Coinbase’s S-1 publicly dropped this morning, with much anticipation. My coworker Alex Wilhelm has the high-level information, but there was one significant wrinkle for the crypto trading darling: 2 of its early investors seem to be cutting down their stakes pre-IPO.
The most noteworthy case is Union Square Ventures, the prominent venture firm where Fred Wilson co-led the Series A round into the business back in 2013, which was the first investment made under the firm’s then recently christened blockchain thesis.
Over the past 2 years– which is the extent of disclosures that Coinbase includes in its S-1 filing– USV has been quickly selling off its holdings in the company across multiple deals, mostly offering to other venture firms around the cap table. Since late 2019, the company has actually sold off roughly 28% of its holdings in Coinbase.
USV presently owns about 7.3% of Coinbase’s exceptional shares, or approximately 13.9 countless an overall of 191.3 million based on Coinbase’s disclosed share count. As the following table suggests, USV has actually carried out 4 independently outdated transactions to sell nearly 5.5 million shares of its holdings in secondary transactions.
Fellow early-stage fintech investor Ribbit Capital, which joined USV in the Series A, likewise carried out a smaller sized secondary transaction in November 2019, offering a bit less than 5% of its exceptional shares (559,228 of 11,995,949 shares).
What’s fascinating is not just that USV in particular is selling a large part of its holdings, however likewise the price they were willing to cost. According to Coinbase’s filing, USV sold 3.35 million shares at $23 per share in late 2019, and later offered about 2 million shares at $28.83 per share in mid-2020.
Those prices are well below Coinbase’s Series E rate per share of $36.19, which it received in late 2019. It’s also below the rate set by the secondary deals of Coinbase CEO and co-founder Brian Armstrong and Paradigm creator and Coinbase co-founder Fred Ehrsam, who received $32.57 for their shares in late 2018.
Now, there are a couple of nuances to think about here. The secondary sale of favored shares will generally convert to typical (even if the sale is to another favored investor), which means that the shares sold would hold less investor rights and provisions, and for that reason, are inherently worth less to investors. This was the case with Coinbase as it disclosed in its filing, which might discuss a minimum of a few of the space in the rate.
The timing of USV’s investment is likewise possibly significant. The bulk of USV’s investment in Coinbase originates from its 2012 vintage fund, which if it follows default market practice, has a targeted 10-year life span. That suggests that the fund is designed to pay out its returns by 2022– which was rapidly coming up for the firm back in 2019 and 2020. There may have been some pressure to cost least a few of the firm’s stake early to make the firm’s LPs better.
It’s likewise beneficial to keep in mind that USV and Ribbit primarily offered to other, existing investors like a16z and Paradigm, which shows that other financiers deeply burrowed on the cap table were quite thrilled to put more money to operate in Coinbase, even at a relatively late stage.
However, it’s rare for an enthusiastic fund like USV to sell perhaps its single-most essential investment of perpetuity just a year or two prior to what may well be among the biggest smash hit IPOs of 2021. At an assessment of $100 billion let’s say (which is what Coinbase priced at a current private market transaction), USV’s stake would deserve about $7.3 billion. Yet, the shares it offered over the past two years would have been worth several billion at exit, and it offered them for about $140 million in cash.
The mystery here is maybe resolved a bit. Fred Wilson, in an article from early 2018, spoke about “taking money off the table” in earlier USV financial investments like Twitter, where the firm “sold about 30% of our position in those 2 secondary deals for about $250mm and returned 2x the whole fund to our financiers.” Referring to crypto, he stated:
If you are sitting on 20x, 50x, 100x your money cash a crypto investment, it would not be a mistake to sell Offer%, 20% or even 30% of your position. Offering 25% of your position on an investment that is up 50x is booking a 12.5 x on the entire investment, while allowing you to keep 75% of it going. I understand that numerous crypto holders believe that selling anything is a mistake. And it might be. Or it may not be. You just do not understand.
Clearly, he took money off the table. It’s a financially-astute, risk-adjusted approach, even if it left billions of returns behind. A16z and Paradigm are, I am sure, quite happy to have made the purchase.
Article curated by RJ Shara from Source. RJ Shara is a Bay Area Radio Host (Radio Jockey) who talks about the startup ecosystem – entrepreneurs, investments, policies and more on her show The Silicon Dreams. The show streams on Radio Zindagi 1170AM on Mondays from 3.30 PM to 4 PM.
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