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Zendesk Buys Live Chat Provider Zopim For Up To $29.8M As It Files For $150M IPO

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Zendesk, the cloud-based helpdesk startup, has hit the ground running with not one but two pieces of significant news today. It’s made its first acquisitionZopim, a Singapore-based startup whose flagship product is live chat software that is used by some 120,000 websites in 140 countries. And it has filed for its IPO, which will see Zendesk list on the New York Stock Exchange to trade under the ticker “ZEN.” The S-1 filing notes that Zendesk plans to raise $150 million.

Zendesk doesn’t disclose the financial details of the Zopim acquisition in its press release, but it does in its SEC filing. According to the S-1, the Zopim deal is worth up to $29.8 million.

The first part of that is the upfront payment of $15.9 million, with $5 million in cash and $10.9 million in common stock, with $1.1 million of the cash and $2.4 million of the common stock consideration “held back between 12 and 18 months as partial security for standard indemnification obligations and which is payable in the future under terms specified in the stock purchase agreement.” The second part is an additional earn-out of up to $13.9 million in cash and equity “over two and three years, respectively, to Zopim employees in connection with their continued employment.”

Prior to today, Zopim had raised less than $400,000 since being founded back in 2008. (In comparison, Zendesk has raised some $85.5 million with investors including Christoph Janz, Charles River Ventures, Benchmark Capital, Matrix Partners, Redpoint Ventures, GGV Capital, Goldman Sachs, Index Ventures and Silicon Valley Bank.)

The IPO filing notes that Zendesk, which has 40,000 businesses as customers, made $72 million in revenues in 2013, growing 88% over 2012. It also posted net losses of $24.4 million and $22.6 million, in 2012 and 2013, respectively. (More on the IPO filing here from Ron.)

As a result of the Zopim acquisition, Zendesk will be phasing out its own chat software and integrating Zopim’s “superior” one into its platform, writes Adrian McDermott, SVP of product development, in a blog post announcing the news. But at the same time, Zopim will also continue to be sold as both a free and paid product, as it is today, the company noted in a press release about the news.

In fact some of that integration may have already started; the S-1 notes that the deal was actually, quietly completed in March of this year.

“Real-time chat has become the foundation for how customers want to communicate online today. It is convenient for customers and makes companies more approachable to more people,” said Mikkel Svane, founder and CEO of Zendesk, in a statement. “Zopim has a proven track record of providing tools for proactive engagement. Most importantly, the Zopim team shares our belief in building products that are beautifully simple and easy for any company to use.”

Zopim is based in Singapore, and its entire team is joining Zendesk, with Zopim becoming a Singapore-based subsidiary of Zendesk. This gives the San Francisco-based company a bolted-on extension into Asia, as Zendesk notes in its S-1 that the team will remain there. One of its primary functions, Zendesk notes, will be as an R&D center for the live chat operations. Currently some 41% of Zendesk’s customers come from outside the U.S.

The other side of the Zopim is that it gives Zendesk a product that is already widely used across hundreds of thousands of websites, representing an opportunity to sell those websites other Zendesk services if they do not use them already. It also, of course, gives Zendesk another product that it will be able to upsell existing customers with.

“We acquired Zopim to accelerate our chat functionality and to bring our users a beautifully simple product they can use to engage their customers in real-time,” writes McDermott. “Zopim has a great track record of providing tools for proactive customer experiences to customers worldwide. They offer both free and paid plans for customers, and have focused on making their product intuitive, transparent, and fun.”

But it’s not an all-fun backstory for Zopim.

Zendesk notes two issues Zopim had prior to Zendesk’s acquisition. The first had to do with a data breach:

“We are aware that Zopim experienced breaches of its security measures prior to the acquisition,” Zendesk notes, with a flag that it will still need to completely vet the Zopim systems further. “The systems, networks, personnel, equipment, and vendors utilized to provide our live chat software are entirely separate from those utilized in connection with our customer service platform and have not been subject to the same security reviews and assessments as those used to provide our customer service platform. Our failure to complete these assessments and implement improvements to the security measures deployed to protect our live chat software in a timely manner could increase our risk of a security breach with respect to this service, which would harm our business as a whole.”

(Zendesk, if you recall, faced its own security breach in 2013, affecting several high profile customers.)

The second is that Zopim had, in the past, traded in Iran and made other violations of U.S. export control and sanctions laws, which it had already filed disclosures for on March 18 (presumably the day or just before the Zendesk deal closed):

“Prior to our acquisition of the Singapore-based company Zopim, Zopim’s service was provided from servers based in the United States to a number of persons and organizations located in Iran, a country that is subject to U.S. economic sanctions,” the company notes. “Zopim also made available for download from the United States certain encryption-functionality software without first having obtained U.S. government authorization to export such software. In these instances, Zopim may have acted in violation of U.S. export controls and sanctions laws. Prior to and as a condition of the completion of our acquisition, Zopim terminated the subscriptions of those customers believed to be located in Iran, screened its customers against applicable U.S. government lists of prohibited persons, implemented measures designed to prevent future unauthorized access to the service, and obtained U.S. government authorization to export its software. Zopim also filed initial voluntary disclosures with OFAC and BIS on March 18, 2014 to alert these agencies of the apparent violations, and will supplement those disclosures with final reports after completing its investigation.”

Zendesk is clear that it might face violations itself if the U.S. government doesn’t accept Zopim’s disclosures of these activities:

“If we are found to be in violation of U.S. sanctions or export control laws, it could result in fines or penalties for us and for individuals, including civil penalties of up to $250,000 or twice the value of the transaction, whichever is greater, per violation, and in the event of conviction for a criminal violation, fines of up to $1 million and possible incarceration for responsible employees and managers for willful and knowing violations. Each instance in which we provide service through our customer service platform or live chat software or in which unlicensed encryption functionality software is downloaded may constitute a separate violation of these laws.”