Bolt issued a formidable directive to its shareholders: purchase a substantially higher number of shares at increased prices or face the repossession of their shares at a nominal value of 1 cent each—a move viewed by a Bolt corporate charter expert as a costly and challenging endeavor, according to TechCrunch.
Recapping: The story surfaced on Tuesday that Bolt, the one-click checkout startup, was looking to secure $450 million in funding, aiming for a staggering $14 billion valuation, capturing widespread attention.
Bolt, notorious for its controversies, including the resignation of its outspoken founder, Ryan Breslow, in February 2022, found its name in the headlines yet again. This time, news of a substantial funding round coincided with Breslow’s potential return as CEO amidst allegations of misleading investors and inflating company metrics during his previous tenure. Moreover, Breslow also faced a legal confrontation with Activant Capital regarding a $30 million loan.
Consequently, the investors were caught off guard by a letter outlining a term sheet that promised not only a significant cash boost but also marked Breslow’s leadership reinstatement.
The deal, disclosed to preferred shareholders through an email from Bolt’s interim CEO Justin Grooms, revealed: “We are finalizing a $450+ million Series F investment round thanks to UAE- and UK-based investors, pushing our valuation above $14 billion—up from a previous $11 billion valuation during the Series E1 round in 2022. Besides these new investments, Bolt anticipates additional funding from current investors in the Series F round.”
Journalist Eric Newcomer noted that as of March’s end, Bolt boasted an annualized revenue run-rate of $28 million, with $7 million in gross profits. Such figures place the $14 billion valuation in stark contrast to the $11 billion figure obtained in January 2022.
However, scrutiny on the transaction revealed it is a modified “pay-to-play” arrangement, where Bolt intends to acquire 66.67% of shares from non-contributing investors at 1 cent per share.
Initially, investments from The London Fund and Silverbear Capital, amounting to $450 million, were under discussion, as per documentation referenced by Newcomer.
However, Brad Pamnani, identified as Silverbear’s representative, informed Newcomer the firm had withdrawn, with an undisclosed Abu Dhabi-based fund stepping in to invest $200 million at the $14 billion valuation, with plans for substantial additional investments. The Information also indicated that investor apprehension surrounding the deal, particularly concerning Breslow’s proposed $2 million bonus and $1 million in back pay for his CEO return, was growing.
This raises the question: Does Bolt have the power to enforce a share buyback or conversion at a mere penny per share if shareholders reject the proposal?
Andre Gharakhanian, a partner at venture capital law firm Silicon Legal Strategy, believes it’s improbable, characterizing the move as a novel take on the “pay-to-play” concept, which typically favors new investors at the expense of existing ones. This approach, growing in prevalence during economic downturns, would essentially force current investors to either participate as required or face punitive measures.
In Bolt’s context, this represents “not a forced conversion typical of pay-to-plays but a compelled buyback, aiming to either encourage ongoing support from existing investors or reduce the stakes of those who don’t,” clarified Gharakhanian. This process would involve repurchasing a majority of the non-participating investors’ preferred stock at $0.01/share.
A significant hurdle, he notes, is that nearly all VC-backed entities’ corporate charters stipulate that transactions of this nature necessitate approval from preferred stockholders—precisely those Bolt is attempting to pressure.
Albeit intricate, “securing proper approval remains a challenge,” he shared with TechCrunch.
He further explained, “The scenario unfolding appears to be an initial term sheet issued by the company/lead investor and now presented to existing investors. It’s at an early phase, grabbing headlines due to its contentious aspects and Bolt’s contentious past.”
Yet, he doesn’t dismiss the possibility of the deal’s approval. The genuine deterrent for investors isn’t the pressure to buy additional shares but the potential consequences for the company if new financing doesn’t come through.
“The knowledge that obtaining necessary approval from existing investors to finalize the deal means non-participants are at a disadvantage is clear to all,” he remarked.
The ensuing steps typically involve extensive negotiations and documentation, culminating in non-participating investors potentially acquiescing to the deal, especially if no alternatives are available, he suggests.
This negotiation also implies that legal costs for pay-to-play transactions can be substantial, similar to those of acquisition deals, while also generating a “general bad mood” instead of celebratory sentiments, he added.
Intriguingly, Gharakhanian highlighted a May 2022 amendment to Bolt’s charter that restricts entering any compensatory agreements with Breslow before October 7, 2024, without majority preferred shareholder consent, underlining the necessity for the same to authorize the proposed deal.
TechCrunch has sought comments from Bolt, Grooms, Breslow, The London Fund, and Pamnani.
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