Update: We spoke to Ashesh Shah, founder and CEO of the fund leading Bolt’s planned $450 million capital raise, to get some much-needed additional details on the deal. Read the full interview here.
Bolt’s aggressive ultimatum to its existing shareholders – telling them to buy many more shares at higher prices or it would take back their stock for 1 cent per share – is going to be an expensive, uphill battle, an expert familiar with Bolt’s corporate charter tells TechCrunch.
To recap, when news broke on Tuesday that one-click checkout startup Bolt was seeking to raise $450 million at a potential valuation of $14 billion, it caused a stir in many circles.
This company has been marred by numerous controversies, including the resignation of its outspoken founder, Ryan Breslow, in February 2022. The news of this huge new funding round also included Breslow’s return as CEO. This came after he was accused of misleading investors and violating securities laws by inflating metrics during fundraising the last time he ran the company. Breslow was also embroiled in a legal battle with investor Activant Capital over a $30 million loan he took out.
It therefore came as a surprise to many that a letter to investors contained a term sheet that would not only provide a significant capital injection but also Breslow’s return to the top of the company.
The proposed deal was unveiled to preferred shareholders in an email from Bolt’s interim CEO Justin Grooms, which reportedly said: “We are closing a Series F financing round of over $450 million with investment firms from the UAE and the UK, which will increase our total valuation to over $14 billion, a significant jump from our $11 billion valuation during the Series E1 round in 2022. In addition to investments from these investment firms, Bolt may receive additional amounts from existing Bolt investors who may participate in the Series F financing round.”
Journalist Eric Newcomer reported Tuesday that Bolt had annual revenue of $28 million and gross profit of $7 million at the end of March. A $14 billion valuation would be many times those numbers and higher than the $11 billion valuation reached in January 2022.
However, as more details emerged, it became clear that the proposed transaction was a modified example of a “pay-to-play” transaction, with Bolt attempting to gain the ability to buy out 66.67% of non-participating investors at a price of 1 cent per share.
The London Fund and Silverbear Capital were originally considered the lead investors in the deal, with Silverbear putting up $200 million and The London Fund investing $250 million in complicated transactions, according to documents cited by Newcomer.
But then Brad Pamnani, who was apparently listed as a representative of Silverbear in the contract documents, told Newcomer that the company was no longer involved in the deal and that “an unnamed Abu Dhabi-based fund will invest $200 million in Bolt, at a $14 billion valuation, with the intention of investing several hundred million dollars more over the next 12 to 24 months.” And The Information reported that some investors balked at the proposed deal. In particular, there was resistance to the possibility that Breslow could receive a $2 million bonus for returning as CEO, plus an additional $1 million back pay.
The question now is: If shareholders do not agree to the terms of the proposed transaction, can Bolt force a buyback or conversion of shares and effectively pay them just a penny per share?
The short answer? Not really, says Andre Gharakhanian, a partner at venture capital firm Silicon Legal Strategy who has seen the company’s charter. He described the planned transaction as “a variation of the pay-to-play structure.”
“Pay to play” is a term used in term sheets that benefits new investors at the expense of old ones. It becomes increasingly popular during market downturns (which is why it will become more common in 2024, according to data from Cooley). Essentially, it forces existing investors to buy all the shares they are entitled to or the company takes punitive action, such as converting their shares from preferred stock with additional rights to common stock, AngelList explains.
In Bolt’s case, “it’s actually not a forced conversion like most pay-to-play transactions. Instead, it’s a forced buyback. The goal is the same — to put pressure on existing investors to continue to support the company and reduce the ownership of those who don’t provide that support,” Gharakhanian said. “However, instead of automatically converting non-participating investors to common stock, they’re buying back 2/3 of the non-participating investors’ preferred stock at $0.01 per share.”
The catch, he said, is that virtually all VC-backed companies specify in their corporate charters that a proposed transaction like this requires some level of approval from preferred shareholders, usually majority approval. Those are exactly the people Bolt wants to pressure.
There are other nuances to consider, but “the road to proper approval is still bumpy,” he told TechCrunch.
He added: “I think this was just a term sheet issued and signed by the company/lead investor (no formal board/shareholder approval is required to sign a term sheet) and they are now offering the deal to existing investors. It is still in early stages and making headlines because of the salacious arguments and Bolt’s crazy story.”
That doesn’t mean he doesn’t believe the deal will be approved, though, because the real challenge for investors isn’t being forced to buy more shares at prices they don’t want to pay, but what happens to the company if new financing doesn’t come through.
“Anyone who gets involved knows that they need the necessary approval from existing investors to actually close the deal. Non-participants are being ripped off and everyone knows that,” he said.
So what usually happens then is “weeks of back and forth” as the deal is negotiated and the final documents are drawn up. “But if the company really has no other alternatives, the non-investors often give in and agree to the deal,” he says.
All this back and forth also means that legal fees for pay-to-play deals can be high, as high as in a takeover deal. But unlike a lucky exit acquisition, this type of deal “generally generates bad vibes,” he added.
Interestingly, Gharakhanian pointed out that an amendment was added to Bolt’s articles of association in May 2022 stating that if the company wanted to enter into an employment agreement or other compensation agreement with Breslow before October 7, 2024, it could not do so without the approval of a majority of the preferred shareholders.
According to the articles of association, the implementation of the planned transaction “will probably still require the approval of the majority of existing preferred shareholders,” he said.
TechCrunch has reached out to Bolt, Grooms, Breslow, The London Fund and Pamnani for comment.
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