally. She was prepared to offer Fintop the contract, but not for more than $3.75 million. Ogunleye was surprised by Ahmed's quick response and wondered whether the claim that Periscope could do the project internally for $3.75 million was honest. Without definitively rejecting her proposal, Ogunleye pushed back. At this price, the engagement would generate a profit margin significantly below what Fintop stood to make from other projects. While Ogunleye was keen to work with Ahmed for a number of reasons, including the potential for follow-on engagements and the reputational benefits of working with a high-profile founder, his firm did not need her business. As the negotiation proceeded, Ahmed asked Ogunleye how confident he was that Fintop could complete the work for Periscope on time and at exceptionally high quality. Ogunleye replied that he was "very confident" in his firm's ability to deliver. This document is authorized for use by Karen Marshall, from 06/14/2022 to 06/15/2023 in the course: FY Darden Before Darden 2022, University of Virginia. Any unauthorized use or reproduction of this document is strictly prohibited. Page 2 UVA-QA-0948 Ahmed responded with a creative alternative: if Ogunleye was willing to bet on his team and share some of the project risk alongside Periscope, she would be willing to pay a bonus for exceptional results. She offered Ogunleye the choice between a bonus in cash and one in Periscope stock. If Fintop chose the cash bonus option, Periscope would pay Ogunleye's team a $2.75 million fixed fee for the product development work, together with a $2 million bonus at the conclusion of the project, provided the work was completed within eight months and in accordance with Periscope's exacting standards, as measured by a third-party assessment. If Fintop chose the equity bonus option, Periscope would pay a $1.75 million fixed fee together with a bonus in the form of shares of common stock representing 3.5% of Periscope's equity capital. As with the cash bonus, the stock bonus would depend on timeliness and quality. Ogunleye pondered the decision. He had told Ahmed that he was very confident in his team's ability to deliver, but he had never really thought about what that meant in terms of his precise odds of success. After considerable reflection, he concluded that Fintop would be eligible for the bonus in roughly 8 of 10 instances that the team performed a project of this nature; some 20% of the time, an unforeseen hiccup would delay the work or cause an issue with quality control. Arriving at this assumption was helpful, but it did little to distinguish between the cash bonus and the equity bonus. Based on his considerable experience working with other fintech start-ups, Ogunleye thought Ahmed had a one-in-four chance of hitting a home run with her business. He believed she had an equal likelihood of failing completely. If she failed, the shares of stock that Periscope received would be worthless. In the home run scenario, Periscope would be worth several billion dollars. However, Periscope's general counsel had inserted a provision into the deal that allowed Ahmed to buy back Fintop's shares under certain conditions. Ogunleye believed that this provision effectively capped the present value of the equity bonus at $15 million. Between these two extremes, Ahmed would experience neither phenomenal success nor total failure. In such a case, Ogunleye estimated the present value of the equity bonus would be about $5 million. In all his years working with savvy founders, no one had ever pushed Ogunleye to handicap the odds of his team's success as Ahmed just had. He admired her negotiating skills and was intrigued by the options she presented. Given that he hadn't definitively rejected her original $3.75 million flat-fee offer, he had three options: the flat fee, the cash bonus, and the equity bonus. And of course, there was always a fourth option: to simply walk away from the deal entirely. Ogunleye pondered how to proceed.
What would you recommend Ogunleye to do?