Update: We spoke with Ashesh Shah, the founder and CEO of the fund leading Bolt’s proposed $450 million raise for some much-needed additional detail on the deal. Read the full interview here.
Bolt’s aggressive ultimatum to its existing shareholders — in which it told them to buy many more shares at higher prices or it would take back their shares for payment of 1 cent a share — will be an expensive uphill battle, an expert familiar with Bolt’s corporate charter tells TechCrunch.
To recap: On Tuesday, when news broke that one-click checkout startup Bolt was attempting to raise $450 million at a potential $14 billion valuation, more than one head turned.
This was a company that had seen a lot of controversy, including its outspoken founder Ryan Breslow stepping down in February 2022. Part of the news of that giant new funding round included Breslow coming back as CEO. This comes after allegations that he misled investors and violated security laws by inflating metrics while fundraising the last time he ran the company. Breslow also was embroiled in a legal battle with investor Activant Capital over a $30 million loan he took out.
So it came as a surprise to many that a letter to investors spelled out a term sheet that would not only bring a significant capital infusion but also Breslow back at the helm of the company.
The proposed deal was presented to preferred shareholders in an email from Bolt’s interim CEO Justin Grooms that reportedly said: “We are finalizing a $450+ million Series F funding round from UAE- and UK-based investment firms, which will elevate our total valuation to over $14 billion, a considerable leap from our $11 billion valuation during the Series E1 round in 2022. In addition to the investment from these investment firms, Bolt may receive additional amounts from existing Bolt investors who may participate in the Series F funding round.”
Journalist Eric Newcomer reported on Tuesday that as of the end of March, Bolt’s annualized run-rate was at $28 million in revenue and that the company had $7 million in gross profit. A valuation of $14 billion would be an enormous multiple over such numbers and higher than that $11 billion valuation achieved in January of 2022.
As more details emerged, though, it became clear that the proposed transaction is a modified example of a “pay-to-play” transaction in which Bolt is attempting to grant itself the ability to buy out 66.67% of non-participating investors at 1 cent a share.
Initially, The London Fund and Silverbear Capital were believed to be the deal’s main investors, with Silverbear ponying up $200 million and The London Fund investing $250 million in complicated transactions, according to documents cited by Newcomer.
But then Brad Pamnani, who was apparently listed as representing Silverbear on deal documents, reportedly told Newcomer that the firm was no longer involved in the deal and that “an unnamed Abu Dhabi-based fund is going to invest $200 million in Bolt at the $14 billion valuation with the intention of investing several hundred millions more over the next 12 to 24 months.” And, The Information reported that some investors were balking at the proposed deal. Specifically, there was pushback on Breslow potentially receiving a $2 million bonus for returning as CEO, plus an additional $1 million of back pay.
The question now is: If shareholders don’t agree to the terms of the proposed transaction, can Bolt force a buyback or conversion of shares and really pay them only a penny per share?
The short answer? Not likely, according to Andre Gharakhanian, partner at venture capital law firm Silicon Legal Strategy, who has viewed the company’s charter. He described the proposed transaction as “a twist on the pay-to-play structure.”
“Pay to play” is a term used in term sheets that benefits new investors at the expense of old. It grows in popularity during market downturns (which is why it has become increasingly common in 2024, according to data from Cooley.) Essentially, it forces existing investors to buy all the pro rata shares they are entitled to or the company will take some punitive action, like converting their shares from preferred shares, with extra rights, to common shares, explains AngelList.
In Bolt’s case this is “actually not a forced conversion like most pay-to-plays. Instead, it’s a forced buyback. The goal is the same — to pressure existing investors to continue to support the company and diminish the ownership of those who are not providing that support,” Gharakhanian said. “However, instead of automatically converting non-participating investors into common — they are buying back 2/3 of the non-participating investors’ preferred stock at $0.01/share.”
The catch, he said, is that virtually all VC-backed companies include in their corporate charters that a proposed transaction like this requires some level of approval from preferred stockholders, typically approval from the majority. Those are the very people that Bolt is trying to strong arm.
There are more nuances involved, but “it’s still a bumpy road to get this properly approved,” he told TechCrunch.
He added: “What I think is happening here is that this was merely a term sheet put out by the company/lead investor that got signed (no formal board/stockholder approval is required to sign a term sheet) and they are now offering the deal to existing investors. It’s early stages and making headlines because of the salacious points and Bolt’s crazy history.”
That, however, doesn’t mean he thinks the deal won’t be approved. Because the true gun to investors’ heads isn’t being forced to buy more shares at prices they don’t want to pay, it’s what happens to the company if new financing can’t materialize.
“Everyone going into this knows that you’re going to need to get the requisite approval from the existing investors to actually close the deal. Non-participants are getting screwed and everyone knows it,” he said.
So what will typically happen next is “weeks of hemming and hawing,” as the deal is negotiated and final documents drawn. “But if the company truly has no other alternatives, the non-participating investors will often relent and consent to the deal,” he says.
All of this back and forth also means that legal fees for pay-to-play deals can be high, as high as an acquisition deal. But unlike a happy exit acquisition, this type of deal generates a “general bad mood,” he added.
Interestingly, Gharakhanian pointed out that an amendment was added to Bolt’s charter in May of 2022 saying that if the company wanted to enter into an employment agreement or anything compensatory with Breslow before October 7, 2024, it could not do so without getting a majority of preferred shareholders to agree.
According to the charter, he said, carrying out the proposed transaction is “likely still going to need the majority of existing preferred shareholders to consent to the deal.”
TechCrunch has reached out to Bolt, Grooms, Breslow, The London Fund, and Pamnani for comment.
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