Down Rounds + Cramdowns = 2009 top VC exits?

OpenTable had a cramdown in 2003 and SpringSource may have had a Down Round in June 2008 (pre-crash)

Financial trends and news by Lorenzo Carver
August 13, 2009 | Comments (12)
Short URL: http://vator.tv/n/9f2

DownRound Roller Coaster Looks Scarier Than It IsWhen a founder hears the words "Down Round" and "Cramdown" in the context of their company, the first reaction is usually defensive.  That makes perfect sense if you consider a "Down Round" or "Cramdown" an adverse event in general.

Ironically, it appears that two of the most significant venture backed exits of the year, SpringSource's acquisition by VMWare this week and OpenTable's IPO in May, had a DownRound and a Cramdown respectively on their way to leading hope for a return of VC liquidity events. 

In fact, if you combine OpenTable's day one market capitalization to the total consideration for SpringSource's acquisition, the dollar amount exceeds $1 billion.  To put that number into perspective in the current environment, it's roughly 5X greater than the value of all venture backed internet, software, and media/communications companies acquired in Q2 of 2009 (based on NVCA data). 

More importantly, these adjustments in pricing (also known as "dilutive issuances" in the case of Down Rounds and "reorganizations" in the case of Cramdowns) may have had a much more detrimental effect on investors than they did on founders. 

The charts that follow illustrate why, in many cases, founders that survive a Down Round or a Cramdown through a company's ultimate acquisition or IPO a) usually make out better than many of the VCs in the deal and b) ALWAYS make out better than companies that fail to secure the next venture round needed to stay in business.

Liquid Scenarios Estimate Based on VMWare's 8K Filing, it appears that SpringSource had a DownRound from Series A to Series B 

Second right half of Liquid Scenarios SpringSource DownRound Estimate Impact on Benchmark Capital  


So this first example is based on capitalization data Liquid Scenarios extrapolated from an 8K filing by VMWare concerning their acquisition of SpringSource.  Based on that data, it appears SpringSource's Series A round was priced at $1.031 per share, whereas their Series B round was priced at approximately $0.887 per share.  By definition, that's a Down Round. 

If you look at the related estimated payout for Founders you will not that the system projects 1,000X returns after the Down Round.  Moreover, it's common that other management incentives, such as stock options, are either re-priced or that additional options are granted at a lower price to management following a Down Round.

Liquid Scenarios Estimate SpringSource Founders Payback After Apparent DownRound 


Liquid Scenarios Search2Model Estimates That Benchmark Capital Return May Be Lower Multiple Than Accel Partners' Return Due To Apparent DownRound


Even though Benchmark Capital invested in SpringSource's first round, their cash-on-cash return multiple is projected to be slightly lower than Accel Partners', because their average cost per share is slightly higher, as a result of what appears to be Down Round based on VMWare's 8K filing. 

So, as you can see in this example, the Founders' still made out well despite the Down Round.  However, the investors in the prior round had a more material adverse event as a result of the dilutive pricing.


OpenTable (NASDAQ:OPEN) May Have Had Both A DownRound (Series C) And Then A Cramdown Before It's Ultimate IPO - Benchmark Capital and Impact Ventures Had To Put More Cash In To Get Good Returns

Around April of 2003, it appears that OpenTable's Series A, Series B and Series C stock originally issued to a large group of investors was converted (crammed down) to common stock.  In order to maintain liquidation preferences, control and any hope of substantial upside, venture capitalists had to put even more money into the company, or end up with only common stock.

Two firms that did continue to invest were Benchmark Capital and Impact Venture Partners.  The diagrams above are from Liquid Scenarios estimates as of April 11, 2003, which show the state immediately prior to the New Series A.  If Benchmark Capital and Impact Venture Partners had not put additional cash into the deal, the slope of their payout line would be almost exactly like the slope of management's payout line.  However, their return multiple would be substantially lower than it was prior to the Cramdown, whereas management's would still be thousands times more than their cash investment.  Most of the investors in OpenTable's original Series C, Series B and Series A rounds had return curves similar to what's shown above, because they were unable or unwilling to put additional cash in at the lower valuation. 

So if you are ever faced with the possibility of a Down Round or even a Cramdown, the best defense may be sticking around.  If you can, it's possible that your deal could end up as a top IPO or acquisition.

Coaster Image Source:  Design Gone Wild

All other graphics, diagrams and callouts generated in Liquid Scenarios(R).

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Lorenzo Carver
Lorenzo Carver, on August 13, 2009

Thank you Meliza! I appreciate that a lot!

Michael Edwards, on August 14, 2009

Awesome article. Have not seen anyone use visuals like these to explain an acquisition in-depth. Wish more people did this.

Mark Freedle
Mark Freedle, on August 14, 2009

Lorenzo, This is an excellent analysis and the way you have put this together really brings to life the power of the technology in Liquid Scenarios. The insight to Founders is incredible and truly for those of us that don't understand all of the potential ramifications of complex deal structure in various rounds-- invaluable.

Alan Kaplan
Alan Kaplan, on August 14, 2009

Vator readers:
This analysis is priceless. The VISIBILITY that your analysis provides in this example can help end roadblocks to Founders or Board Members letting a down round CLOSE - for the chance to stay alive. (John Travolta)

At the risk of sounding outrageous: Lorenzo is a GOD and Liquid Scenarios is a ONE OF A KIND POWER TOOL for understanding the impact of any event or transaction or round in a corporate deal especially VC backed deals. I have the privilege of working with Lorenzo for the past 18 months and have found him to have the HIGHEST level of INSIGHT and INTEGRITY based on my 20+ years in managing and founding start-ups and the outcomes from Bankruptcy to Sweet Exits. This is my first comment and hope that you take a little closer look at the mind and software that allows this much visibility into the outcomes of your deals.

Sue Perrault, on August 14, 2009

Lorenzo........great job on the article! Really breaks everything down and makes it so understandable. Can't wait to read the next one!

Lorenzo Carver
Lorenzo Carver, on August 14, 2009

@Michael - hey thanks a lot for saying that. I hope to post something on the FriendFeed Acquisiton by Facebook together along with a video.

Lorenzo Carver
Lorenzo Carver, on August 14, 2009

@Mark: Very glad to hear that it was of value to a bonafide serial entrepreneur. Thanks.

Mark Evans
Mark Evans, on August 14, 2009

Lorenzo, excellent piece and the visuals really drive the analysis of it home.

Lorenzo Carver
Lorenzo Carver, on August 15, 2009

@Mark Evans - Hey thanks for saying so! These are actually screen shots out of Liquid Scenarios. I'm glad you liked it.
@Sue - very glad you liked it! Thanks.
@Alan - that's an over the top comment (really) - but greatly appreciated. Thank you.

KG Charles-Harris, on August 16, 2009

This is excellent work! I didn't know that this information was available, and as a former tech investment banker, I wish that it had been available during my time. To what extent are VCs, boards and iBanks utilizing this information in negotiation and planning?


Lorenzo Carver
Lorenzo Carver, on August 18, 2009

@KG thanks for the comment! The basic data is available in press releases, SEC filings and to a certain extent public APIs like Crunchbase and Vator. Liquid Scenarios simply pulls that data into its algorithm to back into outcomes and transactional relationships. Most of the VCs using our product do so because it saves their analysts time in building exit and financing models (easily doubles, triples analyst productivity while increasing accuracy and flexibility of analysis). However, the Search2Model technology used hear is still kind of exploratory with respect to a business use case.

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