It uses machine learning to transcribe and highlight the most important parts of the conversationRead more...
When founders ante up in Series A rounds
Why did both the founders of iLike and FriendFeed decide to sell for low cash values? Many people would simply say "look at a chart of the stock market from October 2008 to March of 2009 and you've got your answer."
Notwithstanding the credit crisis, these companies are very unique compared to most venture-backed startups.
In both cases the founders had the experience and financial capacity (LinkExchange and Google) to personally invest cash in their first professional rounds of capital. That unique situation means that founders in these companies are probably able to get 100% of the cash they put into the deals personally returned them when the transactions close.
Certain founders of both iLike and FriendFeed had the same liquidation preferences (right to get their money back first, ahead of common shareholders and optionees) that VCs in the deal had. The founders had these rights because they paid the same amount of cash per share for the same Series A (or first round) preferred stock VCs purchased.
Some charts output from Liquid Scenarios Search2Model prove this for the MySpace acquisition of iLike for $20 million in cash.
The founders of iLike and FriendFeed also held the power to decide whether or not to accept the MySpace and Facebook offers to purchase their companies. In the case of iLike this control is partially due to a pretty high Series B valuation, which was more than twice as high as what the company agreed to accept from MySpace (a sales price of $20 million to MySpace, versus a Series A pre-money valuation of $39.9 million, $53.3 million post money).
In the case of FriendFeed, the founder's control is also a function of being acquired in the early stages of the company's life. In this case, the FriendFeed Series A pricing gave new investors around 25% of the company, which meant management still controlled the board, although Series A holders would have the ability to reject (or not "consent" to) certain transactions (such as selling the company to Facebook in exchange for 30% in cash and 70% in restricted Facebook stock for example).
So try to put yourself in the (very big) shoes of these founders. You have substantial cash invested in your startup, but at the same terms as the VCs. However, the financial world has nearly collapsed in the past 10 months. If you raise another round, you face the prospects of further dilution. If you don't raise another round or get acquired on terms the majority of preferred shareholders can agree upon, you risk the loss of both your company and the substantial cash investment you've made. On top of all of that, any real estate and public securities you own are down by 20% to 50%.
Now, an acquirer comes along and essentially offers you a) a return of your initial investment in the company b) the backing your venture needs to grow into the game changing reality you envisioned originally. What would you do in that situation?
ADDITIONAL CHARTS AND ANALYSIS
Most founders of venture funded companies never get an "even money" option (since most founders don't have the cash or backrounds to co-invest in a Series A deal). Some of the founders of iLike and FriendFeed appear to have had such an option. That option may explain why both deals were actually better deals for the stakeholders than some might perceive at first glance.
As illustrated in the previous chart , investors in the Series A (or A-1), and Series B shares most likely simply got a return of their original investment. For most VCs, that would not be a good ending to a three to seven year investment. However, for a founder that put Series A cash in, gets it back, gets some additonal return from common stock and options and sees their venture stay alive, certainly not the worst resolution. This is illustrated in part in the chart below.
According to the first estimates generated by Liquid Scenarios Search2Model, the Series A holders, which in this case includes a Founder as well as Vinod Khosla, would get 100% of their initial investment back at the $20 million sale price, but would get nothing more than that unless the company sold for more than $25 million.
Similarly, Ticketmaster would not see more than 100% of it's original investment returned unless the company sold for more than $52.2 million. This is due in part to the fact that employee options would have invested and also because of any restricted grants (or reverse vesting grants) to key personnel that were co-founders have probably also vested.
*Charts and analysis for the FriendFeed transaction will appear in a separate post.
**Note. Liquid Scenarios Search2Model assumed the convertible preferred was non-particpating preferred, which means holders can either take the liquidation preference (original investment amount) or convert to common stock, but can't do both (with participating preferred they could potentially do both, which would result in returning more than their original investment).
(Image Source: Dogs Playing Poker - Cassius Coolidge)
(All other graphics and charts output from Liquid Scenarios (R) Search2Model (TM))
Read more from our "Trends and news" series
The freelance marketplace adds the $18 million to its $6 million seed roundRead more...
The German company now has 48 million users in over 160 countriesRead more...
Related Companies, Investors, and Entrepreneurs
Joined Vator on
Since founding bpCentral, our focus has been on increasing each user's competitive advantage each and every time they interact with one of our applications. Naturally, this involves more than simply enabling complex calculations to be performed accurately. In fact, during the first 12 months of developing our new technologies and applications, we put an inordinate amount of resources into discovering how to transform the relationships between idiosyncratic decision-makers and financial information. Our premise was that if that human to data relationship could be elevated to a new standard, then the relationships of those professionals with the entities and individuals they interact with could be more efficient and therefore more valuable.
In response, we developed CIMPA, the Carver Import Algorithm, a system that allows any electronic financial information, data or reports to be interpreted by a receiving system without the need for XML, XBRL, tagging approaches or extensive manual data entry. As a result of this technology, the Company's systems for private equity and venture capital professionals are able to import data in a matter of seconds, instead of a matter of hours.
Similarly, the Company noted that when users attempted to calculate the outcomes of complex liquidation preferences, anti-dilution provisions and other complex terms that are common to VC/PE transactions, any output was virtually impossible to verify without a costly audit of the formulas. Since the formulas were generally based in excel, this meant that few if any partners or other key investment professionals could afford to expend the effort to verify how amounts were arrived at. Upon further consideration, the Company realized that, to a certain extent, this was true of all financial reports. For traditional financial statements, this point is evidenced in the fact that notes to financial statements typically occupy several times more pages than the actual financial reports do. This realization inspired the Company to develop a system it calls OferX, which presents all financial information in a manner that allows any user to audit and see how amounts were calculated (in an easy to understand, quantifiable manner) without the need for extensive textual descriptions.
Together these unique tools form the foundation for the Company's offerings, which are backed by over 29 patent pending technologies.
Joined Vator oniLike is the Web's leading social music discovery service and the dominant music application on Facebook Platform®, Bebo, and Hi5. With over 20 million registered users, iLike helps consumers discover and share playlists, new music, and concerts that match their tastes. The iLike Sidebar for iTunes recommends new music, creates automatic playlists, and connects people through music. iLike's Artist Service Platform is a suite of services to help artists build viral fan communities. By leveraging iLike's "Artist-Fan Graph," a vast database of connections between consumers and their favorite artists, iLike's Artist Services Platform transforms the way artists cultivate and communicate with their fanbases on iLike and Facebook. iLike is privately funded by Ticketmaster (IAC), Khosla Ventures, Bob Pittman, and other private investors. Based in Seattle, WA, the company also operates indie music community GarageBand.com.