Gilt Groupe Investors, Employees Were at The Bottom of The Capital Stack: Josh Siegel, Rubicon
Earlier this month, Gilt Group was acquired by Canadian retail giant Hudson’s Bay Corp. Early Gilt Group investors were taken to school by Hudson’s Bay, one of the oldest companies in the world and other late stage investors. Rubicon Venture Capital General Partner Josh Siegel explained to me at Founders Friday in New York, “No one who invested in the company earlier than an E round got anything. If you were in the 5th round, you got a little something, and the last two rounds got everything, even though all these (earlier) guys took more risks.” I asked Josh how investors can protect themselves through deal structuring.
Josh explained that he prefers to invest in convertible notes, “For a convertible note, it always converts to the next round as equity. In a capital stack, you always want to be at the top.” Though convertible notes end up becoming equity investments, they start their life as debt instruments, meaning that in any court of law, the holders will always get paid first.
“In the note, it’s written, ‘This money, you will never pay back’. We never think you’re going to pay it back, in fact, I don’t even want it back. It will convert into the next round of equity where that’s really like a series A or a seed. What I like about that is the professional investors who go in there, especially us, will negotiate for terms I never even thought of. If I was an angel unknown, maybe I’m some hedge fund dude, I have no idea how to invest in a company. I don’t know about liquidation preferences, pro rata, or participation rights. The guys that are negotiating that do. So they’re going to negotiate all these great protections that I really couldn’t have thought of in a 5 page note document vs a hundred page stock purchase agreement.”
Along with early investors, employees lost out as well. The company was sold for a price of less than $3 per share, while some employees reportedly accepted options that are valueless unless they reached $25 per share. Employees will almost always be at the very bottom of the capital stack and must exercise the same caution as investors when considering their incentive compensation.
