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Here’s The Math Behind Teespring’s Painful Recapitalization

At the end of May, Teespring, the beleaguered tee shirt sales platform funded by the likes of Y Combinator, Andreessen Horowitz, and Khosla Ventures, underwent a stiff round of layoffs. According to our sources at the time, these layoffs reduced headcount to just “twenty to thirty” people at headquarters as the company pursued a “restructuring.” Crunchbase News was the first to cover that latest round of layoffs at the company.

According to multiple sources at the time, Teespring’s management and existing investors were considering a recapitalization of the company. In practice, that often means old voting, corporate, and equity structures are dissolved, with a new corporate entity, of the same name, created in its place. Shares in the old entity are converted to shares in the new entity – or bought out entirely – and, usually, stockholders in the old entity are significantly diluted unless they participate in the financing of the new entity.

Since our report, the Wall Street Journal confirmed the recapitalization of Teespring.

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Crunchbase News has viewed certain documents related to the recapitalization and new financing round. What we’ve been able to gather from these documents, in concert with discussions with sources close to the current transaction, confirm some assertions made by the Journal, as well as provide additional details about the state of Teespring. When reached for comment on a summary of our findings, Teespring’s CEO, Walker Williams, said he would not make any additional statements on the company’s behalf.

State Of The Business

Back in May, sources suggested that Teespring has achieved profitability due to a reduction in operational expenses brought on by the latest round of layoffs. If this is indeed the case, it’s a notable change in course for the company. Historically, it has not been profitable, on an annual accounting basis, for any year since its inception.

Through the end of April 2017, the company generated a GAAP-compliant net loss of $3.5 million on $42 million of revenue. On an annualized basis, it puts the company on a path to take in less in 2017 than it did in 2016—unless the company can grow its revenue numbers.

Below, you’ll find a chart based on information we have been told about Teespring’s finances.

Beyond these revenue figures, a source tells us that, based on documents they’ve reviewed, the company has an accumulated deficit of around $93 million as of the end of 2016.

So what happened to the company’s revenue? The Wall Street Journal came to a similar conclusion that we did back in May: Teespring appears to be a textbook example of so-called “platform risk.”

Tomasz Tunguz, a partner at Redpoint, illustrated this particular kind of risk in his article about different risk types that VCs evaluate: “Is the startup building atop YouTube, Twitter or Facebook? How strong is their relationship? Are their product plans in the direct path of the platform or complementary?”

Based on conversations with our sources, a proximal cause of Teesping’s financial woes was its reliance on third-party social platforms like Facebook as its primary sales channel. Facebook changed how it allocates advertising space in the newsfeed over time, and Teespring was caught in the crossfire. An algorithm change, combined with so-called “power sellers” leaving the platform, culminated in the significant revenue declines shown above.

Back in May, a spokesperson for the company told us, “[r]estructuring the company was a difficult decision, however making these changes enables us to run a healthy and profitable business moving forward.” The statement was echoed, word-for-word, by Chris Lamontagne, Teespring’s VP of Commercial, to the Wall Street Journal.

Inside Teespring’s Series 1

Crunchbase News has confirmed reporting by Wall Street Journal and Pitchbook data that Teespring is raising a $5 million “Series 1” financing.

The company has closed $4.3 million from a number of investors, including Khosla Ventures and 9Point Ventures. Khosla Ventures led Teespring’s $35 million Series B round, and Keith Rabois, a partner at the firm, currently sits on the company’s board. 9Point Ventures is led by Max Altman, brother of Y Combinator president Sam Altman, who previously sat on the company’s board.

As an aside, Jack Altman, the third Altman brother to Max and Sam, was a general partner at Hydrazine Capital alongside Sam. Hydrazine Capital is a holder of Common Stock in Teespring, which, as we’ll show later, means that the fund’s position is effectively wiped out. Jack was also the VP of Business Development for Teespring before co-founding Lattice as that startup’s CEO.

Andreessen Horowitz’s co-founding partner, Ben Horowitz, is the signatory for the fund on Teespring’s paperwork. It’s an interesting twist considering that Lars Dalgaard was a16z’s investing partner on both Teespring’s Series A and Series B rounds. Dalgaard also previously represented the venture capital firm on Teespring’s board since 2014.

Board Shakeup

Teespring’s new board will consist of five directors, four of whom have already been named: Walker Williams will take the CEO seat, Evan Stites-Clayton will represent Common Stock holders, Keith Rabois confirmed in an email that he will represent Khosla Ventures, and Max Altman of 9Point will also be joining the board. The independent seat remains unfilled.

The appointments represent a minor shakeup in the company’s board, which once included Sam Altman and Lars Dalgaard, according to Crunchbase data. According to reporting by the Wall Street Journal, Sam Altman left the board over a year ago. Whether Zal Bilimoria, who alongside Dalgaard co-led Andreessen Horowitz’s investment in Teespring, still retains his board observer seat at Teespring is unknown.

Teespring’s Valuation Haircut

Teespring’s Series 1 financing will be closed at a significantly reduced valuation from is previous rounds.

Unrelated sources provided data from Pitchbook. Here’s what that data suggested: Teespring’s last round was a $35 million Series B financing at a reported $615 million post-money valuation closed in November 2014. VCExperts, another venture capital data provider, reported that the Series B round was raised at a $611 million valuation.

The Wall Street Journal’s reporting based on the latest Pitchbook data was directionally correct, but it’s possible Teespring’s valuation hit might not be quite as bad as reported. According to a Crunchbase News source, the valuation of Teespring’s new Series 1 financing is closer to $30.8 million. However, it has been suggested by an investor that the $30.8 million valuation may be incorrect due to last-minute deal adjustments. We reached out to the Journal reporter and to Pitchbook notifying both parties of the discrepancy between our findings and what she received. We haven’t heard back from either.

According to information shown to Crunchbase News, the company’s new capital structure contains three classes of shares. Here’s what the new capital structure looks like.

Shares purchased by investors in Teespring’s Series A and Series B rounds are being consolidated into Series 1 Prime Preferred Stock, now priced at $84.375 per share. The $5 million Series 1 round is being raised through the sale of 5 million shares of Series 1 Preferred Stock at a price of $1.00 per share. Crunchbase News confirms reporting in the Wall Street Journal that Series 1 Preferred shares have seniority over both Series 1 Common Stock and Series 1 Prime Preferred Stock. The senior status of Series 1 Preferred shareholders gives them first access to any capital made available in the event of a sale or IPO of the company.

Crunchbase News also has learned that Teespring’s board retains the right to issue an 8 percent annual dividend to Series 1 Preferred shareholders. Investors we contacted with this information suggest it’s tantamount to an 8% interest fee, depending on how the board chooses to call in a dividend.

In addition to the two tiers of Preferred shares, Teespring is also issuing 11,000,000 shares of Series 1 Common Stock at a par value of $0.001 per share. Virtually all financial value attached to Common Stock has been lost.

A number of sources have expressed disappointment and frustration regarding this fact. According to sources, as of early June, only 675,000 shares of Series 1 Common Stock have been issued. Roughly 4 million shares of common stock shares have been earmarked for an options pool to be drawn from by employees and other service providers, yet those remain unallocated. The fate of the remaining 6.32 million shares of unallocated Common Stock is unclear based on the select documents Crunchbase News was able to view.

A Crunched-Down Capital Structure

Recapitalization events oftentimes involve the consolidation of old share classes into new ones, and, somewhat obviously, this process can be painful for certain shareholders. In the case of Teespring, all previous shareholders are in a compromised position, but Series A investors appear to have taken the most significant hit, at least when it comes to the relative size of their ownership stakes in the recapitalized company.

Investors holding shares of Series B Preferred Stock will be issued roughly 1/6.095 shares of Series 1 Prime Preferred Stock for each share of Series B Preferred. Series A investors will be issued roughly 1/36.845 shares of Series 1 Prime Preferred Stock for every share of Series A Preferred they hold. All previous Common Stock shareholders will be issued roughly 1/13.6 of a share of Series 1 Common Stock for each share of Common Stock from before the recapitalization.

Threadbare No More?

Let’s be clear here: the situation Teespring finds itself in is unfortunate for everyone involved, especially for previous shareholders. How the company plans to navigate the difficult path between this combined recapitalization and cram-down financing is not known to us. However, if the company has reached profitability – albeit through deep cuts to its ranks at HQ – it’s possible that this new round of financing is a fresh start. If a fresh start isn’t possible, there’s now time to find a suitable resting place for the business.

As one source suggested, what’s happened to the company is an example of “flying too close to the sun.” And now one is left to wonder what would have happened if Walker and Co. chose a different path, eschewing VC financing in the first place, making a bunch of money while the going was good, and quietly folding up the shirt business later on.

Illustration: Li-Anne Dias

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