Hi, can someone translate this into simpler English:
We are participating in their first institutional round: investing 75% via primary at a $15M pre-money valuation and 25% via secondary shares purchase at $8M valuation. Our SPV will charge 10% carry and no management fee.
Why the remaining 25% investment is being done via share purchase at $8M valuation?
In this case there at "two" different transactions. The first is a primary investment where the company issues new equity in exchange for capital that will now go onto the company's balance sheet. The second transaction is what is known as a Secondary deal (in this case more specifically a Secondary Direct deal). Current shareholders (Founders, employees, early investors, angels) are selling shares that are already outstanding on the Cap Table (i.e no new shares are being issued for this transaction). Secondary deals provide liquidity to current shareholders in an illiquid market and therefore the secondary transaction is being done at a discount compared to the last round.
Additionally, since this transaction is also being closed along side a primary round, most likely the shares are subordinate to the newest shareclass and therefore have lower priority in the liquidation waterfall (in general terms but this depends on the specific company's Certificate of Incorporation). Because of the lack of info here, the shares being sold could either be preferred shares from an earlier round or common shares issued to founders and employees. Pricing shares of different shareclasses/common get more complex but this should give you a general idea for the reasoning behind the transaction structure/pricing.
For the SPV, this is a single vehicle separate from a typical fund used to conduct the transaction. This is usually done when the investor brings along a co-investor to the deal on which they will charge carry to the Co-Investor for this one specific deal outside of a typical venture fund. After the transaction closes the Cap Table will show one investor owning shares purchased from the primary round and the secondary transaction.
Primary cash goes to the company. Secondary cash goes to selling shareholders. In a venture context, common to take a discount to get pre-exit liquidity (otherwise, wait 5-7 more years like the rest of the cap table with added risk).
75/25 split between primary/secondary is a different matter that probably speaks to specific deal dynamics and context of the raise.
The above answers are good. I just wanted to throw in a recommendation for Brad Feld's Venture Deals book. It covers all basic terminology and typical deal structures, processes, etc... in VC. It's a great starting point to learn a lot of what you need to know.
Any chance there's a pdf version lying around with you :-P
There are a billion pdf copies floating around the internet. Just Google it, or look it up on libgen.
ok, will look it up. thanks!
And here I thought 3rd worlders were supposed to be more resourceful:
Ebook Search Engine: Brad Feld's Venture Deals
Don't really care for the remark
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