Ben Young
Ben Young
May 26, 2023

Edition #404

On why some investors get a preference, Yeti & Vox and Substack spam.

Back after a bit of a break.

Last week Vice filed for bankruptcy. There’s been a bit of unpacking what happened. A lot of the reasons can be explained by bad capital allocation, but that’s a little too easy. Last year they did over $600m in revenue, so why has the music stopped now?

It seems Vice are unable to make their debt obligations. Their most recent lenders had a loan coming due the end of last year. In bankruptcy the lender has offered to trade that obligation for the company.

Prior to this, Vice have been looking for a buyer, but they’ve been hamstrung by older preference terms. What this means is, one of their older investments has a preference over other shareholders in getting repaid.

In 2017 private equity firm TPG invested $450m, at a $5.7b valuation. To protect themselves, they put in a term, to get 1.8 times their money back, before other shareholders. So $810m before anyone else. So, the first $810m goes to them, any offers below $810m, means no other shareholders would receive any funds. This enables them to provide maybe a bigger valuation, with more protection.

How would that amount be calculated? TPG will have its own ‘return targets’ to investors. Sometimes it has a hurdle rate, whereby they don’t get paid till they get over it. As well as, they will have target returns. I’d guess they went 5 years, at 15%, is about this. Probably over their hurdle rate and just kicking in their fee.

The process would have gone like this, Vice wanted to raise at that valuation, TPG looked at the numbers and went hey, we can do that. But here’s our terms. And Vice could have negotiated, oh ok, maybe we soften the valuation and take some of this out.

The point of this is, that it is a negotiated term, that all parties have ended up agreeing to. Some might say, no harm, no foul. All parties thought this was a good deal. And in the context of raising the cash, you’re raising it because you believe, you’re gonna take this thing to $10b! And $810m seems insignificant. So why not, let’s go to the moon! Deal making is hard work, long hours, highs and rapid lows, all within hours.

This term is not unreasonable, nor unexpected that such a term would be in a deal like this.

Additionally there may be sweeteners for early holders, such as low interest loans or stock purchases for early founders. A way for the new investors to increase their stake and look after the team.

That’s how these roll about. And why is this important? I think many of us work with, or work for companies that may have done these sorts of things, it can impact your own equity comp. It’s worth, understanding how it works.

BUT, it is a negotiated term. It means, it could also be negotiated away. In some cases, firms will alleviate these, to help make a deal happen. And Vice shareholders are grumpy that TPG has not.

FWIW TPG have said to the FT, and I’m reading between the lines, it’s not us, it’s the other funders which have forced bankruptcy. And I kind of believe that, for them it’s better for Vice to meet its obligations, so they can recoup their funds.

Notable stories this week


Campaign of the week

  • How Richard Boccato became one of the biggest cocktail ice dealers in NYC. Yeti with Eater.

View all 2023 best campaigns.

Smartest commentary

  • [On Quibi] “I’m proud to own the failure. I’m not proud of the failure. But I’m proud of what we tried. It was a moonshot. It wasn’t fun failing — I don’t recommend it — but it’s going to come.”Jeffrey Katzenberg

Datapoints of note

  • MorningBrew has used SwapStack to drive over 100,000 subscribers.
  • Creators can earn between $500 and $1,000 for 1 million views on instagram.
  • TikTok Creators can earn $700 per 500,000 videos using their custom filters.

That’s it for this week.