LivingSocial investors take "pound of flesh" in financing

Fri Feb 22, 2013 9:21pm EST
 

By Alistair Barr

SAN FRANCISCO (Reuters) - LivingSocial was forced to make large concessions to persuade some of its biggest investors to plow another $110 million into the second-largest daily-deal company, analysts and investors said on Friday.

Analysts say those investors secured advantageous terms potentially at the expense of LivingSocial's other backers. The nature of those terms shed new light on an investment that Chief Executive Tim O'Shaughnessy declared on Wednesday "a tremendous vote of confidence in our business."

For their $110 million, investors got special preferred securities that pay a 3 percent annual dividend, and almost guarantee that they get money before any proceeds from a sale of the company or an initial public offering go to earlier investors, according to a recently updated certificate of incorporation for LivingSocial viewed by Reuters.

The deal also requires LivingSocial to repay some or all of the money from the latest round of financing in four years, if there has not been a liquidity event - such as a sale or IPO. That measure, which protects their investment, would require 75 percent of the holders of the new securities, known as Series G, to vote for repayment, the certificate shows.

"The investors took their pound of flesh for LivingSocial to get this money," Sam Hamadeh of PrivCo, a research firm focused on private companies, said on Friday.

Like larger rival Groupon GRPN.O, LivingSocial and its rivals have suffered from a rapid loss of popularity of "daily deals" - deep discounts sold on the Internet on everything from spa treatments to dining.

LivingSocial raised hundreds of millions of dollars from Amazon.com Inc (AMZN.O: Quote) and venture capital firms to chase Groupon in the once-hot business. Then Groupon went public in 2011 and subsequently lost about two-thirds of its market value, putting pressure on LivingSocial's own valuation.

In a research report on Wednesday, Hamadeh described the deal as "emergency debt financing." O'Shaughnessy disputed PrivCo's report, so Hamadeh has since updated his research to show that the deal was equity, not debt.   Continued...

 
Tim O'Shaughnessy, CEO and Co-Founder of LivingSocial, poses for a photo at the Reuters Consumer and Retail Summit in New York September 11, 2012. REUTERS/Lee Celano