Founder’s guide to the pre-IPO secondary market

The increase in activity in the pre-IPO secondary market means that founders, early employees, and investors are receiving liquidity much sooner in a company’s lifecycle than ever before. For most startups and privately-held companies, liquidity is often an issue for stockholders, as no market exists for selling shares and/or transfer restrictions can prevent their sale. Secondary stock transactions, however, are a way to work around this problem.

Here’s a quick look at how they work and what to keep in mind, especially if you’re going through the process for the first time. (If you’re not familiar, secondaries are transactions in which an existing stockholder sells their stock for cash to third parties or back to the company itself before the company undergoes an exit; traditionally, an exit refers to an M&A or an IPO.)

Offering secondary transactions to founders is a tool VCs have been using to win deals. For example, if a VC promises that the founders will receive $1,000,000 in cash through a secondary sale from a $15,000,000 venture financing round, the founders will likely prefer that VC’s term sheet to a term sheet from a VC that does not offer that deal.

Why would a founder consider a secondary sale of their equity?

Africa e-tailer Jumia’s shares fall 4% day after IPO lockup expiration

Shares of Africa focused e-commerce company Jumia dropped 4% the day after the lockup period expired for its April IPO on the New York Stock Exchange.

The lockup provision prevents major shareholders — namely those who purchased equity pre-public listing — from selling their shares for a specified number of days following the IPO.

Jumia’s stock price began Thursday at $7.54, fell to an all-time low of $6.98 by 2pm, and then closed 35 cents down from opening, at $7.19. Jumia’s trading volume on Thursday moved up 19 percent over the daily average since the company went public.

Jumia Share Price October 10Sites that track SEC Form 4 trades, or sales by insiders, aren’t showing anything (at the moment) for Jumia.

What does this all mean? It appears there wasn’t an immediate big stock sell by Jumia’s early and large shareholders post lockup expiry. There was some speculation these investors could drop the company after several rough and tumble months for Jumia post IPO.

Founded in Lagos in 2012, Jumia currently operates multiple online verticals in 14 African countries — from B2C consumer retail to travel bookings.

For Jumia, going public has been an up and down affair. After becoming the first tech startup operating in Africa to list on a major exchange, the company saw its share price rise 70% after listing on the NYSE in April at $14.50.

Then in May, Jumia’s stock tumbled when it came under assault from a short-seller, Andrew Left, who accused the company of fraud in its SEC filings.

Jumia’s latest earnings reporting — delivered in August — had some downside beyond losses. The  company did post second-quarter revenue growth of 58% (≈$43 million) and increased its customer base to 4.8 million from 3.2 million over the same period a year ago.

But Jumia also posted greater losses for the period, 67.8 million euros, compared to 42.3 million euros in 2018.

On top of that, Jumia opened up about a sales related fraud (that it has reported in its original SEC IPO filing) committed by some of its employees and members of its JForce program “to benefit from differences between commissions charged to sellers and higher commissions paid to JForce agents,” according to a Jumia statement.

“The transactions in question generated approximately 1% of our GMV in each of 2018 and the first quarter of 2019 and had virtually no impact on our 2018 or 2019 financial statements,” the statement continued.

Collectively, this has added up to influence Jumia’s share-price falling some 50% from its opening price of $14.50 and 80% from its high of $46.99 on May 1.

As a public company now, the most direct way for Jumia to revive its share-price would be reducing its losses while maintaining or boosting revenues. Of course, that’s the common prescription for many a tech company.

Jumia believes expanding and generating more revenue through its JumiaPay product (with better margins than B2C e-commerce transactions) could help close the revenue vs. loss gap.

Investors and the market at large will be able to track Jumia’s progress during its next (Q3) earnings call, scheduled for November 12, Jumia confirmed to TechCrunch.

 

 

 

 

 

 

 

Snap looks to raise $1 billion in private debt offering

Snap, the parent company of Snapchat, is looking to add some cash to its coffers via a new proposed private offering of $1 billion in convertible senior notes, with a due date for maturation of August 1, 2026. The debt offering will be used to cover the cost of general operating expenditures involved in running the business, Snap says, but also potentially to “acquire complementary businesses, products, services or technologies,” as well as possibly for future stock repurchase plans, though no such plans exist currently.

Raising debt to fund operations and acquisitions is not unusual for a publicly traded company – Netflix does this regularly to pick up more money to fund its increasingly expensive production budget for content, for instance. So far, the market seems to be reacting negatively to the news of Snap’s decision to seek this chunk of debt funding, however, as it’s down in pre-market trading.

Snap has generally been on a positive path in terms of its relationship with stockholders, however – its stock price rose on the back of a strong quarterly earnings report at the end of July, closing above its IPO price for the first time. It’s now dipped south of that mark again, but it’s still much-improved on a year-to-date timeline measure.

Amazon shareholders reject facial recognition sale ban to governments

Amazon shareholders have rejected two proposals that would have requested the company not to sell its facial recognition technology to government customers.

The breakdown of the votes is not immediately known. A filing with the vote tally is expected later this week.

The first proposal would have requested Amazon to limit the sale of its Rekognition technology to police, law enforcement and federal agencies. A second resolution would have demanded an independent human and civil rights review into the use of the technology.

It followed accusations that the technology has bias and inaccuracies, which critics say can be used to racially discriminate against minorities.

The votes were non-binding, allowing the company to reject the outcome of the vote.

But the vote was almost inevitably set to fail. Following his divorce, Amazon founder and chief executive Jeff Bezos retains 12% of the company’s stock, as well as the voting rights in his ex-wife’s remaining stake. The company’s top four institutional shareholders, including The Vanguard Group, Blackrock, FMR and State Street, collectively hold about the same amount of voting rights as Bezos.

The resolutions failed despite an effort by the ACLU to back the measures, which the civil liberties group accused the tech giant of being “non-responsive” to privacy concerns.

In remarks, Shankar Narayan, ACLU of Washington, said: “The fact that there needed to be a vote on this is an embarrassment for Amazon’s leadership team. It demonstrates shareholders do not have confidence that company executives are properly understanding or addressing the civil and human rights impacts of its role in facilitating pervasive government surveillance.”

“While we have yet to see the exact breakdown of the vote, this shareholder intervention should serve as a wake-up call for the company to reckon with the real harms of face surveillance and to change course,” he said.

The civil liberties group rallied investors ahead of the Wednesday annual meeting in Seattle, where the tech giant has its headquarters. In a letter, the group said the sale of Amazon’s facial recognition tech to government agencies “fundamentally alters the balance of power between government and individuals, arming governments with unprecedented power to track, control, and harm people.”

“As shown by a long history of other surveillance technologies, face surveillance is certain to be disproportionately aimed at immigrants, religious minorities, people of color, activists, and other vulnerable communities,” the letter added.

The ACLU said investors and shareholders had the power “to protect Amazon from its own failed judgment.”

Amazon pushed back against claims that the technology is inaccurate, and called on the U.S. Securities and Exchange Commission to block the shareholder proposal prior to its annual shareholder meeting. The government agency blocked Amazon’s efforts to stop the vote, amid growing scrutiny of its product.

Amazon spokesperson Lauren Lynch said on Tuesday, prior to the meeting, that the company operates “in line with our code of conduct which governs how we run our business and the use of our products.”

An email to the company following Wednesday’s meeting was unreturned at the time of writing.

Read more:

Lyft’s stock has a blue Monday as shares slide after public debut

Investors took off their rose-colored glasses and looked at Lyft’s shares with fresh eyes after Friday’s ebullient debut.

And — judging by the company’s share price at the end of the day — what they saw wasn’t exactly to their liking.

Lyft’s shares suffered a pretty blue Monday in trading on the Nasdaq stock exchange today, closing down $9.28 (or 11.85%).

One trading after the pink confetti was swept up off the floor and analysts and investors had a different story to tell about one of the first unicorns to make its public debut.

Part of the reason for the company’s share price tumble was a report from Guggenheim Partners analyst Jake Fuller, which voiced skepticism about the ride hailing company’s path to profitability.

Lyft’s financial picture has always been challenged. That was clear from the moment it filed its financial documents with the Securities and Exchange Commission before its public debut.

As TechCrunch wrote at the time:

According to the filing, Lyft recorded $2.2 billion in revenue in 2018, more than double the $1 billion recorded in 2017. Meanwhile, losses have been growing considerably. The company posted a net loss of $911 million on the $2.2 billion in revenue and a $688 million loss on 2017’s $1 billion.

The analysis from Fuller simply makes clear that Lyft’s purported path to profitability is dependent on a number of steps that could prove very difficult for the company to execute.

“We see four paths to profitability: cut driver pay, turn off incentives, reduce insurance costs or shift to self-driving cars,” Fuller is quoted by MarketWatch as writing. “The first two would be tough in a highly competitive category, the third might not be enough by itself and the fourth is likely 10 years out.”

The Erosion Of “Same Round, Same Price”

shutterstock_34623016 It seems most founders believe investors asking for “extras” on the side are simply greedy and short-sighted. While it’s easy to criticize investors, I believe this behavior is driven in large part as a response to conditions founders have created in early stage investing. I believe two trends, when taken together, have eroded the “one round, one price” standard. Read More