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Here’s the catch Robinhood agreed to in its $3.4B funding round this year

August 6, 2021, 8:32 PM UTC

It was the last week of January, and Robinhood needed to raise money fast. The morning of Jan. 28, the brokerage received a demand for a staggering $3 billion—capital needed to back its customers’ unprecedented trading in meme stocks like GameStop and AMC Entertainment. 

Robinhood immediately went to market. The Menlo Park, Calif.-based brokerage raised $1 billion in capital in a matter of 24 hours. Within four days, the company had received commitments from its investors for a total of more than three times that: $3.4 billion.

Now more information on the terms of that fundraising round is coming to light. An SEC filing Robinhood submitted late Aug. 4 revealed that nearly 20 private market investors had come to Robinhood’s aid, including Andreessen Horowitz, Index Ventures, and NEA. Ribbit Capital, a key backer for the company, invested more than $500 million in convertible notes during the fundraising round. All these investors got a key benefit in exchange for the capital: The right to sell shares unusually quickly post-IPO, though some tell Fortune they aren’t in any rush just yet. 

“Susa Ventures is a long-term holder,” says the firm’s general partner, Seth Berman. “We believe Robinhood will be a $100-billion-plus company.”

Typically in fundraising rounds, investors are required to stay in the stock for some duration of time, called a “lock-up period,” that usually lasts anywhere between 90 to 180 days after the date of the IPO. And similarly to what Robinhood did for its employees, the brokerage offered its investors a slightly altered lock-up. Robinhood’s SEC filings show that investors from the February round had their convertible notes swapped for shares at the IPO, but priced at 70% of the offering price (or $26.60). They may be able to sell up to 49 million of those shares as early as this month, once the SEC declares the filing effective. That’s not expected before Aug. 18. They’ll be able to sell another 49 million shares about a month later.

“This [February] financing basically saved the company, so it was probably negotiated in that transaction that they would have the ability to monetize sometime near term down the road,” said David Erikson, a former Lehman Brothers and Barclays investment banker, in an interview with Fortune. Erikson now teaches at the University of Pennsylvania’s Wharton School.

Robinhood’s stock has been plagued by a bout of volatility since its IPO just over a week ago. The brokerage’s shares fell in their debut by more than 8%, a drop that Bloomberg News reported to be the worst IPO for a company Robinhood’s size. But HOOD, as the stock has come to be known (it’s also the company’s ticker symbol), posted a massive comeback in the first part of the following week, rising more than 50% on Aug. 4 alone.

Then, the filing about the February fundraising happened. 

Shares of Robinhood’s stock promptly swung in the other direction on the news. It’s unclear whether the filing directly led to the price drop.  A person familiar with the terms of the February round told Fortune that the timing of the Robinhood registration statement was unrelated to the stock’s outsized performance the day before it was filed. Instead, the filing was to alert the SEC of the fact that the notes issued in February had converted into the combined 98 million shares at the IPO and that the investors would be able to sell them over time, once the regulator declares the statement effective. 

Not all of Robinhood’s backers get to sell shares so early. At least one prior fundraising round included longer, more standard lock-up requirements: among them, the Series F round in May through July 2020, in which growth-stage investment advisory company Republic Capital was involved. “We’re subject to the standard Robinhood lock up period,” says Boris Revsin, head of Republic Capital, which has invested approximately $34 million of its high-net worth investors’ assets in Robinhood in primary and secondary offerings. Revsin wouldn’t comment further on the terms of the Series F round.

Following Robinhood’s latest SEC filing, the 19 investors from the February raise will have the right to sell their combined 98 million shares of Robinhood stock over the next few months—but they don’t have to.

Venture firm ICONIQ Capital, which was a part of the February round, is undecided on what it will do with the 13.5 million of its 15.5 million shares it is now permitted to sell.

“We have not made any decisions about investment,” Divesh Makan, partner at ICONIQ Capital, said in an email, adding that he is excited for Robinhood’s team and that the company has been “long term holders of equity from many years.” Makan declined to comment on whether ICONIQ’s other investments involved a lock-up period.

Now that Robinhood has gone public, raising almost $2 billion in the process, the company will likely have enough capital on its balance sheet to avoid another rapid fundraise. Either way, these 19 investors carried Robinhood through a critical juncture. It “seems to have allowed them to resume trading faster than they otherwise would have,” Republic Capital’s Revsin says. “As an investor in Robinhood we appreciated the support from them.”

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