Interesting Financing Strategies for the New Market –

Interesting Financing Strategies for the New Market

It seems turmoil breeds innovation. A few industry participants have recently noticed some oddball financing strategies employed by the boards of sinking companies.

Strategy: Buy another company with the residual cash from a failure

How it works: The board of a faltering company ceased operations with about $12 million in the bank. The dead company invested $8 million in another company and returned $4 million to the investors. The investors got a going concern and part of their money back.

Who noticed it: Jonathan Bell of Greenberg Traurig LLP

Strategy: Convert equity-related securities to straight debt

How it works: An investor renegotiated its position in a company, eliminating the equity kicker. The investor exchanged a convertible debt instrument to a straight debt instrument with a balloon payment after three years. The only benefit possible from this arrangement is that the investor can avoid writing down the investment. Besides that, the investor has nothing to win. Theoretically, if the company can honor the debt obligation in three years, the equity instrument would have grown to a greater value.

Who noticed it: Ken Boger of Kirkpatrick & Lockhart LLP

Strategy: License unused intellectual property

How it works: A technology company had shifted its strategy away from several earlier-developed patents. In the absence of available outside financing, the company licensed out the IP for a considerable one-time fee.

Who noticed it: Bob Cronin of Stonebridge Technology Associates

Strategy: Completely reorganize the capital structure

How it works: A company cannot attract needed additional funding because of a high valuation in a previous round. In light of current market conditions, the board comes up with a fair valuation aside from the previous numbers and attracts new independent investors. The round is treated like a series A round with all non-participating investors basically washed out. The new structure attracts needed capital and allows management to keep their incentives.

Who noticed it: Tom Simpson of Northwest Venture Associates

Strategy: Sell out to management and get releases from liability

How it works: The VCs think a company is headed for a Chapter 11 situation and has conflicts with the management. The founders have likely threatened legal action if the board forces the company into bankruptcy proceedings. The VCs sell out to the management at a steep loss in return for full releases from all claims, bailing out cleanly before it gets ugly.

Who noticed it: Ken Boger of Kirkpatrick & Lockhart LLP