If you’re an angel who invested in a startup that was meant to go public in 2014, you might be getting a little bit impatient. High-risk, high-reward investing has lost its shine in this environment: the stock market is a mess these days, and you want your cash back.
Enter recapitalization events, where startups restructure their entire cap table to squeeze out old investors, bring on new ones and shift the way equity and debt is managed. For investors, it’s a killer way to enter a company on friendlier terms than normal (read: desperation), and a nice way to get liquidity on a startup you’re betting on.
For founders, it’s rarely good news, as departing investors is not a metric they’re going to add to the pitch deck. As one investor said on background, the spur of coronavirus-related recapitalization events shows “hella dilution for desperate times.”
That’s what makes Workhuman’s transparency with its recent recapitalization event all the more enticing.
Last year, the human-resources platform brought in $580 million in revenue from customers like LinkedIn, Cisco, J&J and other clients. In April, business grew 40%. Co-founder and CEO Eric Mosley says business has grown five times in size since the company pulled back from its 2014 plans to IPO. Workhuman hasn’t raised a single venture round since 2004 (and doesn’t plan to any time soon).
Being conservative has paid off; although Workhuman has operated for nearly two decades, Mosley says he thinks the company is still at the “tip of the iceberg.” The company recently had a recapitalization event to sell the stakes of its earliest investors, who cut a $200,000 check more than 20 years ago.
Mosley says the angel investors wanted to get liquidation now because Workhuman was unable to commit to a specific timing around a potential IPO.
“We learned in the past that no matter how good of a company you are, if the timing is wrong, then the timing is wrong,” he said of the public markets. The co-founder pointed to big tech IPOs over the past few years that were a result of heavy losses and a need for cash. Workhuman, in contrast, is profitable and cash flow positive. “So there’s no financial impetus for us to do that,” he said.
The kicker: The recapitalization event brought Workhuman to a higher valuation: it was a $120 million deal at a $1.2 billion valuation.
The terms weren’t thorny either, he claims. Mosley said investment firm Intermediate Capital Group (ICG) bought out stakes from 19 of Workhuman’s 20 first-check angels who received a 100x return on their original $200,000 investment. The deal didn’t impact the shares Mosley or other executives have in the company. Instead, ICG bought the entire stake, $120 million, from angel investors.
The coronavirus pandemic was expected to drive liquidity needs for investors that need cash. Mosley says they were canvassing for a potential buyer before the coronavirus hit the world, so COVID-19 was not a factor in initiating the recapitalization. Coronavirus did, however, bump Workhuman’s business and get the attention of ICG. The deal closed in the last couple weeks of lockdown due to the increase in business activity.
ICG swept in as a new, perhaps more patient and risk-tolerant, investor.
“It made sense for them to get their liquidity finally and move on,” he said. Investors who put $10,000 in got $1 million back in 20 years, he said.
“They had the faith to start it off when it was nothing,” Mosley said. “I think they were certainly very happy with the return they got.”
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