Founders may have unintentionally given VCs too much power to block IPOs
While some investors have loudly lamented that the IPO window cannot remain closed forever, the reality is that other VCs themselves are part of the problem.
Lowenstein Sandler partner Eric Weiner told TechCrunch that the terms of many standard VC deals allow investors to block an IPO or acquisition if they believe the timing or price isn't right. That's what it means. While it's relatively rare for investors to say in direct terms that they can block an IPO, although he's seen it happen in the past, he says the same thing essentially applies to investors with preferred stock. He said there are very table stakes trading conditions to acknowledge. Added.
Investors with preferred stock have more power than investors with common stock, having a say and usually voting rights in events in which a company dilutes or converts its stock into common stock. . The IPO process does both of these things. “It's not easy to go public,” Weiner said. “A lot of things have to be adjusted.”
Before a company goes public, investors with preferred stock, especially those who have set terms in recent funding rounds, must want the IPO, said Ryan Hinkle, managing director at Insight Partners. said. When markets are good, investors and founders are likely to agree on the right time to go public. Today, founders may be able to exit at less than the startup's final valuation. But investors have to accept that too.
As for what will happen to VC stock after the IPO, Hinkle said, “The stock will lose its preferred rights, it will no longer have a 1x liquidation preference and will no longer have board nomination rights when it converts to common stock.” . “The last round of funding, if not beyond that, basically requires that the last investor wants the IPO, otherwise the IPO won't happen.”
1x liquidation priority means that investors receive the return of their invested funds before other investors in the event of an acquisition. This is a common term that refers to late-stage investors who agree to pay a higher price for stock in order to increase the valuation of a startup. The term preferred by more investors (especially from the early stages) is pari passu, which gives equal equity to all shareholders.
These soaring rights prices are likely to be a drag for many startups raising rounds in 2021. When late-stage startups raised money at sky-high valuations in 2021, they may not have realized how much power they were giving late-stage investors if the market cooled. unknown. , it's done.
“People confuse up and right with God-given rights,” Hinkle said. “We have a right to life, liberty, and the pursuit of happiness. We have no right to look up or to the right.”
Alan Vaksman, founding partner at Launchbay Capital, agreed. He added that there is always more friction between investors and startups when it comes to IPO decisions than investors would like to admit. He added that not everything comes from a negative or selfish place. These investors have a fiduciary responsibility to the LP to make the wisest financial decisions to return the greatest return to investors. It's unwise to push a company into an IPO when you could get more capital back if you waited.
Public markets have also changed over the years. Hinkle said companies traditionally need to achieve eight quarters of strong growth and metrics before entering the public markets. Companies may not have to do that in 2020 and 2021, but they won't be able to do it now. Vaksman agreed.
“Public markets are less concerned with company growth and more concerned with pure financials, good old profitability and margins,” Vaksman said.
Additionally, the rise and maturation of secondary markets, where individual shareholders can sell their shares in company-approved transactions, is also playing a major role for VCs. Rather than forcing start-ups whose valuations have fallen to list, the secondary will allow them to secure liquidity as needed.
Dealing with a VC that the founder may be holding back can create tension in the boardroom, but can yield better outcomes for the startup, the VC's backers, and the VC's underlying LPs. There is sex.
“A year ago we would have expected we would be closer to normality than we are now, but the SVB has dealt a huge blow to the world with rising tensions in the Middle East. , poses suspicion and risk,” Hinkle said. . “We don't expect a surge in IPOs this year.”