Term Sheet

By Dan Primack
October 3, 2016

Monday Mouth-Off

The sun is shining, Tom Brady is returning and we’re less than 48 hours away from the least-anticipated VP debate in recent memory. In other words, it’s time for some Monday Mouth-Off.

Leading us off were some thoughts on the up-round vs. down-round discussion, based on Skyhigh Networks raising new venture capital at a higher valuation (pre-money of new round>post-money of last round), but at a lower per-share value (due to an increased option pool). For the record, I wrote that it should be considered an up-round. Also for the record, almost all emailers disagreed.

Cindy: “Spin spin spin. Yes, it is a down round because options should be factored into pre-money valuation.”

Mike: “They grew market cap which is a goal, but they did not increase value for existing shareholders. If value for shareholders goes down, I feel that should be called a down round.”

Steve: “If per share price is lower than prior round, it technically is a down round. The carried interest of an investor not participating in the current round would be lower than the prior round. The pre-money of the current financing would be lower than the post money of the prior round after adding in the expanded options.”

A.S. takes on my stock split analogy: “From the perspective of an (existing) shareholder, a share split is a non-event to their value. In a 2:1 split for example, the shareholder owns double the shares for half the price and still owns the exact same fraction of the company. In an up-round the value of a smaller fraction is higher. From the perspective of an (existing) shareholder, the shares of SkyHigh were sold for a lower price. Hence the value of the (smaller) fraction is lower – the definition of a down round.”

Adit: “Let’s talk pizza. Take a large pizza cut into 4 slices and an extra-large pizza cut into 8 slices. Say you can only take one slice from either pizza – which slice would have most calories? That depends on how much bigger the extra-large is relative to the large pizza, right? In other words, for you to choose the extra-large pizza slice, the large pizza should have grown enough for you to justify cutting each existing slice in half. Bringing the analogy back home, for an existing investor’s stake to have increased in value (i.e. “up round”), the SkyHigh valuation should have grown enough for an investors to justify a X% dilution as a result of the increased option pool. As the Series D Preferred Stock Original Issue Price was lower than the Series C Preferred Stock Conversion Price, the ‘growth’ in valuation simply wasn’t enough to increase shareholder wealth.”

 Not too much inbox sympathy for Khosla Ventures partner Keith Rabois, who said he’d leave institutional VC were carried interest to be treated as ordinary income for tax purposes: Jack sums up most replies: “Rabois forgets that one of the ways he gets rich is what Buffett called OPM – Other People’s Money. He gets carry on a fund which is largely funded by LPs. This is implicit leverage to his carry. If he goes out on his own – no OPM and no leverage, and the gross capital gains available to him are significantly smaller.”

Will adds: “The money is still going to get invested. LPs want venture capital returns and they will find GPs who will manage their money to give them that. This would just open up partner slots for younger, up-and-coming VCs.”

• James: If Verizon doesn’t use the Yahoo hack as a way to significantly renegotiate the purchase price (down), its shareholders should sue for breach of fiduciary duty.”

• Mark: Now that you’re carving out a niche exposing scam artists, can you do something about Rachel at Cardholder Services?”


THE BIG DEAL

 ZTO Express Inc., a Chinese express package delivery company, has filed for a $1.5 billion IPO. It plans to trade on the NYSE under ticker symbol ZTO, with Morgan Stanley and Goldman Sachs (Asia) serving as lead underwriters. The company reports $115 million of net income on $639 million of revenue for the first half of 2016. Shareholders include Sequoia Capital and Warburg Pincus. www.zto.cn


VENTURE CAPITAL DEALS

• MobiBike, a Chinese bicycle-sharing company, reportedly has raised $100 million in new VC funding. Hillhouse Capital and Warburg Pincus co-led the round, and were joined by Sequoia Capital and Qiming Venture Partners. Read more.

• Carrick Therapeutics Ltd., an oncology startup being spun out of the University of Cambridge, has raised $95 million in new VC funding. ARCH Venture Partners and Woodford Investment Management co-led the round, and were joined by Cambridge Innovation Capital, Evotec AG, Google Ventures and Lightstone Ventures.

• Recursion Pharmaceuticals, a Salt Lake City-based drug discovery company focused on rare genetic diseases, has raised $12.9 million in Series A funding. Lux Capital led the round, and was joined by Obvious Ventures, Epic Ventures, Data Collective,AME Cloud Ventures and Wild Basin Investments. www.recursionpharma.com

• Simplus, a Salt Lake City-based provider of Salesforce quote-to-cash implementations, has raised $7 million in Series A funding. Epic Ventures led the round, and was joined by Salesforce Ventures. www.simplus.com

• Payzer, a Charlotte, N.C.-based maker of a mobile and cloud-based financial tool for specialty trade contractors, has raised $4.25 million in Series B funding from Route 66 Ventures, Grotech Ventures and IDEA Fund Partners. www.payzer.com

• CarForce, a SaaS solution that provides car dealerships with real-time connected car telematics, has raised an undisclosed amount of funding from Digitech, Seed Sumo and Jason Calacanis. www.thecarforce.com


PRIVATE EQUITY DEALS

• Apax Partners, BC Partners and The Carlyle Group have been short-listed to acquire 19 mental healthcare hospitals owned by Priory, a unit of Acadia Healthcare (Nasdaq: ACHC), according to the FT. The deal could be valued at between £250 million to £300 million. Read more.

• Apollo Global Management is in talks to acquire the Lumileds lighting parts unit of Royal Philips NV, according to Bloomberg. Royal Philips had scrapped earlier plans to sell the unit for around $2.8 billion to Chinese private equity firm GO Scale Capital, due to U.S. regulatory concerns. Read more.

• ATC Group Services, a Lafayette, La.-based portfolio company of Bernhard Capital Partners, has agreed to acquire Environmental Compliance Services, an Agawam, Mass.-based provider of environmental consulting, site remediation and regulatory compliance services. No financial terms were disclosed. www.ecsconsult.com

• Charterhouse has agreed to acquire Sagemcom, a French maker of connected terminals and related software in the communication, entertainment and utility sectors, from The Carlyle Group. No financial terms were disclosed. www.sagemcom.com

• DTI, a legal process outsourcing owned by OMERS Private Equity and Harvest Partners, has completed its previously-announced acquisition of Epiq, a Kansas City-based provider of technology and services for the legal profession. The take-private deal was valued at around $1 billion (including assumed debt), or $16.50 per share. www.epiqsystems.com

• Gary Comer Inc. and Safety Net Connect have partnered on the acquisition of vCareConnect, a Chicago-based healthcare coordination platform. No financial terms were disclosed. www.vcareconnect.com

• Goldman Sachs has teamed with Bass Pro Shops and Capital One Financial Corp. to bid on U.S. outdoor gear retailer Cabela’s (NYSE: CAB), according to Reuters. The deal could be worth more than $4 billion. A rival offer has come from Sycamore Partners and Synchrony Financial, but the Goldman-led deal reportedly has pole position. Read more.

• Industrial Growth Partners has acquired SPL, a Houston-based provider of outsourced hydrocarbon measurement, analysis and reporting services for oil and gas production and transport. No financial terms were disclosed. www.spl-inc.com

• KKR and Varde Partners have teamed up on a non-binding offer for the non-performing loans platform of Italian lender Banca Monte dei Paschi di Siena SpA, according to Bloomberg. Cerved Credit Management also has submitted a bid. Read more.

• Linden Capital Partners has acquired MeriCal Inc., an Orange, Calif.-based maker of nutritional supplements. No financial terms were disclosed. www.merical.com

• Ultimate Performance, a Hong Kong-based personal training gym chain, has raised $10 million in private equity funding from Cassia Investments. www.upfitness.com.hk


IPOs

• Seven companies are expected to price IPOs on U.S. exchanges this week, including Camping World, Coupa Software and Advanced Disposal Services. Read more.

• BlackLine Systems, a Woodland Hills, Calif.-based accounting software companyhas filed for a $100 million IPO. The company plans to trade on the Nasdaq under ticker symbol BL, with Goldman Sachs serving as lead underwriter. It reports around a $17 million net loss on $56 million in revenue for the first half of 2016, compared to an $11 million net loss on $37 million in revenue for the year-earlier period. Shareholders include Silver Lake (47% pre-IPO stake) and ICONIQ (23.1%). www.blackline.com

• Carbon Black has confidentially filed for an IPO, according to the WSJ. Carbon Black has raised over $180 million in VC funding funding (most recently at a valuation of around $600 million) from firms like Sequoia Capital, Kleiner Perkins Caufield & Byers, .406 Ventures, Highland Capital Partners and The Blackstone Group. Earlier this year it also acquired VC-backed Confer. Read more.

• ConvaTec Ltd., a British maker of wound and ostomy care products, said that it plans to raise around $1.8 billion in its London IPO. The company currently is owned by Avista Capital Partners, Nordic Capital and company management. Read more.

• Myovant Sciences Inc., a drug company focused on women’s health diseases and other endocrine-related disorders, has filed for a $172.5 million IPO. It plans to trade on the NYSE under ticker symbol MYOV, with Citigroup listed as left lead underwriter. Shareholders in the pre-revenue company include Roviant Sciences (85.4% pre-IPO stake) and Takeda Pharma (12%). www.myovant.com

• Ra Pharmaceuticals Inc., a Cambridge, Mass.-based drug discovery company focused on diseases caused by excessive or uncontrolled activation of the complement system, has filed for an $86.25 million IPO. It plans to trade on the Nasdaq under ticker symbol RARX, with Credit Suisse listed as left lead underwriter. The company has raised around $85 million in VC funding from firms like NEA, Canvas Ventures, Novartis Bioventures, Novo AS and Lightstone Ventures. www.rapharma.com


EXITS

• Clariant Corp., a unit of Clariant AG ( SWX: CLN), has acquired Kel-Tech Inc., a Midland, Texas-based provider of specialty chemicals for onshore production, field stimulation, and drilling applications, from Arsenal Capital Partners. No financial terms were disclosed. www.keltechinc.com

• Diamondback Energy Inc. (Nasdaq: FANG) is nearing a $2.5 billion agreement to acquire Silver Hill Energy Partners, a Dallas-based oil and gas company focused on the Permian Basin, according to Dow Jones. Silver Hill shareholders include Kayne Anderson and Ridgemont Equity PartnersRead more.


OTHER DEALS

• Constellation Brands (NYSE: STZ) is seeking a buyer for its Canadian wine business, according to the WSJ. The deal could be worth more than $1 billion, with Ontario Teachers’ Pension Plan among those that have already made offers. Read more.

• Janus Capital (NYSE: JNS) and Henderson Global Investors have agreed to a $6 billion all-stock merger, creating an investment firm that would manage around $320 billion in assets. Read more.


FIRMS & FUNDS

• African Capital Alliance has closed its fourth West Africa-focused private equity fund with $570 million in capital commitments. www.acagp.com

• Arab Angel Fund, a Virginia-based VC firm focused on startups seeking to enter the MENA region, is raising up to $25 million for its debut fund, according to an SEC filing. It already has secured $10 million. http://www.arabangel.com

• EMK Capital has been launched as a UK-based mid-market private equity firm by Edmund Lazarus (ex-Bregal Capital) and Mark Joseph (ex-Oakley Capital). Read more.

• SVG Capital, the UK-listed private equity firm whose board is recommending the rejection of a takeover offer from HarbourVest Partners, confirmed that it is in talks with a consortium that includes Goldman Sachs and the Canada Pension Plan Investment Board. www.svgcapital.com


MOVING IN, ON & UP

• Canaan Partners has promoted Brendan Dickinson (tech) and Julie Papanek (healthcare) to partner, and Colleen Cuffaro (healthcare) and Michael Gilroy (tech) to principal. www.canaan.com

• Shaun Lascelles has joined Vinson & Elkins LLP as a London-based partner in the law firm’s private equity practice. He previously was with Ashurst. http://www.velaw.com

• Scott Lee has joined BelHealth Investment Partners as a managing director. He previously was a principal with HealthEdge Investment Partners, where his portfolio companies included Woodbury Health Products, Infinity Homecare and MNG Laboratories. www.bellhealth.com

• Preeti Rathi has joined Ignition Partners as a principal in the Bellevue, Wash.-based VC firm’s new Los Altos, Calif. Office. She previously was a principal with Opus Capital. www.ignitionpartners.co

• Joseph Velli has joined private equity firm Lovell Minnick Partners as a senior advisor. He previously was chairman and CEO of Convergex Group. www.lovellminnick.com

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