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WeWork’s botched share sale has investors in unicorns pushing for more safeguard

Since WeWork’s cancelled public offering, investors have been securing protections of their original investments in unicorns. (Aniruddha Chowdhury/Mint)Premium
Since WeWork’s cancelled public offering, investors have been securing protections of their original investments in unicorns. (Aniruddha Chowdhury/Mint)

  • Tougher terms are the price to pay for ensuring late-stage funding and sustaining the pipeline of initial public offerings
  • Safeguards include a higher minimum price on shares in an IPO

BENGALURU/SAN FRANCISCO : In the months since office-sharing startup WeWork’s botched public debut, mid- and late-stage investors in big startups have been pushing for more safeguards in case their firms fail to go public or sell shares at a lower valuation than pre-initial public offering (IPO) financing rounds.

Fundraising terms are rarely made public, but more than a dozen Silicon Valley-based lawyers, entrepreneurs and venture-capital investors told Reuters that since WeWork’s cancelled public offering and other ill-fated IPOs, investors have been securing protections of their original investments in “unicorns"—private companies valued at $1 billion or more.

Tougher terms are the price to pay for ensuring late-stage funding and sustaining the pipeline of initial public offerings, but also can be detrimental for founders, employees and early-stage investors, which in turn could make M&A deals challenging.

A quarterly survey by law firm Fenwick & West, which tracks deal terms of startup clients, showed a sharp rise in those with senior liquidation preferences for later-stage funding rounds in the third quarter, the time when WeWork’s IPO plan unraveled.

Safeguards include a higher minimum price on shares in an IPO, “ratchets" that give investors more shares if the shares are priced below what they paid, guarantees of a certain return on investments, and rights to block the IPO.

“Because many of these unicorn valuations are super high relative to historical IPO values, growth investors are putting in more structure around IPOs," said Ivan Gaviria, a partner at Gunderson Dettmer, a Silicon Valley law firm that works with venture-backed firms and investors.

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