Why Zynga only reported only some of its private transactions.
Earlier this week, I wrote about some apparent discrepancies in Zynga’s S-1 filing. Two basic points:
- 1. Zynga listed a series of private share sales, but did not include its apparent first-round funding from 2007.
- 2. Zynga reported that two VC firms bought a certain class of stock, but later reported that they sold a different class.
For the first issue, it would seem that Zynga was relying on Regulation S-K, a part of the Securities Act of 1933 that describes SEC reporting requirements for public issuers. Specifically, a passage that requires issues to provide “information as to all securities of the registrant sold by the registrant within the past three years which were not registered under the Securities Act.” This would apply to most venture capital transactions, since they utilize a safe harbor exemption under Regulation D.
Regulation S-K does not, however, seem to specify when to start the clock on the three-year window. Legal sources tell me that most companies use three calendar years rather than three fiscal years or three years from date of filing. Zynga also seems to have done that, going back to January 2008 (thus not mentioning earlier investments). Those sources also tell me, however, that an issue has the option of going back longer. Zynga clearly chose not to do so, but I’d wager it will tack on a few months when it comes time to file an amended S-1.
Now onto the second issue, about when and who originally invested in Zynga. Now that we’ve established that Zynga did not disclose all of its financings, it’s virtually certain that Foundry Group and Union Square Ventures bought Series A stock back in November 2007. Reid Hoffman also may have participated on that deal, or perhaps came in a couple months later (the S-1 reports him buying Series A shares in January 2008).
So the only remaining question is about Avalon Ventures, which bought lots of Series A-1 shares in February 2008 — but which was listed as a Zynga shareholder as of December 31, 2007 (based on a regulatory filing). My understanding is that Avalon took a very small piece of the original Series A (led by partner Rich Levandov, who had joined the firm in May 2007). It may have wanted more, but at the time was basically out of dry powder. Once it closed a new fund in February 2008, however, it bought in big at around a 2x step-up from the Series A — with Foundry and USV also buying a few more shares to balance things out.
Zynga has declined to comment on any of this, citing regulatory restrictions. Also no comment from Avalon, Foundry or USV.