Reprint: R0411A
On the face of it, Petrolink’s business plan looks like a winner. At present, the only available pipeline for operators in the Baltic Sea’s newly developed Helmark gas field is owned and operated by the Russian oil and gas company Gazprom. But this gives Gazprom access to information about the productivity of individual leases and therefore an advantage in negotiating new ones. Petrolink’s founders believe that the company that opens a new pipeline should find ready customers among the field’s numerous independent producers.
The Petrolink team has been talking with two potential investors. After six weeks of due diligence, London Development Partners—a large, well-established venture capital firm with no experience in the gas business—offers a relatively small early round of investment without any tangible commitments to future rounds. The package is far from what the team had hoped for. Polish venture capital firm BRX Capital has been in business fewer than five years, but it has already made investments in the Eastern European oil and gas industry. BRX not only agrees to the capital structure that Petrolink proposes, it also agrees to invest both the first- and second-round equity amounts. One of the start-up’s main objectives has been to ensure that no one investor has too much clout, so the arrangement proposed by BRX suits them.
But now that a € 4 million check is on the table, there’s been an apparent breach of trust by the Polish VC. Petrolink’s founders discover that an agreed-upon provision covering ownership dilution has been changed. Should they take BRX’s money or go elsewhere?
George Brenkert of Georgetown University; Sonia Lo of Chalsys Partners; William Sahlman of Harvard Business School; and Charalambos Vlachoutsicos, adviser to 7L Capital Partners Emerging Europe, comment on this fictional case.
