Coinbase’s S-1 publicly dropped this morning, with powerful anticipation. My colleague Alex Wilhelm has the high-stage dinky print, however there became as soon as one major wrinkle for the crypto trading darling: two of its early investors seem to be cutting down their stakes pre-IPO.
Basically the most indispensable case is Union Sq. Ventures, the prominent undertaking company the put Fred Wilson co-led the Sequence A spherical into the corporate serve in 2013, which became as soon as the first investment made below the company’s then newly christened blockchain thesis.
Over the previous two years — which is the extent of disclosures that Coinbase includes in its S-1 filing — USV has been lickety-split selling off its holdings in the corporate across more than one transactions, principally selling to varied undertaking corporations around the cap table. Since unhurried 2019, the company has offered off approximately 28% of its holdings in Coinbase.
USV at show veil owns about 7.3% of Coinbase’s outstanding shares, or roughly 13.9 million of a total of 191.3 million in response to Coinbase’s disclosed share rely. Because the following table indicates, USV has performed four one after the other dated transactions to sell virtually 5.5 million shares of its holdings in secondary transactions.
Fellow early-stage fintech investor Ribbit Capital, which joined USV in the Sequence A, additionally performed a smaller secondary transaction in November 2019, selling slightly decrease than 5% of its outstanding shares (559,228 of 11,995,949 shares).
What’s interesting is now not any longer factual that USV in particular is selling a super fragment of its holdings, however additionally the value they occupy been willing to sell at. According to Coinbase’s filing, USV offered 3.35 million shares at $23 per share in unhurried 2019, and later offered about 2 million shares at $28.83 per share in mid-2020.
These prices are effectively beneath Coinbase’s Sequence E tag per share of $36.19, which it purchased in unhurried 2019. It’s additionally beneath the value region by the secondary transactions of Coinbase CEO and co-founder Brian Armstrong and Paradigm founder and Coinbase co-founder Fred Ehrsam, who purchased $32.57 for their shares in unhurried 2018.
Now, there are a couple of nuances to bewitch into consideration here. The secondary sale of most well-appreciated shares will in general convert to general (even supposing the sale is to one more most well-appreciated shareholder), which methodology that the shares offered would maintain fewer investor rights and provisions, and due to this fact, are intrinsically value less to investors. This became as soon as the case with Coinbase as it disclosed in its filing, and that can perchance perchance explain no decrease than a couple of of the opening in the value.
The timing of USV’s investment is additionally perchance indispensable. The bulk of USV’s investment in Coinbase comes from its 2012 vintage fund, which if it follows default industry practice, has a focused 10-yr shelf life. Meaning that the fund is designed to pay out its returns by 2022 — which became as soon as lickety-split coming up for the company serve in 2019 and 2020. There may perchance perchance occupy been some force to sell no decrease than a couple of of the company’s stake early to invent the company’s LPs happier.
It’s additionally important to repeat that USV and Ribbit principally offered to varied, existing investors love a16z and Paradigm, which exhibits that varied investors deeply burrowed on the cap table occupy been rather wrathful to attach more money to work in Coinbase, even at a slightly unhurried stage.
Nonetheless, it’s rare for an ambitious fund love USV to sell arguably its single-most significant investment of all time factual a yr or two earlier than what may perchance perchance perchance be understanding to be one of the crucial greatest blockbuster IPOs of 2021. At a valuation of $100 billion let’s narrate (which is what Coinbase priced at a most up-to-date inner most market transaction), USV’s stake would be value about $7.3 billion. Yet, the shares it offered over the last two years would occupy been value several billion at exit, and it offered them for about $140 million in cash.
The thriller here is seemingly to be solved slightly. Fred Wilson, in a weblog post from early 2018, talked about “taking money off the table” in earlier USV investments love Twitter, the put the company “offered about 30% of our jam in those two secondary transactions for about $250mm and returned 2x your total fund to our investors.” Then referring to crypto, he acknowledged:
When you happen to are sitting on 20x, 50x, 100x your money on a crypto investment, it will no longer be a mistake to sell 10%, 20% or even 30% of your house. Selling 25% of your house on an investment that’s up 50x is booking a 12.5x in your total investment, whereas allowing you to sustain 75% of it going. I know that many crypto holders think that selling anything is a mistake. And it is miles seemingly to be. Or it is miles going to no longer be. You factual don’t know.
Clearly, he took money off the table. It’s a financially-astute, probability-adjusted methodology, even supposing it left billions of returns behind. A16z and Paradigm are, I am obvious, rather satisfied to occupy made the purchase.