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Term Sheet — Tuesday, August 19

August 19, 2014, 2:30 PM UTC

Random Ramblings

Early startup employees usually take stock options in lieu of higher salaries. It’s a transaction covered in optimistic capitalism, with the employee betting that today’s worthless paper eventually will be valued higher than a few thousand greenbacks. And so the employee goes to work, in an effort to realize that vision.

But there is a big catch.

If the employee leaves the company after his options vest, he often is required to exercise the options within a few months or else they are terminated. And exercising the options can create a big up-front tax bill.

The capitalist solution to this, of course, is for the employee to exercise the options and then sell some of the stock – either on the secondary market or back to the company – to cover the IRS demands. But many of the hottest startups are refusing to cooperate.

We discussed this back in June with Uber, which was preventing secondary market sales and, instead, was conducting regular tenders at below-market rates. That seemed pretty hardball, but we’re now learning that many companies aren’t offering tenders at any price – thus leaving ex-employees stuck between a rock and a hard place.  

Pinterest, for example, restricts all employee stock sales on the secondary market and has not launched a tender offer for employees since October 2012. A future tender is not currently scheduled, although a spokesman says that “we are constantly evaluating ways for employees and former employees to get liquidity, including facilitating non-recourse loans and another secondary offering.” AirBNB also doesn’t do regular buybacks, even though its revenue profile more closely mirrors Uber than Pinterest.

Many of these startups also resist efforts by third-parties to offer loans in exchange for equity.

I honestly don’t know what the proper solution is here. There are legitimate reasons for startups to prevent their shares from hitting the general secondary market and, in some cases, there isn’t a huge amount of cash available to buy back stock. On the other hand, an ex-employee who spent years helping to build value shouldn’t be forced to either give up their options or going in hock to the IRS (particularly if the company is a unicorn that can easily raise new venture capital). Nor should he be shackled by golden handcuffs when his original handshake was gilded by straw.

So I ask you: What should be the market standard solution?

Google IPOversary: It has now been 10 years since Google went public, and my colleague Miguel Helft has a good piece up about how the company has managed to maintain its quirky culture. Two related notes:

(1) I wrote at the time that VC backers Kleiner Perkins and Sequoia Capital were making a huge mistake not selling at least some of their combined 45 million shares (18.6% of the company) at the $85 IPO price. For context, Google stock opened trading today at a modest $586 per share (not adjusted for recent stock split). This is why I don’t give stock advice.

(2) I’ve been hearing some talk lately about how certain VC firms are passing on certain Bitcoin-related investments, due to competition concerns by existing Bitcoin-related portfolio companies. The idea is that even though a Bitcoin startup may not today compete with the prospective investment, the industry is so nascent that future competition is entirely possible. So I reached out to some veteran VCs to find out if early Internet entrepreneurs expressed similar concerns 25 or 30 years ago. I’ll have a larger piece on this soon, but here is a part of John Doerr’s reply where he talks about search engines (bringing us back to our original subject):

"There was Yahoo! vs. Infoseek vs. Alta Vista vs. Inktomi vs. Northern Light vs. Excite vs. Google. We backed Excite, asked about Google (Excite had tried to acquire them). Excite objected to our investment, we discussed further, Excite acquiesced and we went ahead. Thank God."

In market: OpenView Venture Partners is seeking around $250 million for its fourth fund, according to an LP source. The Boston-based VC firm yesterday disclosed the fundraising plans – sans dollar target – in an SEC filing. It had raised $200 million for its third fund in 2011.


 KPS Capital Partners has agreed to sell Waupaca Foundry Inc., a Waupaca, Wis.-based iron foundry company, to Hitachi Metals Ltd. (TSE: 5486) for $1.3 billion in cash. KPS originally invested $226 million in cash to acquire the company two years ago. Last year Waupaca paid out a $325 million dividend to shareholders, and this deal would generate another $800 million in cash for shareholders (i.e., around $900mm in profit).


GuardiCore, an Israel-based developer of data center security solutions, has raised $11 million in new VC funding. Battery Ventures led the round, and was joined by Greylock IL.

ScriptRock Inc., a Mountain View, Calif.-based provider of configuration monitoring solutions, has raised $8.7 million in Series A funding. August Capital led the round, and was joined by return backers Valar Ventures and Square Peg Capital.

WebLinc, a Philadelphia-based e-commerce platform for retailers, has raised $6 million in Series A funding from Safeguard Scientifics.

Algorithmia, a Seattle-based cloud marketplace for algoriths, has raised $2.4 million in seed funding. Madrona Venture Group led the round, and was joined by Rakuten Ventures, Deep Fork Capital and individual angel investors.

Nirmidas Biotech Inc., a San Francisco-based developer of fluorescence technology that helps medical researchers detect biomarkers, has raised $2 million in seed funding from backers like the StartX Fund.

Scale Computing Inc., an Indianapolis-based provider of data center infrastructure for the mid-market, has raised an undisclosed amount of equity funding from First Analysis.


 Linden Capital Partners has acquired Spear Education LLC, a Scottsdale, Ariz.-based provider of post-graduate dental education. No terms were disclosed, except that Golub Capital provided debt financing.

Natural Resource Partners has agreed to acquire VantaCore Partners LP for $205 million from shareholders like Trilantic Capital Partners. VantaCore operates three hard rock quarries, six sand and gravel plants, two asphalt plants and a marine terminal.

Mount Kellett Capital Management and Global Asset Capital have agreed to sell EVOQ Properties Inc. (OTC BB: EVOQ), a property owner focused on downtown Los Angeles, to an investor consortium that includes Atlas Capital, Square Mile Capital Management and USAA Real Estate Co. The deal is valued at approximately $357.4 million.

Nielsen Bainbridge Group, a portfolio company of Kohlberg & Co., has acquired The Home Décor Cos. from Linsalata Capital Partners for an undisclosed amount. Home Décor is a Southaven, Miss.-based provider of decorative home accessories to North American retailers.

Partners Group has agreed to acquire a control stake in Suzhou Savera Shangwu Elevator Riding System Co., a China-based maker of elevator components, at an enterprise value north of $450 million.

Peninsula Pacific Strategic Partners has acquired Brundage-Bone Concrete Pumping Inc., a Denver–based provider of concrete-pumping services. No financial terms were disclosed.

Riverlake Partners has acquired a majority stake in Guerdon Enterprises LLC, a Boise, Idaho-based producer of large multi-unit modular buildings. No financial terms were disclosed.

TA Associates has invested an undisclosed amount into SkinnyPop Popcorn LLC, a Skokie, Illinois-based marketer of packaged popcorn products.

Warburg Pincus and Baosteel Gases (China) have agreed to acquire the industrial gas assets of Henan Jinkai Chemical Investment Holding Group for approximately $489 million. This is the first deal of a recently-announced strategic partnership between Warburg Pincus and Baosteel Gases to explore industrial gas assets.


 Medley Management Inc., a New York-based asset management firm with around $3.3 billion in AUM, has filed for a $150 million IPO. It plans to trade on the NYSE under ticker symbol MDLY, with Goldman Sachs and Credit Suisse serving as co-lead underwriters.


 CHS Capital has agreed to sell Dura-Line, a Knoxville, Tenn.-based provider of high-density polyethylene (HDPE) conduit, duct and pressure-pipe solutions, to Mexichem for approximately $630 million. Read more.

Graham Partners is seeking a buyer for Infiltrator Systems, an Old Saybrook, Conn.-based maker of septic tanks and other onsite wastewater treatment products, according to peHUB. The deal could be valued at more than $400 million. Read more

M/C Partners and Ridgemont Equity Partners have hired Moelis & Co. to find a buyer for AccentHealth, a Tampa, Fla.-based company that shows licensed CNN programming on screens in doctor office waiting rooms, according to Reuters. A sale could be valued well north of $200 million, while possible buyers could include rival PatientPoint (owned by Catterton Partners). Read more

TPG Capital is selling nearly half of its stake in investment management software company Advent Software (Nasdaq: ADVS), just one year after acquiring a 14.6% position, according to a regulatory filing. At its most recent share price prior to the filing, the sale of 3.75 million shares would be valued at around $121 million.


 BHP Billiton (ASX: BHP) said that it will spin off several of its metals and mining assets into a new listed company. Read more

Ingersoll-Rand PLC (NYSE: IR) has agreed to acquire the assets of of Cameron International Corp.’s (NYSE: CAM) Centrifugal Compression division for $850 million. Read more


 Hastings Equity Partners, a Boston-based private equity firm focused on lower middle-market energy services and equipment companies in the U.S., has closed its third fund with $171 million in capital commitments. Forbes Private Capital Group served as placement agent.

 HealthQuest Capital, a medtech-focused VC firm founded last year by ex- Sofinnova Ventures partner Garheng Kong, has closed its debut fund with $110 million in capital commitments. Read more.


Mae Shan Chong has joined Jones Day as a Singapore-based partner in the law firm’s private equity practice. She previously was with White & Case.

 Richard Dell’Aquila has joined Brookside Equity Partners as a managing director. He previously was a managing director with Parallel Investment Partners.

 Annie Johnson has joined Cascadia Capital as marketing manager. She previously spent more than eight years as director of investor relations with Montlake Capital.

 Thomas Montag will become sole chief operating officer at Bank of America, while co-COO David Darnell will move to Florida and become vice chairman, according to Bloomberg. Read more

 Geoffrey Rhizor has joined investment bank JMP Group as a San Francisco-based vice president. He previously was a VP with MartinWolf M&A Advisors.

 Paras Vira has joined the Canada Pension Plan Investment Board as a member of its principal credit investments group. He previously spent more than eight years with Oaktree Capital

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