More details have emerged about LivingSocial‘s new $110 million funding round announced yesterday. In response to a blog post characterizing the raise as an emergency round of debt financing, LivingSocial CEO Tim O’Shaughnessy issued a new memo to employees clearing up some misconceptions about the raise. (Full memo below)
The key takeaway? Yes, it was a down round, but no, this was not an “emergency debt infusion with oppressive terms.”
The whole thing started yesterday, when a memo to employees got picked up, announcing that the daily deals company had raised another $110 million, as it seeks to reach profitability. Late last night, however, a report from PrivCo emerged, painting the raise as a desperate round of debt financing that was necessary to keep the lights on.
Among other things, PrivCo reported that the financing was raised as complex class of convertible debt securities that effectively made employee and founder stock worthless. It also claimed “super liquidation preferences” of several times the $110 million raised, and an issuance of “super-warrants” at the same time. And citing LivingSocial senior management and investor sources, PrivCo characterized the raise as a take-it-or-leave-it, 11th hour-type deal.
In a memo to employees issued this morning, LivingSocial’s CEO rebutted those claims. In short, he said that the funding was not an “emergency round,” and that the funding was an equity round, not a debt infusion. While admittedly it was a down round, O’Shaughnessy wrote that there was no re-pricing of investor shares from previous rounds, no 4x liquidation preference, and no double-digit cash dividend.
Instead, LivingSocial straight up sold 7.5 percent of the company for $110 million. That values it at around $1.5 billion, which is lower than in 2010 when it raised $175 million from Amazon. At the same time, the market value of Groupon, its closest comparable, has also fallen dramatically over the last few years.
While there is some change in liquidation preference, O’Shaughnessy wrote that it shouldn’t change the value of employee stock too much, and that if the company goes public, employees shouldn’t be affected. “Basically, the preference stack is a little higher now. At any valuation over $1B, though, we clear that stack by quite a bit,” he wrote. And “in the event of an IPO, all preferred stock becomes common stock, and the preference stack goes away.”
In light of a recent report on our financing round that contained significant inaccuracies and errors, I wanted to provide some additional details on yesterday’s round.
If you’ve seen some of that misinformation, here’s the real story:
* This was not an emergency round. We received our first term sheet on December 23rd, nearly two months ago, and this has been an organized, thought-out process.
* This was an equity round, not a debt infusion.
* There was no re-pricing of investor shares from previous rounds.
* There were no warrants issued as part of this round.
* There were no “double-digit” cash dividends. (Typical of many financing rounds, including our own past rounds, there was a nominal 3% dividend for a class of shares.)
* There is no “4x liquidation preference.” (Once again, typical of almost all venture rounds, there is a liquidation preference, but it slides up or down based on a key metric and gets nowhere near 4x.)
* The quotes from a “senior LivingSocial communication executive” are straight up fiction.
* Two of the three investors listed on the PrivCo site as participating in the round didn’t participate, and one isn’t even an investor in the company.
On valuation, people always seem to be overly enamored with market value, which has puzzled me because as a private company, there is no liquid market on which to buy and sell shares, so a valuation is established without any degree of market efficiency. In short, it’s an educated guess between the company and a set of investors at one particular snapshot in time.
But nevertheless here goes. Yes, this was a down round, which I’m sure is not a shock to anyone. Our main comp in the market is down significantly from when we last fundraised. In this round, we sold 7.5% of the company for $110mm. Although there were some bells and whistles associated with those shares, as mentioned above, this should give you some idea of the current valuation of the company.
So how does this round impact employee stock? In short, some, but not much. Basically, the preference stack is a little higher now. At any valuation over $1B, though, we clear that stack by quite a bit. For comparison, our major competitor’s market cap is now $3.9B. In the event of an IPO, all preferred stock becomes common stock, and the preference stack goes away.
We are a company that does over half a billion in revenue. If we stay diligent, we hope to turn the corner to become profitable soon. Thanks to this round, we have significantly more capital to be able to be opportunistic and drive the future growth of the business.
Hopefully this will help clear up any questions you may have or get on yesterday’s round. Now it’s back to executing on our plan.