Zantaz, which makes email archiving software, is being acquired by Autonomy for $375 million in cash, yet apparently its founder will get comparatively zilch when the deal closes in August. Our friends at VentureBeat wrote of this sad tale first last weekend, and posted alongside their story several alarming documents from Zantaz’s protesting parties who believe their stakes were inappropriately diluted in a 2002 Series E round.
The dispute over who got paid and who got burned in the deal will probably go to court. But for now we’ll use this ugly charade to call out a few cautionary tips on fundraising for the benefit of all founders. File them under your “There but for the grace of God” references, and uh, reread ‘em frequently.
(Excerpts in italics below are taken from docs #3 and #4 as footnoted in the VentureBeat story.)
1) Never put off fundraising until your company needs the $$:
One interpretation of the history of Zantaz… is that the Board delayed any serious effort towards obtaining additional funding until the Company was on the verge of a liquidity crisis…in the year 2001 while the Company had almost $20 million in cash, it did not … raise additional capital.
2) You can always hire a banker — they work on comission:
No investment banker was retained on a commission basis, to assist in preparation of a business plan, fairness of opinion, and capital raise when the Company could afford to do so.
3) Closed auctions aren’t auctions at all:
[defendant directors] did not distribute the projections to interested investors, nor did they provide them to any of the shareholders asked to vote on the various Series E financings.
And one email from the Chairman said that the Board wanted to keep the terms of the proposed transaction secret until the offering was presented as a completed deal.
4) Be wary of sudden discounts:
In July 2002 the Board considered that the valuation of Zantaz (pre-money) was at least $48,000,000 … in connection with a proposed $5 million funding mostly to non-insiders. However, when the board decided to change plans and raise $11 million mostly from insiders one month later…the valuation of the company was now only $16 million.
5) Warrants are a four-letter word, unless they’re yours:
The number of shares actually issued, and to be issued upon exercise of Warrants (mostly to the VCs represented on the Board)…would produce $383,128,970 for the Company [but] the amount the Company will actually receive ($11.3 million) leaves a damage claim amounting to $371,834,672.
6) Late stage investors pressuring for a down-round or a sale is a red flag:
The Common Shareholders, in sufficient numbers, consented to the financing. However, they were not given any information about the Company’s prospects (i.e., the projections, contracts in the pipeline, etc). Instead, informally they were threatened with a bankruptcy filing if they did not acquiesce.
7) If you decide to sell, but what you’re hearing doesn’t sound right, get a 2nd Opinion:
[defendant directors] said that they had not seriously tried to sell the Company because no one was interested in buying it … [yet] Iron Mountain said they would be in interested in purchasing Zantaz for $150 million.
[defendant directors] said the company went to “great lengths” to get financing before deciding the only source would be those already invested at the Board level.”
When push comes to shove, hire your own banker or financial consultant. It will be spendy, but worth it. This reporter once interviewed a woman caught-up in a contested sale of her company. Short on funds, she hired her daughter’s high school economics teacher to advise her. Against all odds, the teacher drummed up the high bid and the woman is now a billionare. For real.
I heard so many bad things about Roland van der Meer (comVentures partner), that I really want to think that the guy just ended his career, but I guess i will be wrong.}
That’s really good advice. Many of us are good at building companies – but the process of selling is just as important for the end result. Unfortunately, just like with getting started, if you haven’t done it before it’s easy to get lost.}
An excellent summary of principal misdeeds . However, there is more. For instance, the self-dealing Board choosing to sell for cash instead of IPO wherein their preferences would have evaporated. It appears that even the VCs knew that the preferences and warrants in the Series E burnout financing were a double dip such that the warrants would be dropped if the company went for a sale instead of an IPO. That is just one instance of additional self-dealing that supported an overall plan to effectively shift equity from the founder group and early risk taking investors, to the VCs who controlled the Board after their initial investment.}
I would add #8, which is to carefully diligence one’s partners before joining up with them.
This applies equally to investors, co-founders, employees, etc. Get references, ask the people how they managed bad situations, find out the reasons for any negative feedback.}