Groupon Receives $344 Million in Founders Liquidity in Recent $950 Million Secondary Round

Earlier this month I wrote an article on Business Insider explaining how I believed Groupon may have used Google as its BATNA (best alternative to a negotiated agreement) to create more liquidity, and it appears they may have done just that.

According to the SEC Form D filing by Groupon, they just closed on $500 million of a $950 million round they are raising.  Interestingly, the filing also states that existing shareholders will receive $344 million in liquidity in this round.  While the filing is not 100% clear what portion, if any, of the $344 million is founders liquidity, I assume both the founders and existing investors are receiving liquidity in this round.

Under Item 16 of the Form D filing, which is the Use of Proceeds section, it asks the Company to provide the amount of the gross proceeds of the offering that has been or is proposed to be used for payments to any of the persons required to be named as executive offers, directors or promoters in response to Item 3 in the Form D filing.  Groupon listed that they will use $355,547,138, and gave the following clarification for the use of proceeds:

A portion of the gross proceeds will be used to pay for shares repurchased by the Issuer in a tender offer for shares held by, among others, certain of the persons named in response to Item 3 above and/or their respective affiliates.

According to Fred Wilson of Union Square Ventures, entrepreneurs often have to hold out longer than VCs in order to get a good exit, and he explains that if that’s the case, its entirely reasonable to provide some founders liquidity to them.  Fred goes on to explain:

I’ve also seen entrepreneurs choose to sell the company prematurely because they want to take some money off the table. If offered the opportunity to take a bit off the table and swing for the fences, many would prefer to do that“.

That appears to be the case with Groupon.  Perhaps Google’s $6 billion offer to acquire Groupon was premature, and in order to swing for the fences, I think its reasonable to provide founders liquidity.  Remaining private and utilizing the secondary markets for some liquidity in return for the that risk is the best case scenario for Groupon in my opinion.  They remain in control of their business and its direction, they maintain their entrepreneurial spirit, there’s less scrutiny from the SEC and they take some cash off the table.  Not a bad!

Additionally, it appears Groupon may have used a broker to source this deal, as Item 15 “Sales and Commission & Finder’s Fees Expenses” is checked off with $7,500,000 listed as a Finder’s Fee for the raise.  It’s unclear if the Finder’s Fee is for the entire $950M or just the recent $500M for this portion of the round.  We’re seeing more brokers involved in secondary transactions, helping to bring more liquidity to the secondary markets.  I think this is great for accredited investors interested in investing in high growth technology companies that they would otherwise not have been exposed to.  Generally these companies have been reserved for the institutional venture capital investors.  These brokers are helping the market by creating more liquidity and more favorable terms to the founders, their shareholders and employees by increasing the demand for their shares.  Its great for all parties.

Well played Groupon.  Well played.

How Groupon May Have Used Google As Its BATNA To Create More Liquidity!

As we’ve said before, the need for growth companies to be acquired or chase that rubber chicken laced road show circuit to go public through an IPO aren’t private companies only option anymore.  While the world can only speculate as to what Groupon will ultimately do, one thing is for sure, they have done wonders in creating shareholder value and increasing their private market value in their very public negotiations with Google.

Perhaps Google was Groupons’ BATNA (best alternative to a negotiated agreement) to the secondary market?  Just eight months ago Groupon raised $135 million on a $1.3 billion valuation from DST, which at the time was intended to be used to buyback equity from Groupon’s then 90+ employees as well as their early investors.  Today, Groupon reportedly has 1,000 plus employees, and their revenues are north of $2 billion annually.  With that kind of trajectory, did Groupon know their downside of walking from Google, or better yet, use Google to pump their valuation up for a new secondary sale of their private company stock, which will provide less dilution, preserve more control and protect their unique culture?

Again, one can only speculate.

The reality is, we just don’t know why Groupon would go public if the private market is providing a higher valuation for their shares and maintains more control for the founders that clearly seem to know what they are doing.  We believe that with $2 billion in annual revenue, Groupon is already a “real-live business.” Further, we believe that Groupon can comfortably take its “fuck you money” off the table without having to negotiate further with any public company, Google included. Groupon could sell less shares to the private market than the public market, for less dilution, less scrutiny, less regulation while providing sufficient liquidity to its founders, investors and employees.

So perhaps a congratulations is in order for Groupon.

Jay Gould maintains a long position in shares of Facebook (private). This post was edited by Bill Auslander.

DST Buys ICQ For $187 Million – Did Zuckerberg Miss The Writing On The Wall?

SocialBeat’s Dean Takahashi reports that Digital Sky Technologies (DST) has agreed to pay AOL $187.5 million for ICQ, the largest instant messaging service in Russia, and a number of other markets.  According to Time Warner, ICQ has over 100 million accounts registered, and more than 32 million unique visitors per month, which was started in 1996 by Israeli firm Mirabilis, which AOL acquired for $407 million back in 1998.

While DST for a long time has been an owner in Eastern block countries of significant social media assets, more recently they have become known as a secondary investor in companies like Facebook, Zynga, Groupon and Tencent.  Yuri Milner, CEO of DST, said “the acquisition of ICQ is a strategic enhancement of our business in Russia and Eastern Europe.”

So does this acquisition of ICQ position them as a competitor, or better yet – frenemy, to their existing or future social media investments?  Although DST has been an owner operator largely in the Eastern block countries, and it now appears they have more global aspirations, so it will be interesting to see how the market reacts to DST in future investment opportunities.

In a BusinessWeek interview in February 2010, Yuri Milner says “I am making big investments… You just have to be personally involved.”  He goes on to say, “I’d like to see DST as a significant global investment company in the Internet arena.”

As we understand it, DST hasn’t taken board seats in their late stage deals at companies such as Facebook and Zynga, but its hard to believe that their hundreds of millions of dollars of investment hasn’t yielded them with a wealth of confidential information that Facebook, Zynga and others wouldn’t want their competitor to get a hold of.  And now DST could just be that competitor?

Sure, Facebook and others probably aren’t worried about ICQ as a competitor, but DST has certainly proven that they have access to nearly unlimited capital and they’re willing to pay a premium or above, so what’s next on their acquisition horizon and how much are they willing to pay?  Were they paying premiums in these companies for a strategic reason we didn’t quite see at the time?  Is this something their current or future portfolio companies should be worried about?  Did Mark Zuckerberg miss the writing on the wall?  Tell us what you think.

Groupon Raises $135MM From DST At $1.3 Billion Valuation

DST (Digital Sky Technologies) just invested $135 million into social commerce service Groupon.

Like their previous investments in Facebook and Zynga, most of the capital provided by DST will be used to buyback equity from Groupon’s 90+ employees as well as their early investors.  Interestingly, Groupon has only been in business for 18 months.  That’s some serious shareholder value in such a short period of time.

Groupon uses social tools to attract buyers for a given product and uses its collective buying power to get low prices.  If it reaches the number of buyers required for a deal, Groupon collects a fee from the business that receives the sale, and then distributes coupons to the buyers for the discount.  Groupon claims to have saved consumes over $150 million.

With investments like this, there’s no question that the secondary market continues to heat up.  In the 90′s, the horizon for an exit was about 3-4 years, while today the average exit horizon is much longer, 6-8 years.  Also, most web 1.0 companies were very speculative, whereas today these companies are building real sustainable businesses with serious revenue and profits.

This round will hopefully help Groupon stay focused on their core business, rather than having to deal with employees selling shares into the secondary market as they continue to create shareholder value.  Create a buyback program this early in their lifecycle could help them stay focused on the prize at hand.