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3 Notes on the Foursquare Financing

Mobile World Congress 2012Mobile World Congress 2012

Foursquare yesterday announced $45 million in new venture capital funding from (mostly) existing investors. The company also said that its founding CEO Dennis Crowley would be replaced by chief operating officer Jeff Glueck. Crowley will become the company’s executive chairman.

The big headline here is that this is a major down-round for a company once valued at $760 million. The new investors put money in at a valuation of $250 million.* But there are some other interesting items in the company’s Delaware stock certificate (courtesy of VC Experts):

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1. The Series E stock’s liquidation preference** is tied to a “qualifying revenue event.” In general, the preference is 1.5x, meaning the new investors are guarantee a 50% return, if the company is sold or IPOs. But, if Foursquare reaches $25 million in gross revenue during a calendar quarter, then the Series E liquidation preference drops to 1x. This suggests both that Foursquare is not yet generating $100 million in annual revenue, and also that management feels it’s a reachable threshold.

2. Per terms of this deal, the Series E holders ($4 per share) get paid back first in a liquidity event. Next comes the Series D folks, who paid $12.89 per share (that round came with a 4:1 stock split). Then it appears that remaining proceeds would be distributed pro rata among the Series A ($1), Series B ($13.34), Series C ($59.24) and common stock holders. This is an employee-friendly switch for Foursquare, which previously made the Series A-C holders senior to the common stock holders. Now they’ll all get paid at the same time (assuming there is any money left).

3. Not included in the Delaware docs is debt it raised two years ago from Silver Lake and existing shareholders like Union Square Ventures (which led the new round) and Andreessen Horowitz. That’s not surprising, as debt isn’t usually disclosed in such filings. My understanding, however, is that the notes remain on Foursquare’s books (i.e., have not been repaid). Moreover, the notes are senior to any of the stock, whether preferred or common.

* That is the pre-money valuation, which is what the company is worth before the new cash is added.
** Liquidation preference relates to which investors get paid first, and how much, in the event of something like the sale of the company.