Meh

(Updated on January 7 to include comment from LegalZoom’s CEO.)

After several years of IPO drumbeat, Glendale, CA- and Austin, TX-based LegalZoom has decided to shelve those plans and find liquidity in the private equity markets.

As announced this morning, European private equity firm Permira will acquire more than $200 million of the Web-based legal services company’s existing equity in a secondary transaction that will provide liquidity to existing investors, and to a lesser degree management and employees, but which will not provide any new capital to the company.

Counter to prior reports, this will not give the new investor majority ownership of LegalZoom, but will make it the company’s largest shareholder and give it the right to majority control of its Board of Directors. According to a source close to the transaction, who spoke on the condition of anonymity, the transaction valued LegalZoom at approximately $425 million, meaning that Permira will end up owning between 47 and 50 percent of the company.

A $425 million valuation is nothing to be laughed at. But it can’t be what founder Brian Lee and his team, who toiled in obscurity for much of the last fourteen years, were hoping for. As exits go, a minority buyout by a private equity firm is a bit like kissing your cousin. It’s some action, sure. But you don’t want to brag about it.

The primary seller in this transaction was Polaris Venture Partners, as was to be the case during the company’s planned IPO. Polaris, Institutional Venture Partners, and Kleiner Perkins Caufield & Byers will all retain minority interest in the company. While there will be some paper millionaires created among management and the company’s rank and file employees, it will be several more years before the bulk of that wealth is liquid.

The lack of liquidity isn’t all that makes this deal a bit “meh.” The price represents a slight downgrade from the $500 million-plus valuation we’re told the company was most recently hoping to attract in the public markets, although a private market discount is not uncommon. When the company first filed its S-1 in May 2012, and subsequently priced the transaction in July of that year, it was seeking a top-side valuation of $484 million at $12 per share. (Prior to the issuance of new shares and the injection of $45.6 million in new capital under the IPO, the company’s implied value would have been $438 million.) The response from Wall Street was essentially, thanks but no thanks.

This deal was arguably better for Polaris than anyone else. With the IPO, LegalZoom planned to provide only $50.4 million worth of shareholder liquidity. With this deal it quadrupled that figure, but had to bypass the injection of fresh capital or an opportunity to provide much liquidity for employees and other shareholders.

The decision to delay the IPO was apparently driven in large part by the less than favorable reaction from Wall Street during its recent road shows. Legalzoom isn’t giving up – this deal was merely a stopgap to get early investors off its back, while it crafts a more compelling story for the public, according to our sources. Permira will likely be looking at a three to five year horizon for a second-chance IPO. In order to get there, our sources tell us that the company will focus on transitioning a larger portion of its sales from its legacy ecommerce business to its two-year-old subscription business, which currently accounts for less than one third of its revenue.

Whatever the plan, LegalZoom needs to grow faster if it wants to excite Wall Street. LegalZoom is generating approximately $200 million in revenue, according to our sources, which if accurate would represent a trailing two-year average annual growth rate of just 13.2 percent over the $156.1 million in 2011 revenue reported in its S-1. Even if this rate were double, it would still be a far cry from the more than 100 percent annual growth rate of recent ecommerce IPO darling Zulily. In other words, it’s little surprise that LegalZoom got a lukewarm reception from Wall Street.

In a statement about today’s transaction, the company commented that “Permira funds’ backing strengthens LegalZoom’s ability to move forward with its significant growth plans, which include potential acquisitions in both the U.S. and abroad.” While the private equity backer may contribute additional capital at a later date, today’s deal will have absolutely zero impact on the company’s balance sheet. Make no mistake about it: This was primarily about delivering liquidity to existing venture capital backers.

On the upside, LegalZoom’s new sugar daddy is the same firm that completed the December 2012 buyout of Ancestry.com, a similar subscription-powered, consumer-facing ecommerce company. The experience gained in that transaction should benefit both parties in this latest deal. The belief, it would seem, is that with a larger top-line revenue figure, a greater percentage of subscription revenue, and ideally a slight increase in growth rate, LegalZoom may find a warmer reception on Wall Street in a few years’ time. Whether the company can deliver on this three metric parlay remains to be seen.

LegalZoom CEO John Suh alluded to Permira’s Ancestry experience in that same statement, saying, “[they have] an unusual knack for helping industry leaders extend their market leadership.”

Lost in today’s discussion is what this transaction means for LegalZoom co-founder Brian Lee, as well as for the Los Angeles startup ecosystem, which has long held LegalZoom up as one of its greatest successes. In both cases, it’s a bit of a mixed bag.

The deal may provide a dash of liquidity relief for Lee, as well as LegalZoom’s day-to-day management and employees – many of which have been around for the entirety of the company’s 14 year journey – but it’s not the kind of life-altering, millionaire creating event that many were hoping for. That will have to wait until the next liquidity event, which presumably will be an IPO in the 2017-2019 timeframe.

It seems that Lee just can’t catch a break. Earlier this year he sold his once high-flying subscription footwear ecommerce startup ShoeDazzle at firesale prices to its crosstown rival and category leader JustFab. That once unthinkable outcome was the result of Lee and the company’s board of directors’ failure in appointing a replacement CEO, as the serial entrepreneur shifted his focus to his next Los Angeles celebrity-powered ecommerce venture, Honest Company.

Just 18 months ago, it appeared like Lee would have three home runs to his credit. And with it, Los Angeles would have a stable of tentpole companies and a local hero in their founder. Everyone debated the early optimism around Honest and the simultaneous turmoil surrounding ShoeDazzle’s unraveling, but no one doubted that LegalZoom — built with little help from the ashes of the dot com bust– would be a big win. Now, that win has been delayed another three to five years as Permira and LegalZoom’s current management seek to beef up the company’s underlying metrics.

At our May 2013 PandoMonthly, Lee talked about the hard fought battle to get LegalZoom of the ground, including strong arming his cofounder into finally quitting his 9-to-5 and cold calling famed attorney Robert Shapiro to pitch him on an endorsement. LegalZoom may still make it public and ShoeDazzle may become a valuable part of an even more valuable JustFab. But in either scenario, Lee’s victory lap will have to wait.

When reached for comment on this story, Legalzoom found Brian Lee deferred to the company’s current CEO John Suh, who did not respond to repeated requests for comment.

Update: In an email response, LegalZoom CEO John Suh denied accuracy of the above-reported valuation and revenue figures, but declined to disclose further details.