As I wrote in my updated
article, the deal makes zero sense. That’s why standard and institutional investors and publishers have been blowing him off since 2017 as
sources claimed back in Sept 2017.
But if you are familiar with investments, then you should already know about these two things which are certain to be how/why they did this deal.
The Liquidation PreferenceWhen you invest real cash money in what could be charitably called a speculative venture, you typically agree on a higher valuation in exchange for protection on your investment – the liquidation preference
So if I invest $50 million in a company I think is only worth $100 million, and the seller would like the valuation to be $500 million, I might ask for an 4x LP as a condition of agreement.
What this means is that if the company sells for, $500 million, I will take my investment times four out first, before other owners – $200 million out of the $500 million. If the company sells for $100 million, I will take the entire $100 million, and other owners will go away with nothing.
The reason it’s called a preference is that often the investor who holds the LP clause can force management to sell when they would rather not – they can induce the liquidation of the firm whenever they want, more or less.
Convertible NotesAs an additional protection, the investment is usually convertible, from stock to debt, sometimes high-interest debt, at the investor’s choice.
The specific amount of debt is never less than the cash value of the investment. The interest rate is never 0. Exactly how big the debt, and how nasty the interest, is negotiated.
I expect that SC’s new investor has both these terms, plus quite a number of other ones, to protect their investment.
VCs put money into pretty crazy ventures, and they want either explosive growth, or a fast liquidation, so they can re-invest the money before their current fund closes. You’ll notice how both these terms point in that direction. (An LP is, obviously, a liquidation. Converting your note gives the firm huge incentive to either solicit new investment or borrow money from someone else to pay you off.)
So there’s someone out there that might have the ability to force cig into liquidation if they feel they won’t be able to get their 46 million back?
Essentially yes
The one-two punch of L.P. and convertibility means the investors are likely to shitcan the company the minute they don’t like the story
Bear in mind they will expect 500MM to 5B of return on their 50MM investment. That’s not a typo. 10x is a minimum. 100x is the target return on a successful VC investment.
If it doesn’t look like 10x returns are coming on a very short horizon, they will pressure management to raise more money to expand and improve the odds, or liquidate immediately.
VC doesn’t want to see you piddle along with a modestly successful business. Go to the moon, or eat shit and die. Nothing in between.
NOTE: For anyone who thinks this is a credulous music industry idiot meddling, do note that his board appointee is a Silicon Valley lawyer who specializes in VC. This deal passed his highly paid “family office” investors. They intend to get paid.
