The Curious Case of Sprinklr

When buying and selling are controlled by legislation, the first things to be bought and sold are legislators.

-P.J. O’Rourke

Sprinklr acquired a company we invested in a few years back. After a couple years, the founder of the acquired company decided to leave. The founder wanted liquidity and asked for our help. I found an investor looking to acquire a position in Sprinklr. The rest of the process is generally pretty simple, so little did I know what was lay ahead of me.

Most institutional investors have minimum check sizes, and this investor needed more shares to acquire a “meaningful position”. Introduced via our friend, we had conversations with numerous employees/ex-employees who wanted to sell small stakes. We never signed an NDA with Sprinklr. We didn’t buy shares of the company. We were simply brokering some employees and ex-employees common shares who after years, wanted some liquidity.

The work I did at Fideras tended to be discreet. I didn’t talk details about our previous deals as we usually signed NDAs, and there are regulatory rules around what can be considered marketing. Additionally, we couldn’t imagine our clients being happy about others knowing what stocks they are buying or selling.

Secondary sale transactions are sometimes signed the same day and close the next day… but they can also be very long. Once the buyer and seller are committed at a price, the process is usually pretty quick with only one or two contracts (depending on company process) needed to move forward. A month is on the high end of getting a fully executed share purchase agreement (SPA).

The Sprinklr process took six months. Six months after the buyer and seller were committed. The buyer and seller never changed their mind on the price. What took so long?

The devil is in the stock plan

The stock plan is something that all employees sign but barely any read. It’s the terms of service of the tech world where you may unknowingly be selling your soul. The Skype/Silver Lake example is the most infamous of this where employees with fully vested shares, had their shares taken from them. I’m shocked there wasn’t more shaming done of Silver Lake, Silver Lake’s LPs, and Skype. Silver Lake and their LPs made money by effectively stealing shares from the employees who built Skype. If your company has Silver Lake on its cap table, you want to read your stock plan very carefully.

Back to Sprinklr — all the shares we helped sell in Sprinklr were common shares. In Sprinklr’s stock plan it allowed Sprinklr to buyback Sprinklr shares at the strike price or 409a, whichever is lower.[1] From the stock plan:

“Repurchase Price” means (i) except as provided in subsection (ii) below, an amount equal to the Fair Market Value of the Shares on the date of repurchase; or (ii) on or following the termination of a Participant’s employment or other service by the Company or its Affiliates for Cause, an amount equal to the lesser of (1) the original purchase price paid for the Shares, and (2) the Fair Market Value of the Shares on the date of repurchase.

(z) “Repurchase Right Exercise Period” means the period commencing on the date of the Participant’s termination of employment or other service with the Company or its Affiliates for any reason and ending on the earlier to occur of (i) the date of consummation of an IPO, or (ii) the twelve (12) month anniversary of the date of such termination or, if later, the twelve (12) month anniversary of the date the applicable Shares were acquired upon exercise of an Option or other Award requiring exercise.

Say you’re the buyer here — if you bought shares at $20/share, and the original option strike price for the employee was at $1/share, then the company could repurchase your newly acquired shares at $1/share. You would immediately lose $19/share or 95% of your money.

The buyer obviously had an issue with this. I recapped this in an email to all the employees/ex-employees trying to sell on 12/13/17 below:

All,

Thank you for your patience and effort in completing this transaction. I Bcced all sellers in this transaction.

Where we stand

We’re at an impasse with the company.

[Buyer of secondary shares] needs Sprinklr to waive their repurchase right (the right to repurchase shares at the 409a price). Sprinklr says the RoFR Co-sale Agreement gets rid of the repurchase provision and supersedes the 2011 Equity Incentive Plan. The issue is that Sprinklr could simply alter or replace the RoFR Co-sale Agreement to enable them to repurchase shares at the 409a price.

[Buyer of secondary shares] is asking Sprinklr to say to them in writing that they will waive their repurchase right or to add two sentences to the STA. Sprinklr has refused to do so.

This is highly disconcerting. [Buyer of secondary shares] has worked with hundreds of companies and has never run into this issue before. Tyson and I have also never run into this issue before.

[Buyer of secondary shares] has devoted months of legal resources to this effort. I Cced [buyer] who you can message directly, and who has kindly offered all sellers to speak to [buyer of secondary shares] lawyers directly for any further clarification.

Below are the two small changes needed for the STA. I also attached the redline and clean version.

Include as last sentence of Section 1 of Stock Transfer Agreement

· “Notwithstanding the foregoing, the Company confirms that Transferee is not a service provider of the Company and therefore that Section 8(f) of the Plan shall not apply to the Securities when held by Transferee.”

Include as add-on to last sentence of Section 2(m) of Stock Transfer Agreement

· “; provided, however, that notwithstanding any other provision of this Agreement or the Securities Documents, the Company hereby confirms that Transferee is not a service provider of the Company and therefore that Section 8(f) of the Plan shall not apply to the Securities when held by Transferee.”

Thank you in advance for any help you can provide here in pushing the company to add these two sentences to the STA, or to get Sprinklr to send a confirmation over email to [buyer of secondary shares] that they will not repurchase the shares.

All the best,

Jon

The sellers of the stock signed contracts agreeing to pay the difference between the strike price and the price the buyer paid if Sprinklr repurchased the buyer’s shares. As of writing now, it has been over a year since the transaction took place — so the sellers are likely in the clear.[2]

The issue here is that this repurchase provision is insane to have in a stock plan. None of the employees or ex-employees knew about it. After being caught, the company refused to say in an email that they will not repurchase the shares. Even if you assume the best of company management, if the company is acquired or undergoes management changes, this provision could be used by a bad actor similar to how Silver Lake abused Skype employees.

Moral of the story — read your stock plan before you join any company. If you find something concerning, discuss it with friends and experts.

Notes:

[1] The RoFR process for Sprinklr could be up to 180 days, which is high (standard is 30–60 days). Companies sometimes illegally delay RoFRs, but the RoFR process was fast for these Sprinklr transactions.

[2] To be fair to Sprinklr, they approved the transactions here. There are other companies like Instacart that block any transfers or loans on shares. So when an employee leaves, they need a personal recourse loan to be able to exercise their options and pay their taxes. Employees then cannot even sell those shares to pay back the loan.