Yesterday, Pando and others reported Box’s pre-IPO funding round which carried an apparent $2.4 billion valuation. I argued that it’s a troubling development for the late-stage company, which has been forced to delay its listing amid worsening market conditions and a tepid response to its recent financial performance.
More troubling however are the provisions of that funding round, found buried within the company’s updated S-1.
Box’s newest funders TPG and returning investors Coatue are evidently no more confident in its IPO prospects than the company’s own bankers. They felt compelled (and able) to bake in some pretty nasty “poison pill” covenants into this new funding round.
Put simply, if Box doesn’t have a healthy IPO, and quick, it’s going to cost the company big time.
A look at the updated S-1 reveals that Box has just one year to go public or the company must pay its late stage investors a $0.75 per share penalty for each quarter beyond one year which the IPO is delayed. Equally ugly, is the fact that the company must get out (either via IPO or acquisition) at a value of no less than $20 per share (approximately $2.4 billion total valuation) or TPG and Coatue will be entitled to a 10 percent discount against that reduced IPO share price.
In its updated S-1, Box writes:
In July 2014, we issued 7,500,000 shares of Series F redeemable convertible preferred stock at $20.00 per share for gross proceeds of $150.0 million. Under the terms of the arrangement, the redemption value for the Series F redeemable convertible preferred stock is determined based on a $3 per year return on the original purchase price. Additionally, if we consummate an initial public offering on or prior to July 7, 2015, each share of Series F redeemable convertible preferred stock will convert into shares of Class A common stock equal to $20.00 divided by the lesser of 90% of the price per share of Class A common stock or $20.00. If we consummate an initial public offering after July 7, 2015, holders of Series F redeemable convertible preferred stock will receive shares of Class A common stock with a value equal to $20 plus $3 per year, calculated on a quarterly basis (based on a 360 day year) with no compounding, through such date. In addition, in certain circumstances, the shares of Class A common stock issuable upon conversion of the Series F redeemable convertible preferred stock are subject to a floor limitation.
As I’ve written time and again, Box’s destiny is hardly certain at this stage and drawing such rigid lines in the sand could easily come back to burn the company. Levie, it seems, had no other choice than to accept these onerous terms.
It’s not altogether uncommon for late stage investors to request downside protection when a company’s performance is in question. Early stage investors do the same by way of liquidation preference and discounted, capped notes. But the very extent of TPG and Coatue’s protections suggest that Box was in a particularly bad negotiating position. With just eight months of runway left when filing its S-1 in March, this is indeed the case.
In the year ended January 31, 2014, Box posted $168 million in losses despite generating $124 million in revenue. This left the company with just $109 million in cash at the time. In its updated S-1, box posted revenue of $45.3 million over the three month period ending April 30, a figure that is up some 93.6 percent over the same period a year earlier. It was unable to rein in its losses at the same rate, however, posting $38.5 million in net losses for the quarter, an improvement of just 13 percent. The company had just $79.26 million in cash remaining before raising this latest round.
Yes, these numbers look better than a year ago, but they’re hardly the picture of a healthy company. As IVP’s Jules Maltz recently explained, Wall Street has moved beyond rewarding SaaS growth at the expense of forward-looking metrics like retention and profitability. Box, for what it’s worth, posted a healthy a retention rate of 135 percent in its latest quarter, suggesting that if it can keep on the same path it may one day be able to flip the switch to more profitable operation.
Nonetheless, in light of Wall Street’s apprehension around the enterprise SaaS sector, Levie will likely have to continue its belt-tightening in Q2 of this year if he wants to enter the markets this fall without triggering Coatue’s poison pill provision.
Such is the life of a late stage enterprise CEO.