What difference should it make to founders whether their company does an IPO or gets acquired for the same price?
In general, it should matter, because in most cases anyone that holds common stock or options on common stock will see a significantly greater realized value under an IPO scenario than they will see if the company is acquired at the same price.
Don’t believe that? You’re not alone.
I’ve found that it takes several minutes to walk seasoned CFOs of venture backed companies and venture capital funds through the different mechanics of how IPOs are priced versus how acquisitions are priced. In the simplest sense it relates to how VCs count shares versus how underwriters count shares and also how fees, debt and unvested options are treated by different parties. The best way to get the point across, perhaps, is to take a look at the table below which shows Liquid Scenarios system generated estimates of per share proceeds available to Lance Armstrong, Goldman Sachs, Enom investors, Tyra Banks and the founders of Demand Media if the company does an IPO “valued” at $1.5 billion versus being acquired for “$1.5 billion.”
|
|
IPO@ $1.5B |
M&A @ $1.5B |
M&A @ $2.4B |
|
Founders |
$12/Sh. |
$7.95/Sh. |
$12.02/Sh. |
|
Lance Armstrong |
$12/Sh. |
$7.95/Sh. |
$12.02/Sh. |
|
Tyra Banks |
$12/Sh. |
$7.95/Sh. |
$12.02/Sh. |
|
Enom Investors |
$12/Sh. |
$8.28/Sh. |
$12.34/Sh. |
|
Goldman Sachs |
$12/Sh. |
$9.44/Sh. |
$13.49/Sh. |
Source: SEC Filings Via Liquid Scenarios Search2Model
An IPO that “values the company” at around $1.5 billion should be priced at around $12 per share. That means that the warrants with an exercise price of $6.00 per share held by Lance Armstrong and Trya Banks could realize $6.00 per share in profit if exercised. On the other hand, if the company were acquired for $1.5 billion, those same warrants would probably result in less than $7.95 per share in proceeds to the common stock holders.
This means the IPO scenario, at the same “value” would be worth nearly three times as much profit ($6.00 of profit in an IPO scenario at around $1.5 billion in value versus $1.95 profit in an acquisition "valued" at $1.5 billion, $6.00/$1.95 = 3.08X) to Lance Armstrong and Tyra Banks. The same applies to the founders and employees of the Demand Media, to varying degrees depending on their option exercise prices or restricted stock grant prices.
So, for instance, Demand Media founders Richard Rosenblatt and Shawn Colo could see cash gains of 794,900% (yes, that's 7,950X the nominal/par issue price of $0.001) on their originally issued restricted stock under an acquisition scenario versus paper gains of 12,000X (or 1,199,900% if you'd prefer the gain as a percent of the purchase price) on those same shares under an IPO scenario.
As simple as that sounds, there are of course a number of reasons why the IPO payout is better and it's not simply a function of liquidation preferences. The series of articles (five of them) that will follow attempt to give founders, employees and investors in high-growth companies an overview of some of the reasons why a successful IPO is generally worth a lot more to common stockholders and optionees than an acquisition at the same “value.”
Lance Armstrong Image Source: Wikipedia
At Culture, Religion & Tech, take II in Miami on October 29, 2024
Read more...
Bambi Francisco Roizen
The company will use the funding to broaden the scope of its AI, including new administrative tasks
Read more...
Steven Loeb
The company will be deploying Qventus’ Perioperative Solution to optimize its robotics program
Read more...
Steven Loeb
Startup/Business
Joined Vator on
Demand Media is building a different type of new media company. With a proprietary media platform that powers the company's highly-trafficked domains and wholly-owned content media properties, Demand Media leverages cutting edge, user-driven publishing, community and monetization tools in its quest to define the next generation of new media companies.
Startup/Business
Joined Vator on
Oversee.net leverages its proprietary technology and significant expertise to effectively address its customers' business needs — Oversee.net's online marketing solutions provide the greatest return on investment possible for a broad range of customers from search engines and publishers to advertising agencies and financial institutions.
Oversee.net is dedicated to building lasting partnerships with each customer. We pride ourselves in delivering on our promises and we have the speed, knowledge and agility necessary to shift our focus quickly to address what our users want.
The company has over 150 employees who work to deliver innovative online marketing solutions every day. Headquartered in Los Angeles, the Company is an industry leader, and has grown organically since its inception. By using knowledge of internet traffic and developing proprietary technology that focuses on optimized utilization of the Internet, the Company has achieved leadership positions in three core areas: direct navigation, lead generation and online advertising solutions.
In 2000, at the age of 21, Lawrence Ng and Fred Hsu saw beyond the dot-com bust. While many businesses were talking about the demise of the dot-coms, they were envisioning how the internet could change the advertising and add performance metrics to what is considered art as much as science. When Lawrence and Fred launched Oversee.net, they created a company from their personal savings. They focused on driving search-based traffic to advertisers while generating additional revenue streams for small to medium web sites. Using their knowledge of search technology, Lawrence and Fred understood that quality Internet traffic would form Oversee's foundation. Over the last six years, Oversee has grown steadily. The Company has flourished from its inception without outside funding and has achieved significant growth, standing out in a crowded marketplace.
Startup/Business
Joined Vator on
Register.com provides all the essential tools a business needs to build and manage their online presence. Leveraging ten years of experience in the domain business with over two and a half million domain names under management, Register.com has built a reputation as a leading provider of global domain name registration, web design and management services. Through an expanding, broad selection of website design and management solutions, Register.com enables small businesses and organizations to create a dynamic web presence without the need for extensive technical knowledge or resources.
Register.com offers customers quick and user-friendly registration and a wide array of web site design services from do-it-yourself tools to fully customized offerings; all backed by expert 24 x 7 online and toll-free phone customer support.
Startup/Business
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 on
