Dear Etergo Investors,
Since the update we posted last week, there have been a lot of questions and concerns raised by investors. We have been responding to these queries as best we can in the discussion forum and via firstname.lastname@example.org over the last week. Given a number of common themes have arisen, we have tried to gather together some of the topics and responses below so that they are accessible to all investors:
Communication with investors
I would like to start by acknowledging that we at Seedrs could have done a better job at communicating this situation and the transaction. In particular, I would like to apologise that many investors were first notified via an email letting them know that shares had been sold, and at that point in time many investors had lost access to Etergo’s post-investment page. We are undertaking a review of the notifications we send to investors in these situations in order to improve how such matters are communicated. I appreciate this has exacerbated the frustration of investors.
As a more general point, often in these types of situations — where a business is in serious trouble but is exploring options — the matter must be kept confidential while the various options are being reviewed, in the hope that a positive outcome can be secured for shareholders. That was the case here, where the prospective acquisition by Ola was highly confidential. We do try to provide investors with as much information as possible, and this was a key driver behind ensuring Etergo updated investors about the situation they were in on the 4th of May. However, I appreciate the final outcome came as a shock to many investors.
Sale of the shares without approval of shareholders
Many investors were surprised that the shares in Etergo were sold without their approval. While it is always our preference to give investors a choice, that is not always possible. There are two elements that should be understood here: (i) the role of the Seedrs nominee and (ii) mandatory sale clauses (also known as “drag along” clauses) which are a common feature of private equity investment.
(i) The Seedrs Nominee Role
As part of investing through the Seedrs Nominee, investors assign certain powers to the Seedrs Nominee to act on their behalf. Our roles as nominee is set out in detail in each investment agreement that investors agree to when making an investment.
One aspect of this role relates to company sales: you will see in the investment agreement that we do not make voluntary buy/sell decisions on behalf of investors, but when there is a complete sale of the company (and investors therefore have no choice as to whether to sell, either by operation of law or through drag-along rights), there is no decision for us to pass through to investors and the nominee may take action to sell the shares in this case.
(ii) Mandatory sale/drag along provisions
I appreciate many investors may be unfamiliar with drag along provisions and how they work. They are standard practice in early stage investment and often work in the favour of investors (as they can stop one investor from blocking an exit).
At a high level, if a potential buyer makes an offer to buy the company and the majority of shareholders agree to accept this offer, they can require the other shareholders to also sell their shares as part of the deal (ie all shareholders are “dragged” by the majority). Many potential buyers make an offer that is conditional upon receiving 100% of the company. So without a drag along clause, one shareholder would have the power to frustrate a potential exit opportunity that all other shareholders wish to accept.
In the case of Etergo, the deal was not just accepted by the founders. It was accepted by all shareholders of Etergo, including 2 institutional investors and Etergo’s angel investors. These shareholders had, in some cases, invested more than the Seedrs investors and at higher valuations, and also stood to make a loss on their investment in Etergo. Ultimately, the decision was that it was better to accept the offer so that investors received some proceeds, even at a significant loss, rather than putting the company into liquidation and receiving no return.
If the company had instead filed for bankruptcy, there was every chance the assets of the business would be purchased out of the insolvency proceedings (potentially by the same purchaser) and in such a situation any proceeds would have gone to creditors first and then, likely, shareholders would not have seen any value returned to them. This was the background against which the shareholders were evaluating and negotiating the deal. Significant effort went into improving the terms of the deal as best as the shareholders could – though ultimately given the precarious situation of the company this could not be achieved at any higher price in the time available.
How were the founders incentivised to agree to this deal?
A number of questions have been raised about whether the founders received shares in Ola as part of the transaction.
Firstly, the founders did not receive any portion of the proceeds of the sale. Between them, the founders held 46% of the share capital of Etergo at completion of the sale, but it was a condition of the agreement of the other shareholders that they would waive their right to receive any portion of the proceeds.
The founders will not receive any shares in the purchaser as part of the transaction. However, one of the requirements of the purchaser for doing this deal was that the founders accept employment with the purchaser, and as part of that arrangement they will receive an employee options package. It is important to note that this options package will be tied to their employment, and it is subject to vesting schedules and performance criteria. Note is that it is not just the founders who retain employment through this sale, but the rest of the team employed by the company.
This was considered by the Etergo shareholders and is why the waiver of proceeds upon the sale was set as a condition.
Can I receive shares in the purchaser instead of selling my shares at a loss?
Unfortunately, this was not a possibility that the purchaser was willing to make available to the shareholders. The only offer available was for cash.
Insolvency versus sale of shares
Some investors have expressed the view that they would rather have seen the company go into insolvency than to sell at this price. We recognise this view: it is frustrating to have made such a significant loss and to think that the business may still go on to have a future.
However, allowing the business to go into insolvency would likely not have changed that outcome. If the company had instead gone through an administration/liquidation process, the assets would have been sold and, in all likelihood, the same purchaser could have purchased those assets out of the administration process. In that situation, it is likely that no value would have been distributed to shareholders as any proceeds would go to creditors of the company first.
In the company sale situation, the creditors of the company remain (and will need to be settled by the new owner), while the proceeds of the share sale can be distributed to the investors.
What due diligence did Seedrs conduct on Etergo
A number of questions have arisen about the Seedrs due diligence process:
– The due diligence performed by Seedrs is conducted at the time a company raises on the Seedrs platform. In this case, Etergo last raised with Seedrs 3 years ago and we were not involved in their more recent fundraisings.
– We have published a guide to our due diligence process which can be found on the Seedrs platform at https://www.seedrs.com/learn/blog/due-diligence…. This is important as it sets out the steps that Seedrs takes and, just as crucially, what we do not do in performing due diligence so that investors can decide what further steps they need to take to satisfy themselves. At a high level, we perform comprehensive due diligence to ensure that the investment is properly structured, the company is what it says it is and that the campaign information presented at the time of investing is accurate. We do not provide a view on whether something is a good investment or not. That decision ultimately lies with the investor.
– A related question has arisen about the valuation of the company at the time it raised on Seedrs. Seedrs does not advise or set valuations. We are a marketplace: we allow investors to decide whether or not they wish to invest at the proposed price. If investors on the Seedrs platform feel the valuation is too high, then they won’t invest and the campaign is unlikely to succeed. I would note that Etergo did go on to raise further funds after the Seedrs fundraise at a higher valuation from a group of new investors, including some of the aforementioned angels and family offices. This does not necessarily mean that the valuation was ‘correct’, but it is an indication of the market dynamics and attractiveness of Etergo as an investment opportunity at that time – even if that potential was not ultimately fulfilled.
How will Seedrs handle this type of situation going forward?
Each company, investment, exit and transaction comes with its own set of complex circumstances, but certainly there have been some learnings from this situation we will look to address going forward. Namely:
– Improve communication methods: the method and timing of communication to investors, particularly in such sensitive situations, needs enhancing and we are already looking at ways to improve this.
– Where possible & practicable, we will strive to ensure information about situations like this is disclosed to investors as early as possible, and we will work to provide insight into the decisions being deliberated and present any choices to investors. It may not change the outcome, but we appreciate the desire to be informed ahead of final decisions being made where possible. Where such matters cannot be disclosed ahead of a decision, we will look to provide a more fulsome update and context at the time the transaction is announced.
We also intend to put out more content about our role as nominee, the work undertaken and the powers we have available as a shareholder to act on behalf of investors (as well as the limits to those powers). Significant resource and legal knowledge goes into this role and to protecting the rights of shareholders, but this does not necessarily give us the ability to turn around a failing business, only to represent shareholders as best we can in light of the options available.
We make every effort to ensure that investors understand the risks of investing in this asset class and to take a diversified portfolio approach when investing. The associated risks are published here and Seedrs every investor is required to accept these risks. However, we recognise that investing in this asset class is not for everyone and, despite understanding the risks, a loss on investment like this may still discourage some investors from investing further on the Seedrs platform or into growth companies more generally.
For those who have provided feedback and thoughtful responses on these matters, we thank you for your engagement on these important topics and hope to continue the discussion as the Seedrs platform progresses.