Kadoink

Beware The Venture Debt: Kadoink Shuts Down For Good

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In April we reported that San Francisco based mobile startup Kadoink was heading towards the deadpool. Not because they ran out of money, but because Hercules Technology Growth Capital, one of their backers, had seized the company and was shutting it down.

CEO Scott Cahill confirmed the shutdown yesterday in an email to investors, saying that Hercules had “foreclosed on its collateral and has sold the company’s intellectual property to a third party”:

From: “Cahill, Scott”
Date: Wed, 3 Jun 2009 16:42:29 -0400
To:
Subject: Final Kadoink Update
Dear Angel Investor:

This is the final update on Kadoink. On Friday, May 30th, Kadoink completed the sale of its assets. As the attached letter indicates, the company contacted over 600 parties to determine interest in an acquisition of the company’s assets. Of those, 22 expressed interest. Following a due diligence period, the Company received 6 bids for the acquisition of the Company’s intellectual property. Unfortunately, the highest offer was insufficient to pay the company’s secured lender in full. The company’s secured lender, Hercules Technology II, L.P. and Hercules Technology Growth Capital, Inc. has foreclosed on its collateral and has sold the company’s intellectual property to a third party. While the details of the transaction between Hercules and the buyer are subject to a confidentiality provision, the company can assure investors that the purchaser is not an insider and the transaction was arms-length.

The Company’s inability to pay its secured creditor in full means that that the Company, with certainty, is unable to make any payments on the general unsecured claims against it. Additionally, investors will receive no return on their investment. The company will be dissolved under state law. Please consult with your tax advisor regarding how you, or your organization, should handle losses arising from the closure of the company.

On a final note, I regret that we were unable to return at least some portion of your investment to you. While we were optimistic at the start of the process that this might be achievable and we were ultimately satisfied with the size of the top bidders given what we learned over time regarding sales such as ours, it is disappointing nonetheless.

I wish you all the best in your future endeavors and investments.

Best Regards,

Scott

Venture debt looks extremely attractive when things are going well for a startup. The dilution to shareholders is minimal, usually just some warrants attached to the debt. It can make a lot of sense to raise debt when building out infrastructure, particularly since the debt can be secured against hardware being purchased.

But the terms of the debt are key, particularly under what circumstances the creditor can come in and shut down the company. Many creditors look for triggers in the financial statements that give them the right to seize assets. That’s likely what happened with Kadoink, and it’s a sad way to end a company that may still have a shot at doing something interesting. Smart entrepreneurs only accept debt agreements that require nothing but payments to be made on time. As long as those payments come in, the creditor has to stay away. Terms are usually less attractive, but in the end it may save you from the deadpool.

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