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We Co., the parent company of WeWork, office sharing company, has more than one foot on the neck.
The New York-based operation, co-founded by
Adam Neumann
postponed its initial public offering at least in October after reducing its valuation but not raising the interest. Governance issues are seen as a persistent risk, but investors may soon be focusing on a more immediate threat: dilution triggers embedded in We's capital structure will pose problems as the company again attempts to tap markets public.
The problems started when the value of We began to fall. His latest fundraising in private markets earned him an implied valuation of $ 47 billion. The company has reduced its forecast to a desired valuation of about $ 20 billion of IPOs, which further declined last week. The Wall Street Journal announced that the start-up was seeking to issue shares worth $ 15 billion.
We desperately need capital to continue to grow on the path to current growth. Earlier this year, he signed a $ 6 billion credit facility. As part of the agreement, we agreed to make the facility conditional on raising $ 3 billion in equity.
The debt agreement is an all-or-nothing proposition: it only comes if we successfully get $ 3 billion. In other words, funding of at least $ 9 billion will materialize or not materialize if an IPO occurs. This would make it much more difficult for the loss-making company to withdraw from the IPO if market conditions or market conditions were unfavorable.
But this can trigger a vicious circle. With the valuation of We decreasing, he must always issue more shares to reach the $ 3 billion mark. With a valuation of $ 47 billion, a $ 3 billion capital increase is only a fragment of the company. With an estimate of $ 15 billion or $ 20 billion, however, it dilutes existing shareholders much more.
That's not all. Venture capital providers often protect themselves with a provision called an "adverse clause". These provisions give insiders an additional stock in the event that a future fundraising is set below the last valuation attributed to a company.
In this case, the downside protection of the first contributors appears to take the form of a $ 1 billion convertible note that converts into shares on the last day of this year. The rating is held by the largest shareholder SoftBank, according to We's regulatory filings. The proposed prospectus offers only a fuzzy price for the conversion. It is therefore impossible to say exactly how much or if shareholders will be diluted, she says.
Nori Gerardo Lietz,
Lecturer in Business Administration at Harvard Business School in an unpublished document seen by the Wall Street Journal. But as the conversion appears to take place after the IPO, buyers of its shares in the offer could suffer the consequences.
Features like these can cause a downward spiral. As the offer becomes more and more dilutive, the valuation drops. As the valuation declines, the supply becomes more dilutive. SoftBank and We both have reason to restructure these features if they make fundraising too difficult, but it also takes time, which we may not have. One last pressure on the company is that it will lose its status as an emerging company under the Employment Act at the end of this year, which would further increase the IPO process. The law allows the company to use more flexible reporting standards on its finances and executive compensation, a potential problem for a company already preoccupied with governance issues.
Companies rarely make good deals with their back to the wall.
The rapid expansion and flexible business model of We Co. helped it stand out from the competition. But some investors say its public offering may not be worth the risk. Here's why. Photo: David & Dee & # 39; Delgado / Bloomberg
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