Stuck in a downturn, startups ghost investors(bloomberg.com)
bloomberg.com
Stuck in a downturn, startups ghost investors
https://www.bloomberg.com/news/articles/2024-01-24/startup-founders-ghost-investors-to-avoid-dreaded-down-round
26 comments
https://archive.is/pSbmF
Pet subject time.
It can happen that VCs attend board meetings, have the right to appoint directors but don't appoint them, as a way of holding power over the rest of the board. They do this (amongst other reasons) to avoid being directors of a company that might fail (as many companies do in the early years). This legally should make them 'shadow directors' and should mean they have the same responsibilities as a director, but I haven't seen this enforced.
Anyway, if they became real directors, like they should, then they would have open access to the financial records. Hoisted by their own petard.
It can happen that VCs attend board meetings, have the right to appoint directors but don't appoint them, as a way of holding power over the rest of the board. They do this (amongst other reasons) to avoid being directors of a company that might fail (as many companies do in the early years). This legally should make them 'shadow directors' and should mean they have the same responsibilities as a director, but I haven't seen this enforced.
Anyway, if they became real directors, like they should, then they would have open access to the financial records. Hoisted by their own petard.
> to avoid being directors of a company that might fail
Why does this matter? Just trying to avoid the bad optics of being the director of a failed company?
Why does this matter? Just trying to avoid the bad optics of being the director of a failed company?
Yes, and some practical matters. Being a director of a run of insolvent companies can lead to disqualification from being a director.
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Funny this doesn't mention structured equity. Matt Levine touched on this in a recent Money Stuff column for Bloomberg Opinion, and he had a way to turn this problem into a business model:
> There are, these days, a lot of startups that used to be worth $1 billion and are now worth $500 million. Some of them raised money at $1 billion valuations, back in the good times, and now they need to raise money again. It is, for some combination of good and bad reasons, extremely undesirable for a startup that raised money at $1 billion to raise money again at $500 million. Therefore there is a business opportunity for a fund that will:
> 1. Give startups money at a $500 million valuation, but
> 2. Say that it’s at a $1 billion valuation.
> This is called “structure,” or “structured equity.” Bloomberg’s Gillian Tan reported Friday:
> > Philippe Laffont’s Coatue Management raised about $3 billion for a structured equity fund that allows closely held companies to avoid raising money at lower valuations, a person with knowledge of the matter said.
> > With the market for initial public offerings in a funk and lower risk appetite from large venture capital investors, some startups have sought to raise convertible notes and pursue structured financings instead of accepting a lower valuation through a traditional equity funding round.
https://archive.is/Uy4nZ
> There are, these days, a lot of startups that used to be worth $1 billion and are now worth $500 million. Some of them raised money at $1 billion valuations, back in the good times, and now they need to raise money again. It is, for some combination of good and bad reasons, extremely undesirable for a startup that raised money at $1 billion to raise money again at $500 million. Therefore there is a business opportunity for a fund that will:
> 1. Give startups money at a $500 million valuation, but
> 2. Say that it’s at a $1 billion valuation.
> This is called “structure,” or “structured equity.” Bloomberg’s Gillian Tan reported Friday:
> > Philippe Laffont’s Coatue Management raised about $3 billion for a structured equity fund that allows closely held companies to avoid raising money at lower valuations, a person with knowledge of the matter said.
> > With the market for initial public offerings in a funk and lower risk appetite from large venture capital investors, some startups have sought to raise convertible notes and pursue structured financings instead of accepting a lower valuation through a traditional equity funding round.
https://archive.is/Uy4nZ
I'm very confused here. How is "structured equity" not just considered "lying?" In other words, why is this not just fraud? How is it even legal? They're literally just making up numbers that are independent of the business's financial health, revenue, TAM, or any other damn thing that ought to go into writing an honest valuation.
I thought the same and did more reading.
It's generally "structured" because its something like preferred shares instead of regular equity.
They give some liquidation preference to the new money so it has an incentive to pay more than a straight % value of true valuation.
ie - if it gets taken out below certain levels where not all equity is going to get made whole, you are first in line and get made whole.
"The preferred stock has the same upside as the common stock, but it has a lot of protection on the downside."
They give some liquidation preference to the new money so it has an incentive to pay more than a straight % value of true valuation.
ie - if it gets taken out below certain levels where not all equity is going to get made whole, you are first in line and get made whole.
"The preferred stock has the same upside as the common stock, but it has a lot of protection on the downside."
Valuations of public companies are decided by a small number of parties. Those parties can decide the valuation is whatever they want it to be. As long as the underlying economics of the business are not obscured, there is no fraud being perpetrated.
If it helps you can think of this as a transaction where the investor is providing a service of buying the startup more time to build up their valuation and in return obtains shares for a discounted rate.
If it helps you can think of this as a transaction where the investor is providing a service of buying the startup more time to build up their valuation and in return obtains shares for a discounted rate.
But, the underlying economics are being obscured if I'm someone interested in buying shares of the company you say is worth $X but everyone else says is only worth $X/2.
Not really. Imagine you want to buy my car. I give you the make, model and let you test drive it. I also tell you that I paid $X for it and so I’m selling it at some related price F(x). At this point you have all the information to make an independent valuation. You may or may not be influenced by my view of the valuation but that’s on you to decide if you will pay what I’m asking or not.
Sorry, but cars are not companies. This doesn't apply even if it was correct.
Basically yes. Whatever it takes to hold up the value before dumping into the public
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Nonsense lying like this is how we ended up with the mortgage crisis.
I actually shed a tear reading this article. Mostly from LOL or maybe from my allergies.
First - pretty sure that if investors require that info to receive investment, a company seeking that investment will provide it for them. It sounded to me like this "VC" is picking up shares on the secondary market from owners of the stock desiring an early exit - not necessarily the company wanting investment. Caveat Emptor.
Second - until that company becomes public it's value is more like the state of Schrodinger's Cat rather than a knowable value - it is simultaneously alive and dead;O
First - pretty sure that if investors require that info to receive investment, a company seeking that investment will provide it for them. It sounded to me like this "VC" is picking up shares on the secondary market from owners of the stock desiring an early exit - not necessarily the company wanting investment. Caveat Emptor.
Second - until that company becomes public it's value is more like the state of Schrodinger's Cat rather than a knowable value - it is simultaneously alive and dead;O
It says so right in the subtitle:
> A dearth of information can halt transactions on secondary markets.
> A dearth of information can halt transactions on secondary markets.
That's pretty expected. I don't have too much sympathy for the investors here.
To a certain extent, investors are the ones who are creating an incentive for companies to stay private for longer by funding gigantic late stage rounds rather than having the company simply go public.
Private companies don't need to share info. Public ones do.
To a certain extent, investors are the ones who are creating an incentive for companies to stay private for longer by funding gigantic late stage rounds rather than having the company simply go public.
Private companies don't need to share info. Public ones do.
Private companies still have fiduciary responsibility, but yes you’re totally correct about the private-for-longer incentive. So many paper only unicorns the public market isn’t accepting anymore
If investors wanted information rights they should have made that one of the terms.
Couldn’t one make the argument - the terms could have always been better in hindsight?
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