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Term Sheet — Friday, July 1

Random Ramblings

Zenefits, the HR software startup that has accused its founder and former CEO of regulatory impropriety, is slashing its valuation to $2 billion from $4.5 billion.

This is not a “down-round,” in which a company raises new equity at a lower share price than the last time around. Instead, this is a repricing of existing stock―and it seems unprecedented (at least for a well-known company).

The move was announced internally late yesterday via an email to Zenefits employees by current CEO David Sacks, who was cleared of wrongdoing by the same investigation that found former boss Parker Conrad had written a software program called Macro to circumvent state licensing requirements.

In the email, Sacks says that he has spent several months “in discussions with a number of our major investors about how we can reset our relationship… and get fully aligned with the new Zenefits.”

Per terms of the agreement, investors who participated in the company’s $500 million Series C round in May 2015 (led by Fidelity and TPG Growth) will have their ownership stake increased from around 11% to around 25%. The Series C investors also will receive a permanent board seat, while the board also will create a compliance committee. Those that invested in the Series A and Series B rounds “will receive small adjustments to offset their dilution.”

So far the investor agreement has been approved by such Zenefits investors as TPG, Fidelity, Insight Venture Partners and Andreessen Horowitz. Sacks writes that the company “will be offering it to all our investors shortly.”

Other existing Zenefits shareholders include Comcast Ventures, Founders Fund, Foresite Capital, Institutional Venture Partners, Khosla Ventures, Panorama Point Partners, Otter Rock Capital, Peregrine Ventures and Sound Ventures.

“This is a unique situation, we’ve never seen it before and we don’t expect to see it again,” said a spokesperson for Andreessen Horowitz.

All investors who sign the agreement also are being required to sign a release of claims against the company. Excluded from the release, however, are claims against the $10 million of stock that Parker Conrad sold personally via earlier financings.

Investors that do not sign the agreement will still have the value of their shares diluted, but would retain the right to sue.

Sacks’ email also includes information for employees concerned that the recapitalization will negatively impact the value of their own equity in the company.

“Each non-executive employee of Zenefits will be ‘trued up’ through a special stock grant equal to 25% of their current number of shares. This new grant will vest 100% in 12 months. It will consist of RSUs rather than options so that employees don’t have to pay a strike price. Our executive team will also receive additional 4-year grants to incentivize them. However, co-founder/CTO Laks Srini and I have offered not to participate in this true-up in order to ensure that there are enough shares for employees. We will be diluted to the same extent as any other common stockholder.”

For Sacks, that dilution will hit his personal investment of around $12.5 million into the company.

Finally, the email reports that Zenefits recently offered all employees the option of a two-month separation package, but that only around 10% accepted. That means that, post separations, Zenefits will have around 900 remaining employees.

Multiple sources say that Zenefits has no immediate need to raise new funding, although we’ve been unable to learn its exact cash on hand.

• Best laid leverage plans… Until this Zenefits stuff broke, today’s column was going to be about leveraged loan multiples and, more specifically, how many banks seem to have forgotten the Fed guidance about 6x debt-to-EBITDA caps (based on both anecdote and data). It’s one of those things that seemed to cause a temporary LBO financing hiccup, until everyone realized that the SEC doesn’t seem to actually care too much. What first were a few exceptions expanded into a lot of exceptions and then expanded into the rule. We’ll return to it after the holiday, but always interested in your thoughts via email.

• Conspiracy buff: Early yesterday afternoon, Peter Kafka reported for Recode that music streaming company Spotify had sent a letter to Apple’s general counsel, accusing it of “causing grave harm to Spotify and its customers” by rejecting an update to Spotify’s iOS app. Several hours later, the WSJ reported that Apple is in exploratory talks about buying music streaming service Tidal, which is better known for its top artist relationships than its actual number of users.

Perhaps the timing here was just a coincidence. Or perhaps this is a not-so-subtle way of Apple telling Spotify to back off…

• Have a great long weekend. Term Sheet will return on Tuesday.


• Mondelez (Nasdaq: MDLZ) offered to acquire Hershey Co. (NYSE: HSY) has rejected a $23 billion cash and stock takeover bid from Mondelez International (Nasdaq: MDLZ), in a deal that would have created the world’s largest candy company. Read more.



• Index, a San Francisco-based provider of retail software focused on measurement and personalization, has raised $19 million in Series B funding. General Catalyst led the round, and was joined by General Catalyst executive-in-residence (and Datalogix founder) Rob Gierkink.

• Woven Digital, a Los Angeles-based digital media and content company focused on millennial males, has raised $18.5 million in Series B funding. WPP Ventures led the round, and was joined by return backers Institutional Venture Partners and Advancit Capital.

• Revinate, a San Francisco-based provider of guest experience software for the hospitality industry, has raised $13 million in third-round funding, according to a regulatory filing. The round total could hit $15 million. Existing backers include Tenaya Capital, Northgate Capital, Industry Ventures, Benchmark, Formation 8 and Tao Capital Partners.

•, a London-based personal data aggregation and exchange platform, has raised GBP 4.2 million in Series A funding led by Swiss Re. Read more.

• Cylance, an Irvine, Calif.-based cybersecurity company that leverages artificial intelligence and algorithmic science, said that Citi Ventures has joined a previously-announced $100 million Series D round. The round was co-led by The Blackstone Group and Insight Venture Partners, which were joined by return backers DFJ Growth, KKR, Dell Ventures, Capital One Ventures and TenEleven Ventures.


• Aqua Capital has acquired a control stake in Rural Basil, a Brazilian distributor of agricultural inputs. No financial terms were disclosed.

• Bain Capital and Vista Equity Partners have completed their previously-announced acquisition of Vertafore, a Bothell, Wash.-based provider of insurance industry software, from TPG Capital. No financial terms were disclosed.

• Bestop Inc., a Louisville, Colo.-based manufacturer of soft tops and fabric accessories for Jeep vehicles, has acquired Baja Designs, a San Marcos, Calif.-based provider of off-road lighting systems for the automotive market. No financial terms were disclosed. Bestop is a portfolio company of Kinderhook Industries LLC.

• Capital Z Partners has acquired Portfolio Group Inc., a Lake Forest, Calif.-based provider of finance and insurance products and services to auto dealers, from Frontenac Co. No financial terms were disclosed.

• The Carlyle Group has agreed to acquire the Irish business of AA PLC (LSE: AAAA), a British roadside recovery and insurance brokerage company, for approximately $174 million. Read more.

• Centre Partners has made an investment in Bradford Health Services LLC, a Birmingham, Ala.-based provider of substance abuse treatment and recovery services. No financial terms were disclosed for the deal, which was done in partnership with company management.

• Clayton Dubilier & Rice has completed its previously-announced acquisition of German sausage casings maker Kalle from Silverfleet Capital. No financial terms were disclosed, except that Silverfleet says it generated a 3.5x return multiple on its original EUR 71.5 million investment (and a 22.5% IRR).

• Conner Industries Inc., a Fort Worth, Texas-based portfolio company of The Argentum Group, has acquired the packaging division of Nebraska-based Golden Triangle Inc. No financial terms were disclosed.

• Implus, a Durham, N.C.-based athletic and outdoor accessories company owned by Berkshire Partners, has acquired the insole and medical adhesives assets of Spenco Medical Corp. No financial terms were disclosed.

• Inca Rail, the tourist train operator that transports people between Cusco and Machu Picchu in Peru, has raised an undisclosed amount of private equity funding from The Carlyle Group.

• Jones & Frank, a Raleigh, N.C.-based provider of fueling system solutions, has acquired ANS Distributing, a Tucson, Ariz.-based petroleum equipment provider, from KLH Capital. No financial terms were disclosed. Jones & Frank is a portfolio company of MidOcean Partners. No financial terms were disclosed.

• Keystone Capital has acquired Nature Soy Inc., a Philadelphia-based provider of soy and vegetarian products to ethnic markets. No financial terms were disclosed. Baker Tilly Capital managed the process.

• Pamlico Capital has sponsored a recapitalization of PrizeLogic LLC, a Southfield, Mich.-based digital promotions company focused on large consumer brands and retailers. No financial terms were disclosed.


• Atomera Inc., a Los Gatos, Calif.-based engineered materials company focused on the semiconductor market, has filed for a $20.7 million IPO. It plans to trade on the Nasdaq under ticker symbol ATMR, with National Securities Corp. serving as underwriter. Shareholders in the pre-revenue company include K2 Energy Ltd. (6.4% pre-IPO stake).

• BioVentus Inc., a Durham, N.C.-based maker of bone stimulation devices, has filed for a $150 million IPO. It plans to trade on the Nasdaq under ticker symbol BIOV, with J.P. Morgan and Piper Jaffray serving as lead underwriters. The company reports a $34 million net loss on nearly $254 million in revenue for 2015. Shareholders include Essex Woodlands Health Ventures, Smith & Nephew, Spindletop Healthcare Capital, Pantheon Ventures, Ampersand Capital and Alta Partners.

• Full Spectrum Inc., a Sunnyvale, Calif.-based developer of wireless communications infrastructure equipment, has filed for a $17.25 million IPO. It plans to trade on the Nasdaq under ticker symbol FMAX, with Joseph Gunnar & Co. serving as underwriter.

• Icon Group, an Australian chemotherapy provider for cancer patients, said that it is planning a mid-2017 IPO that would see majority holder Quadrant Private Equity sell its 55% stake. The company added that it is now worth A$1 billion overall. Read more.

• Syros Pharmaceuticals, a Cambridge, Mass.-based developer of gene control therapies for cancer and other diseases, raised $50 million in its IPO. The company priced 4 million shares at $12.50 per share (below $14-$16 range), for an initial market cap of around $284.5 million. The pre-revenue company will trade on the Nasdaq under ticker symbol SYRS, while Cowen & Co. and Piper Jaffray served as co-lead underwriters. Shareholders include Flagship Ventures (23.8% pre-IPO stake), Arch Venture Partners (22.9%), Fidelity (11.4%), Deerfield Management (9.1%), Polaris Partners (6.4%) WuXi Healthcare Ventures (5.8%), Redmile Group, Aisling Capital and Alexandria Venture Investments.


• Apple Leisure, a Caribbean and Mexico resort operator owned by Bain Capital, is exploring sale options after receiving interest form Chinese suitors, according to Reuters. A deal could be valued at more than $1.5 billion. Read more.


• Dick’s Sporting Goods (NYSE: DKS) agreed to pay $15 million for the brand name and certain intellectual property of bankrupt retailer Sports Authority. Read more.

• Sungevity Inc., an Oakland-based residential and commercial solar energy systems provider and installer, is going public via a reverse merger with special purpose acquisition company Easterly Acquisition Corp. (Nasdaq: EACQ). Sungevity has raised around $330 million in funding from firms like Craton Equity Partners, E.On, Jetstream Ventures, Apollo Investment Corp., GE Ventures and Hercules Technology Growth Capital. Read more.


• Shasta Ventures is raising up to $300 million for its fifth fund, according to a regulatory filing.


• Wendy Jarchow has joined River SaaS Capital, a provider of debt financing for SaaS businesses, as chief investment officer. She previously was a venture partner at JumpStart Inc.

• Jean-Pierre Mustier has been named CEO of Italian lender UniCredit, succeeding the departing Federico Ghizzoni. Mustier had led investment banking for UniCredit until leaving the bank in 2014. Read more.

• The Securities and Exchange Commission has named C. Dabney O’Riordan as co-chief of the Division of Enforcement’s asset management unit.

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