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Term Sheet — Wednesday, May 11

Random Ramblings

It was the split heard ’round Silicon Valley: David Lee was leaving SV Angel, the high-profile venture capital firm he had co-founded with Ron Conway to invest in such tech startups as Airbnb, Docker, Pinterest and Snapchat.

The stunning news came out nearly one year ago, based on a terse memo Conway sent to SV Angel’s limited partners about how Lee “had made a personal decision” to spend more time with his family in Los Angeles. Neither Conway nor Lee commented further to the media, prompting speculation that this was not an amicable business divorce.

Indeed, Fortune has learned that Conway’s verbal conversations with LPs were much more critical of Lee than was his official letter.

“It’s really too bad because I like both Ron and David and would invest with both of them again. But there are some pretty hard feelings between the two of them,” says one SV Angel limited partner, who spoke on condition of anonymity.

According to several sources, Conway claimed to LPs that Lee had spent less time in Silicon Valley than Conway had expected when Lee first moved to Los Angeles in late 2012. That geographic shift had raised some eyebrows at the time, particularly given that SV Angel was a “ground game” firm known for focusing on Bay Area-based companies. But no one outside SV Angel paid too much attention, perhaps because Conway had said just months earlier at a conference that SV Angel “is David’s fund” in which Conway had “a huge vested interest.”

By early 2015, however, Lee had told Conway that he didn’t wanted to be part of SV Angel’s next fund (SV Angel VI). Not only because of their disputes over “time and place” ― driven by Lee’s family considerations ― but also because Lee had developed investment interests in areas that didn’t necessarily match the core of SV Angel’s strategy (e.g., healthcare).

The trouble, however, was that SV Angel wasn’t just “David’s” in a figurative sense. It was literally his, in that Lee owned its management company. Conway, a “special limited partner” in SV Angel who didn’t take a salary, had paid relatively little attention to any of the structural nitty-gritty until Lee indicated that he wanted to move on. But when Conway did finally dig into the details, in order to facilitate the transition, LPs say that he blew a gasket.

“When Ron is your friend, he is your best and most loyal friend in the world,” says ano ther SV Angel limited partner. “But when he feels betrayed… well, you don’t want to piss him off.”

According to what Conway told limited partners, Lee had effectively paid himself more than SV Angel’s $250,000 annual salary cap, via a technique known as a fee waiver. While apparently foreign to Conway, fee waivers have been relatively common among private equity fund managers as a way to cover the portion of funds that the managers are required to invest up-front in order to better align interests (i.e., “skin in the game”). Some managers used fee waivers as a tax dodge ― since they sidestepped ordinary income taxes on salary, instead plugging it directly into funds that would generate capital gains ― but others (particularly younger managers, perhaps including Lee) literally didn’t have enough cash on hand to cover the “GP commit.”

Lee’s fee waivers were spelled out in SV Angel’s lawyer-approved fund documents (which Conway had also signed), and Lee’s ownership of the management company theoretically meant that he could spend incoming management fees as he wished. As such, Conway never alleged any sort of fraud or legal violations. But he did tell LPs that he believed Lee had breached his trust, and that the two sides eventually hammered out a confidential separation settlement whereby Lee agreed to indirectly repay some of the disputed fee proceeds, plus some unrelated expense reimbursements.

Lee, who currently is raising a new fund called Refactor Capital, provided the following statement to Fortune:

I’m deeply grateful for my time at SV Angel. I had the chance to develop many great relationships and work with many great startups. Those experiences were invaluable for my investing career. Ultimately I moved on because I wanted to spend more time with my wife and daughters. That’s it ― there’s no other reason.

Also I’m proud of the work I did as the manager of SV Angel and what we accomplished as a team to help our portfolio founders and serve our investors. I stand behind everything I did while I was there.

I’m very excited about my next chapter – to work with startups in areas like healthcare, education, and financial services. Software will play a big role in areas like these, and it’s been fun to support founders who are working on hard problems. It’s great to be back doing what I love, and I wish the SV Angel team all the best.

Conway, who now serves as co-managing partner of SV Angel alongside his son Topher, declined comment.


• Hyperloop One (f.k.a. Hyperloop Technologies), a Los Angeles-based developer of ultra-high speed transportation services, has raised $80 million in new VC funding from Caspian Venture Partners, EightVC, Sherpa Ventures, ZhenFund, GE Ventures, Fast Digital, Khosla Ventures, France’s national railway SNCF, and Western Technology Investment. Read more.


• BigCommerce, an Austin, Texas-based e-commerce platform for SMBs, has raised $30 million in new VC funding. GGV Capital led the round, and was joined by return backers General Catalyst, Revolution Growth, SoftBank Capital, Tenaya, Split Rock, Telstra Ventures and American Express Ventures.

• Soracom, a Tokyo-based provider of a communication platform for connected device developers, has raised around $22 million in Series B funding from firms like World Innovation Lab and Infinity Venture Partners. Read more.

• Simplee, a Palo Alto, Calif.-based platform that lets patients track and pay medical bills, has raised $20 million in Series C funding. Social Capital led the round, and was joined by American Express Ventures and return backers 83North and Heritage Group.

• OxStem, an Oxford University spinout focused on designing stem cell drugs to treat age-related diseases, has raised £16.9 million in new VC funding. No investor information was disclosed.

• Waveworks, a London-based provi der of networking and monitoring solutions for containers and microservices, has raised $15 million in Series B funding. Google Ventures led the round, and was joined by return backer Accel.

• Drayson Technologies, a London-based developer of wireless energy solutions for lo-consumption devices, has raised £8 million in Series B funding co-led by return backers Landsdowne Partners and Woodford Investment Management. Read more.

•, a city-focused news platform, has raised $4 million in Series A funding. Backers include Rakuten, Greylock, Graph Ventures, Social Capital, Charles River Ventures, John S. and James L. Knight Foundation, Innovation Endeavors, Pejman Mar Ventures, Matter Ventures, 500 Startups, Joi Ito, Director of MIT Media Lab, and angel investors Blake Krikorian, Magdalena Yesil and Shane Smith.


• AWE Ltd. (ASX: AWE), an Australian oil and gas company, has rejected an A$421 million takeover offer from Lone Star Funds, saying that the bid undervalues the company. Read more.

• Bank of East Asia Ltd. (HK: 23), under pressure from Elliott Management, has hired Goldman Sachs to find a buyer for Tricor Holdings Ltd., a Hong Kong-based provider of back-office services, according to the WSJ. The Carlyle Group and Baring Private Equity Asia reportedly are among interested suitors. Read more.

• CHIC Fresh, a Shanghai-based maker of “cold-crafted” coconut water and juices, has raised $30 million in equity funding from ClearVue Partners.

• Dell is expected to launch an investment grade bond sale that could be designed to raise at least $16 billion, to help finance its proposed purchase of EMC Corp. Read more.

• Epic Health Services Inc., a Dallas-based portfolio company of Webster Capital, has acquired Rehabilitation Associates, a Virginia Beach, Va.-based private pediatric therapy provider. No financial terms were disclosed.

• Huron Capital Partners and Duchossois Capital Management have acquired a majority stake in Systems Inc., a Germantown, Wis.-based maker of loading dock leveling equipment, truck restraints, specialty dock equipment and related accessories. No financial terms were disclosed.

• Iovate Health Sciences International Inc., a Canadian provider of nutrition and weight-loss products has received takeover bids from such suitors as CDH Investments, Hony Capital, Kelso & Co. and Xiwang Group Co., according to Bloomberg. The deal could value Iovate, maker of MuscleTech, at upwards of $1 billion. Read more.

• KKR has reemerged as a prospective bidder for Australian supermarket chain Woolworths Ltd. (ASX: WOW), which has a current market cap of around A$21 billion, according to The Australian. Read more.

• Willowood USA, a Roseburg, Ore.-based manufacturer of generic crop protection products, has raised an undisclosed amount of private equity funding from Lariat Partners.


• Midland States Bancorp Inc., an Effingham, Ill.-based regional bank with around $2.9 billion in assets under management, has set its IPO terms to 3.9 million shares being offered at between $25 and $27 per share. It plans to trade on the Nasdaq under ticker symbol MSBI, with Sandler O’Neill and Keefe, Bruyette & Woods serving as co-lead underwriters.

Oncobiologics, a Cranbury, N.J.-based developer of biosimilar therapeutics, has cut its proposed IPO terms to 5.8 million shares being offered at $6 per share, compared to earlier plans to offer 5 million shares at between $11 and $13 per share. The company plans to trade on the Nasdaq under ticker symbol ONS, with Jefferies and Barclays serving as lead underwriters. Oncobiologics has raised over $43 million in VC funding, from firms like Perceptive Advisors,Cormorant Global Healthcare Master Fund, Longwood Capital Partners, venBio Select Fund, Proximare Lifesciences Fund, OSSB Pharma Fund and MIH Fund.

• Turning Point Brands Inc., a Louisville, Ky.-based maker of “other tobacco products” like loose leaf chew and Zig Zag rolling paper, raised $54 million in its IPO. The company priced 5.4 million shares at $10 per share (below $13-$15 range). It will trade on the NYSE under ticker symbol TPB, with FBR and Cowen & Co. serving as underwriters.


• Ardian is beginning to discuss a dividend recap for German specialty pharma company Riemser, as the first step of what would become a sale process, according to Reuters. Riemser generates around €300 million in annual revenue. Read more.

• EnCap Investments has hired Jefferies Group to find a buyer for PayRock Energy, an Oklahoma City-based oil and gas company, according to Bloomberg. The deal could be worth upwards of $1.5 billion. Read more.

• The Gores Group has agreed to sell Hay Group, a German producer of forged and machined steel automotive parts, to Japanese auto parts manufacturer Musashi Seimitsu (Tokyo: 2770). No financial terms were disclosed.

• L Catterton has sold its remaining stake in Nature’s Variety, a St. Louis-based maker of all-natural pet foods, to joint venture partner Agrolimen SA (Spain) for an undisclosed amount.


• Citadel is in talks to acquire Automated Trading Desk, an electronic market-maker , from Citigroup (NYSE: C), according to the FT. Read more.

• Engie (Paris: ENGIE) has acquired an 80% stake in Green Charge Networks, a Santa Clara, Calif.-based provider of battery systems and energy management software for building owners. Read more.

• Grubhub (NYSE: GRUB) has acquired LAbite, a Los Angeles-based restaurant delivery service, for around $65 million in cash. Headwaters MB managed the process.

• Marketo Inc. (Nasdaq: MRKO), a San Mateo, Calif.-based provider of cloud-based engagement marketing software, has hired Morgan Stanley to explore strategic alternatives, including a possible sale of the company, according to Bloomberg. Marketo shares surged on the news, giving the company a $1.19 billion market cap. Shareholders include Battery Ventures (1.14% stake). Read more.

• Ultimate Fighting Championship president Dana White said that the mixed martial arts league is not for sale, following an ESPN report that UFC parent Zuffa LLC was seeking a buyer. Read more.


• Lantern Asset Management , a Dallas-based private equity firm led by former Ally Financial executive Andy Mitchell, is raising upwards of $500 million for its debut fund, according to regulatory filings.

• Longitude Venture Partners is raising upwards of $525 million for its third fund, according to a regulatory filing.


• Bob Bianco, former CEO of Menlo Worldwide, has joined Calera Capital as an operating partner.

• Isaac Bright has joined Synthetic Biologics Inc. (NYSE: SYN) as VP of corporate development. He previously was a partner with Merieux Development, where he led U.S. private equity investments.

• Grant Moyer has joined Mitsubishi UFJ Financial Group as head of leveraged capital markets for the Americas. He previously was a managing director with Goldman Sachs.

• Steven Pierson has agreed to join Lovell Minnick Partners, a private equity firm focused on financial and business services companies, as president and a partner. He previously was with UBS as head of FIG investment banking for the Americas and global head of financial technology and services.

• Carl Rutstein has joined management consulting firm A.T. Kearney as a partner in its financial institutions group. He previously was with The Kessler Group.

• Ashleigh Schap has joined Dorilton Capital, a family office focused on lower middle-market buyouts, has director of business development. She previously was with Axial.

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