Bittorrent recapitalizes: $17 m financing undone, valuation plummets | techcrunch

Bittorrent recapitalizes: $17 m financing undone, valuation plummets | techcrunch

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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 [email protected] (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: http://viewer.docstoc.com/ DOCS-1990105-v4-Summary_of_Terms_Series_C-1_BitTorrent – Free Legal Forms CAPITALIZATION TABLE: http://viewer.docstoc.com/


bitprepostcap – Free Legal Forms