Stuck in a downturn, startups ghost investors
bloomberg.com
bloomberg.com
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.
Why does this matter? Just trying to avoid the bad optics of being the director of a failed company?
> 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.
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.
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."
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
> A dearth of information can halt transactions on secondary markets.
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.