File sharing service BitTorrent has undone its $17 million financing from earlier this year, we’ve learned from an investor in the company, and that money (or what’s left of it) has been returned to investors DCM, Accel Partners and DAG Ventures.
The company, admitting that the their business was “not gaining sufficient traction,” has closed a new $7 million round of financing from those same investors at a “substantially reduced” valuation of $28 million.
Down valuation rounds are common in tough economic times. But rescinding entire rounds of financing and returning capital to investors isn’t – it’s a sign of significant distress at a startup.
From a letter to shareholders:
In late May and June of this past summer we closed a $17 million Series C financing.
The lead investor in this financing was DAG Ventures. Given the changes in our Company’s business model and projections that occurred in close proximity to the Series C financing, DAG claimed that the Series C financing should be substantially renegotiated. After evaluating DAG’s claim, engaging in significant negotiations with DAG, unsuccessfully trying to raise funds from other sources, and taking into account the overall economy, the Company decided to work with DAG to significantly modify the terms of the Series C financing.
The executive team has also been cut dramatically. Most of the executives listed on this page no longer appear to work for the company (BitTorrent previously announced that Eric Klinker was promoted from CTO to CEO after the resignation of Doug Walker) :
As a result of the foregoing, the Company now employs 19 people, and our executive
officer team consists of the undersigned, Eric Klinker, as CEO, Mitch Edwards as CFO, Bram Cohen as Chief Scientist, Simon Morris as VP of Product Marketing and Ilan Shamir as VP of Engineering.
The founding team has also been diluted to the point that they own a very small percentage of the company. Common stock and stock options account for only 11.4% of the company after the new financing, and much of that is owned by the venture capitalists. Current executives, though, are clearly being topped up. 30% of the newly capitalized company is set aside for new stock options.
The full letter is below, as well as the term sheet for the new financing and the current capitalization table. We’ve emailed BitTorrent with a request for comment.
Letter To Stockholders:
CONFIDENTIAL
Dear BitTorrent Shareholder:
I am writing to inform you of a number of significant developments related to the
Company, including the renegotiation of the terms of the Company’s Series C financing, and to
request your approval of, and to offer you the opportunity to participate in, the revised financing.
Business Update
Last spring the Company was focusing its business efforts on content delivery services
(DNA), embedded software (SDK) and our direct to consumer portal (the Store). Over the
course of the summer it became clear that some of the Company’s businesses were not gaining
sufficient traction, and that the Company would significantly miss its projections. In response,
the Company substantially restructured various product offerings, closed the Store, laid off a
significant number of employees, and made significant changes to our management team.
As a result of the foregoing, the Company now employs 19 people, and our executive
officer team consists of the undersigned, Eric Klinker, as CEO, Mitch Edwards as CFO, Bram
Cohen as Chief Scientist, Simon Morris as VP of Product Marketing and Ilan Shamir as VP of
Engineering.
Series C Financing
In late May and June of this past summer we closed a $17 million Series C financing.
The lead investor in this financing was DAG Ventures. Given the changes in our Company’s
business model and projections that occurred in close proximity to the Series C financing, DAG
claimed that the Series C financing should be substantially renegotiated. After evaluating
DAG’s claim, engaging in significant negotiations with DAG, unsuccessfully trying to raise
funds from other sources, and taking into account the overall economy, the Company decided to
work with DAG to significantly modify the terms of the Series C financing. The modifications
included reducing the amount of the financing from $17 million to $7 million, substantially
reducing the pre-money valuation of the Company to $28 million, and reducing the amount of
the outstanding pre-financing liquidation preference from $38 million to $13 million.
Series C-1/Series C-2 Financing
The terms of the revised financing call for the rescission of the Series C financing and the
sale of $7 million of a new Series C-1 Preferred Stock at a price of $0.32178 per share. The
terms also require the conversion of all of the Company’s pre-financing outstanding Preferred
Stock into Common Stock, and providing shareholders whose Preferred Stock is converted into
Common Stock the opportunity to exchange approximately one-third of such Common Stock
(approximately 2.1 million shares based on a $7 million financing) for a new Series C-2
Preferred Stock at a ratio of approximately 15 shares of new Series C-2 Preferred Stock for each
share of Common Stock being exchanged, if such shareholders participate in the new Series C-1
financing. The new Series C-2 Preferred Stock has a liquidation preference of $0.4196 per share,
resulting in an aggregate liquidation preference of the Series C-2 Preferred Stock of $13 million
(assuming a $7 million financing). The purpose of this Series C-2 Preferred Stock exchange is to
incent current Preferred shareholders to participate in the Series C-1 financing, and to obtain
their agreement to the reduction of their liquidation preference, by providing for them to receive
a higher percentage of the Company than they would otherwise have. We expect that the $7
million raised in this financing will fund the Company’s operations for a minimum of 12 months.
Please note that the financing documents also provide that the Company may use up to
$750,000 of the financing proceeds to repurchase shares of Common Stock from current
Common Stock holders. The Company has not yet decided whether to pursue such possibility.
In connection with the financing John Cadeddu of DAG will be joining the Company’s
Board, and Ashwin Navin has resigned. All directors other than Mr. Navin voted in favor of and
support the financing.
Enclosed is a Summary of Terms describing the Series C-1/C-2 financing in more detail,
together with a pre-financing and post-financing capitalization table.
The Company has already received the commitment of DAG to purchase $2 million in
the Series C-1 financing, and for Accel and DCM, the Company’s other major investors, to
invest an aggregate of $5 million in the financing. The other smaller investor in the Series C
financing, Quilvest, has elected not to participate in this financing. The Company may raise up
to approximately $7.8 million in total if additional shareholders purchase their pro rata portion.
Shareholder Participation
Given the nature of this financing, the Company is providing all shareholders the
opportunity to participate in the financing, to the extent that they can consistent with applicable
securities laws. If you would like to participate in the financing, or would like additional
information on the financing or the Company’s business, please contact the undersigned at (415)
568-[redacted] or [redacted]@bittorrent.com; or Mitch Edwards at (415) 568-[redacted] or
[redacted]@bittorrent.com.
If you are interested in participating in the financing you must notify the Company in writing by January 5, 2009.
Financing Approval
Enclosed is a Shareholder Consent approving this financing, and various related matters
(including a substantial increase in the Company’s stock option plan to allow the Company to
provide appropriate incentive to its new management team). If the proposed transactions and
Consent are acceptable, please sign the Consent and return it to our Company’s law firm,
Fenwick & West, attention Diana Woods at (650) 938-5200 (fax) or dwoods@fenwick.com (by
pdf). Please provide your consent as soon as possible, as we would like to close the initial
closing of this financing in the very near future. We will be holding a second closing in the
future for any shareholders who wish to participate in the financing as described above.
The need for this revised financing is disappointing. That said, the management team
believes that the Company’s prospects are bright with a greatly reduced operational expense
profile, a focus on attaining profitability and a commitment to building value for our
shareholders.
Sincerely,
Eric Klinker
President and CEO
Term Sheet:
DOCS-1990105-v4-Summary_of_Terms_Series_C-1_BitTorrent – Free Legal Forms
Capitalization Table:
Who else competes with BitTorrent?
I guess successful new services like Hulu.
I’m not sure what business model was behind BitTorrent, but today if you want free stuff online it doesn’t mean you have to choice p2p.
Thanks to Bit Torrent we now have really cool legal ways to get free Hollywood content.
For it to survive I think it needs to be built in Firefox and other browsers! It also needs a streaming component so users are streaming bits to each other through their browsers. Would be great for start-uppers as the cost to innovate this space would cheap!
If you like Hulu check out playon.
It turns your HTPC into a Hulu, CNN, ect.. media server for your XBox 360 or PS3.
The MSN IPTV beta in Media center is COMPLETE GARBAGE next to playon.
themediamall.com/playon
Playon literally replaces cable. I no longer pay for cable. Literally. And I have good programming.
W/o playon that’s impossible.
MSN Vista Media Center IP TV Beta is such garbage next to Playon. MSN IP TV Beta has advertisements before EVERY VIDEO, and they’re all Bill Gates smiling saying “I’m a PC”. It makes me want to nuke Redmond.
no one
I’ll never understand why there’s no possible implementation for Firefox, etc. So Ryan is absolutely right: they have to go in that direction… immediately!
I think it will be a vital case for both Qualitative and Quantitative research studies in academia. I will ask my Ph.D supervisor to allow me change my subject
.
Mike, do you think some key people there follow the Danish guy.
errr. what?
I meant, do you suspect any fraud? Like the IT Factory case.
JK..
I’m wondering about the fiduciary duty of the board of directors…follow up post coming.
Just a few week ago ı read whole article and amazed but now it is hard for them. God helps bittorent and us also
This is the article link.
http://www.busi...05046863317.htm
I didn’t get what was their business model to begin with
Or do they have one?
Jack
Yocial.com
Sounds like BT is having a hard time
- cypherial@yahoo.com
Here it is: Business Model- content aggregation the company, on February 25, 2007, released a web-based store to distribute movies, TV shows, music, and video games. The company also licenses its technology, called BitTorrent DNA (Delivery Network Accelerator),[1] to websites “to add the speed and efficiency of patented BitTorrent technology to their current content delivery infrastructure, significantly reducing bandwidth costs while increasing capacity over standard HTTP delivery solutions.” The third product offering is the BitTorrent Software Development Kit (SDK) for consumer electronics and home networking hardware manufacturers.
Wikipedia
The licensing part of their business model is a model that only degrades in power over time, as broadband becomes cheaper and more plentiful and nullifies any advantages their technology confers (while only adding additional complexity).
It’s analogous to products in the late 90s that did on-the-fly compression (e.g. STAC) to increase the capacity of disk drives – there was no long-term business model there because hard drive capacity-per-dollar just increases so rapidly.
i wonder how much they paid forthe client utorrent in december 2006, nobody knows?
20 millions $ if I remember correctly.
That was the most expensive 300kb of software I’ve even seen, lol.
Wow. I’m wondering why someone leaked these documents, the investors have to be absolutely PISSED! Amazing to see how something as powerful as Bittorrent can’t find a revenue generating business model.
The bulk of the dilution of common stock here is not coming from the VC preferred stock, it’s from the huge option pool top up in this round. There’s still ~50% equity available for the team. Looks like those who kept on will be rewarded at the expense of the people no longer at the company.
Their business model changed to enabling video delivery (the DNA business they talk about). They dumped the content portal/aggregation business a while ago.
This is essentially a re-cap of the company. If you read through the cap table and the docs, the Series A and B investors are crammed down to a single share. Some of those investors are participating in the C round where they have a significant ownership in the company.
Also, the option pool increase is actually very generous. You have to give the VCs credit for understanding they needed to motivate the people still working there.
The losers from what I can tell include: the founder (Bram) whose ownership has decreased, the employee common shareholders who are no longer with the company, and the previous investors who aren’t participating.
Actually, all things considered the VCs should be commended for putting in a bunch of fresh cash into a struggling company and created a fresh big new option pool for employees.
Alex
MA,
You must be tired forom LEWeb..first time in reading blog that I ever see a mistake, ie spelling:
Down valuation rounds are common in tough economic times. But rescinding entire rounds of financign and returning capital to investors isn’t – it’s a sign of significant distress at a startup.
Get some sleep Mike..
You must be new here. Splleing msitaeks are aplntey hree.
why new? you are wrong!:(
Copyright issues aside, I feel for BitTorrent.
Recapitalizing is hard already; but seeing your financing documents in public has to be embarrassing to the new team.
It seems strange that so many people were upset about the re-publication of Jason Calacanis’s email about layoffs, which had already been sent to 10,000 people, but not about this.
I don’t blame TechCrunch in either case — in your role you are obligated to publish important, factual information like the above, and self censorship would be an active wrong.
But that doesn’t preclude any of us from sympathizing with a startup over a leak like this.
i actually think it would be much better if everyone published their documents on techcrunch.
I emailed the press team at bittorrent and would have been quite willing to discuss not publishing them and just writing a story about it, but they don’t appear to work on Sundays.
Agreed.
Have you a chance to ditch the thick suit? Last I saw no?
BitTorrent is a sick company inside and out. If you followed this company, you will know that the investors are just as much to blame as management. What I can’t understand is how these seemingly astute investors elect Eric Klinker as CEO. He was pretty much pushed out at InterNap for being a limp CTO, and now during this crisis they place him as the commander in chief? They also didn’t keep a leash on their very strange founder which created issues. You gotta wonder what goes into their thinking. Very unimpressed.
We’re doing a couple of interesting things in the BitTorrent space over at LittleShoot I think people here will like *a lot.* I pretty much hate BitTorrent from a protocol-design perspective, but Julian Cain and I have come up with a pretty nifty little twist on BitTorrent streaming, and we’re integrating it just because:
1) We can
2) BitTorrent has just a few more users than the protocols we’re working on…for now
So this is a shameless plug, but *I wouldn’t mention it if wasn’t going to be seriously worth your time.* Still about a month out yet. I’ll be talking about it a lot more at SXSW on my P2P 2.0 panel.
Do you have any information on how much salary their executives are making? I bet that it is an indecent amount of money. Here is a guess at their business model: (1) raise a ton of cash, (2) help yourself to much of it and live the good life until company dies, (3) move to next company (flaunting your ability to raise a ton of cash) and do it again. Anyway, thanks for the heads up: I just added a few names to my executive black list.
Personally I think Bittorrent is a waste of time. It’s a slow file sharing site. I’ve tried Bittorrent a couple of times and I couldn’t download anything. Bittorrent reminds me of file sharing sites like Napster, Limewire, and Bearshare.
It’s not a file sharing site, nor is is slow. You’re doing it wrong.
good news,fast to touch it:)
Wowzers, ugly situation there. Thanks for all the detail….intriguing stuff.
classic case of creating value, but unable to capture value.
one of their employees left their finance folders seeding.
deadpool
The post money evaluation is still over $100 million. How many t shirts do they sell? Isn’t that their only real revenue model?
lesson learned for the VCs…STOP overvaluing companies that don’t have a proven business model. please.
Their problems may be further compounded by banks getting nervous with their lending.
If we were not living in such a capitalist world, BT and it’s creator would have been rewarded for making this very popular technology.
Go Cohen Go.
Sometimes, you have got to pull the plug on an investment, before that there are always hard feelings to overcome. http://www.nichea.info does offer some help.
Hope the BitTorrent continues to provide the usual service, downloading. http://www.youtechno.info
Wow, somebody f-ed up, big time:
Why would you agree to a rescindable deal? Yes, I know, “you had to,” because you’re investors, who probably called themselves your “partners” when they were wooing you, saw your weakness and forced you into the bathroom stall, bent you over, and showed you who they really were.
Why did your lawyer not demand whatever clause let this happen be removed, even if you had to trade something for that to happen? Because they are conflicted too. You can bring them one deal, but the VC can bring them many. Who do they want to please? Right.
Yes, I’m over-simplifying, exaggerating, and possibly mischaracterizing, but this story is yet another lesson for entrepreneurs, yet another reason why you should bootstrap if you can. Otherwise, most of the time, you’re just asking to be taken advantage of.
Sure, sometimes you get some benefit from taking VC money before you have revenue and positive margins, just like sometimes you get some benefit (at least it looks that way for a while) from taking the devil’s money. In the end, though, most of the time, you will get screwed (sometimes justifiably so, maybe, such as if it was your own greed that drove you to the deal). Why? I leave you with my favorite version of a famous fable:
Once upon a time, a woman was picking up firewood. She came upon a poisonous snake frozen in the snow. She took the snake home and nursed it back to health. One day the snake bit her on the cheek. As she lay dying, she asked the snake, “Why have you done this to me?” And the snake answered, “Look, bitch, you knew I was a snake.” -NBK
What a scoop Michael. Award level stuff here. Amazing reporting.
Two big news items here:
1. Series C was not closed? If it was, then there were some loose strings to go back and redo a Series legally. Probably gun to the head of Boardroom level stuff
2. Common stock reduced from 50% to 9%. This is the big news really. New option pool of 30%? Series A/B remain at same level, Series C gets a little more, but the new structure is really kills the employees and founders.
Michael well done,and needs some digging deeper on why.
you’re banned. go be shocked somewhere else, i’m in no mood for this crap today.
http://www.tech...tful-but-arent/