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How SPACs are changing the IPO game: Equity ownership of founders a big consideration




SPACs are hot right now, and one of the reasons is they can keep more equity in the hands of founders. (GeekWire Illustration / Canva Image, adrian825)

A few weeks ago, a longtime GeekWire reader sent a note expressing shock that Sana Biotechnology co-founder and CEO Steve Harr only owned 4.9% of the company after the completion of the IPO.

Given that the Seattle biotechnology company was on the cusp of a blockbuster stock market debut and now is valued at more than $6 billion, I responded that 4.9% of $6 billion seemed pretty good to me. After all, having a small slice of a big pie is often financially better than a big piece of a small pie.

That dialogue started an interesting back-and-forth about how much founders should own at the time of their IPOs, a discussion that has become even more interesting in light of the SPAC phenomenon that’s rip roaring through the startup and venture capital ranks.

That’s because a SPAC — a special purpose acquisition company — can expedite the path to liquidity for founders, early employees and executives.

Instead of pursuing a later-stage round of funding from venture capitalists or private equity investors — say a Series C or Series D round — a founder can choose to merge with a SPAC, essentially leapfrogging into the public markets earlier than they anticipated.

One result of this super-charged pacing is that the founding team can enter the public markets retaining larger chunks of equity. That’s an appealing lure, and one of the reasons why these so-called “blank check” companies are all the rage among the entrepreneurial set.

After all, those later stage funding rounds often result in the founding team losing equity. In other words, their pie piece shrinks.

Founders usually don’t like that. And so when a SPAC comes knocking, they can motivate to jump into the public markets faster.

Sujal Patel
Veteran Seattle entrepreneur Sujal Patel is taking his company public via a SPAC.

For example, take Seattle-based Nautilus Biotechnology. Last month, it decided to go public via a SPAC led by Arya Sciences Acquisition Corp III that would ultimately value Nautilus at $900 million.

Founded in 2016 by veteran Seattle entrepreneur Sujal Patel and Stanford University professor Parag Mallick, Nautilus only recently began sharing more details on its product vision. Patel, who previously led Seattle data storage company Isilon Systems to an IPO and later sold it to EMC for $2.25 billion, told The Information (subscription required) last week that the SPAC deal was faster and more efficient than hitting up venture capitalists for more money.

Since the Nautilus deal is still in the works, the ownership structure is unclear. But given the stage of the company and the fact that Nautilus bypassed the later rounds of venture capital, it’s likely that Patel and Mallick are hanging on to a larger ownership slice than if they’d chosen the VC path. Patel declined to comment for this story.

Patel’s SPAC foray is interesting, in light of the last company he guided onto Nasdaq. Like Nautilus, Isilon also went public five years after it was founded. The 2006 Isilon IPO filing listed Patel’s stake at 5.8%. Meanwhile, Isilon’s venture capital backers together owned nearly 80%.

The founder equity advantage recently played out with Luminar Technologies, which went public via SPAC in December and is now valued at just over $9 billion. Austin Russell, the 25-year-old founder and CEO of the Orlando, Fla. maker of autonomous vehicle software, held a 35% stake at the time of the stock market debut, making him a billionaire on paper the day the stock started trading.

Porch CEO Matt Ehrlichman. (Porch Photo)

And you can see this at play with Porch Group, the Seattle software company that went public via a SPAC in December. The 9-year-old company is now valued at $1.54 billion, and founder and CEO Matt Ehrlichman’s 20% stake is worth $308 million, with additional shares to be granted via an earnout if the entrepreneur hits future milestones.

SPACs still dilute the ownership stakes of founders and CEOs. For example, Ehrlichman owned 43% of Porch Group prior to the company’s SPAC merger.

However, the speed at which SPACs happen and when they occur in a company’s life cycle means entrepreneurs can hop into the public markets holding more equity.

For example, check out the the equity stakes of Washington state founders and CEOs who guided their companies to more traditional initial public offerings in the past two years.

  • Adaptive Biotechnologies CEO Chad Robins: 6.3% ownership prior to the IPO. (5.5% after the offering)
  • Accolade CEO Raj Singh: 6.4% ownership prior to the IPO. (5.2% after the offering)
  • Athira Pharma co-founder and CEO Leen Kawas: 9.3% prior to the IPO. (5.8% after the offering)
  • Sana Biotechnology co-founder and CEO Steve Harr: 5.6% prior to the IPO. (4.9% after the offering)
  • Silverback Therapeutics CEO Laura Shawver: 3.6% prior to the IPO.* (2.5% after the offering)
  • ZoomInfo co-founder and CEO Henry Schuck: 22.4% prior to the IPO (23.2% after the offering. Note: Combined voting shares)

*Note: Shawver was named CEO eight months prior to the IPO. The company’s co-founder Peter Thompson, who previously served as CEO and works as a venture capitalist at Silverback investor OrbiMed Advisors, held a 35% stake. 

The types of on-paper paydays seen by Russell and Ehrlichman highlight one of the reasons why SPACs are so attractive to founders. They are often faster, lighter weight, and in some instances allow the exec team to get liquid quicker before stock dilution takes hold.

And this gets to a larger question: What’s an appropriate amount of ownership for a founder to hold at the time of the IPO or SPAC?

That’s complex, notes Seattle venture capitalist Greg Gottesman.

Gottesman is a managing director at Pioneer Square Labs and co-founded Rover, which is planning to join the public markets via a SPAC valuing the online pet sitting business at $1.35 billion.

“Your percentage as a founder can vary meaningfully for a number of reasons,” notes Gottesman.

Those factors include:

  • The number of founders
  • Did the company bootstrap or raise outside funding?
  • How many outside rounds of financing occurred before the SPAC or IPO?
  • Was the company founded as part of a startup studio or accelerator?
  • How long did it take to go public?
  • Did the board refresh the equity of the founders with new option grants?

And Gottesman offers a bit of sobering advice amid this craziness.

“The other key thing to remember is that an IPO is a financing event, just one with a lot more fanfare,” he said. “It still may take a long time for the CEO or investors to achieve liquidity post-IPO, so focusing on the percentage or value of a founder’s equity stake post-IPO is interesting but may have little to do with ultimate value.”

He notes that Amazon founder Jeff Bezos was not the richest person in the world after the IPO, pointing out that “the value of his equity increased dramatically over time.”

Even still, SPAC mania continues. Just today, GeekWire reported on another SPAC, this one being led by Seattle entrepreneur Mark Vadon, the co-founder of Zulily and Blue Nile. And former Zillow CEO Spencer Rascoff today led a $300 million SPAC to the public markets under the name of Supernova Partners Acquisition Company II.

SPACinsider tracked 248 SPACs last year, a more than four fold increase over 2019. And this year the SPAC frenzy is accelerating with 204 SPACs generating gross proceeds of $64 billion. (Need I remind you we are just two months and two days into 2021).

In a story in The New York Times this past weekend titled Anyone Who’s Anyone Has a SPAC Right Now, reporter Steven Kurutz noted that Ciara Wilson, Serena Williams, Billy Beane and other celebrities are involved in SPACs, with the subhead of the story noting that the “once obscure financial maneuver becomes a celebrity flex.”

The buzz is indeed growing. A Seattle area investment manager bluntly told me last month: “this SPAC thing is off the charts.” We’ve chatted with startup attorneys and venture capitalists who say they can’t recall a time when things were so busy, in part due to the SPAC boom.

In fact, one entrepreneur and investor I connected with for this story apologized for not returning my email for several days.

The reason? He was too busy working on a SPAC.

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Wall Street’s $100 Billion SPAC Boom Upends the League Tables




  • Niche players like Cantor Fitzgerald soar in league tables
  • Citi jumps to No. 1 in IPO rankings as UBS drops out of top 10

The blank-check listings craze is shifting fortunes on Wall Street, knocking some of the world’s biggest banks off their perches and bringing unexpected bragging rights for others unaccustomed to competing for league table glory.

Cantor Fitzgerald LP, long one of the top SPAC underwriters, has been the biggest beneficiary of the boom and ended the first quarter as the No. 10 adviser on initial public offerings globally. The boutique, which hasn’t ranked that high for any full year in the past decade, got 99% of this year’s deal credit from blank-check work, data compiled by Bloomberg show. Without those deals, it would be 155 places lower.

Special purpose acquisition companies raised $100 billion in the opening three months, equivalent to more than two-thirds of the haul from all U.S. listings. That meant league table spots were heavily affected by a bank’s expertise in a once-niche part of the market that’s suddenly ballooned in popularity.

Citigroup Inc. jumped six spots in the rankings to become the busiest IPO arranger globally in the first quarter, thanks in part to its status as the No. 1 SPAC underwriter. Rival Bank of America Corp. rose nine places from this time last year to No. 6.

On the flip side, Switzerland’s UBS Group AG and four Asian investment banks — China International Capital Corp.Citic Securities Co.China Securities Co. and Sinolink Securities Co. — all dropped out of the top 10.

Global IPO Rankings

League tables shaken up by wave of blank-check listings

Source: Bloomberg
“Ranking Boost” compares current positions on IPO league table to ranking if blank-check companies weren’t counted. Last column measures percentage of deal credit coming from SPACs.

There was a chance to boast for firms further down the tables too. Though they still ended a way off the top, both Oppenheimer Holdings Inc. and BTIG LLC — niche players in the world of equity capital markets — saw their IPO rankings boosted by more than 100 spots thanks to roles on SPAC listings this year, the Bloomberg data show.

To be sure, investment banks that are too dependent on SPAC listings could be caught flat-footed when volumes dry up, and signs are already emerging that these deals won’t maintain their breakneck pace.

Turning Tide

Volume of new SPAC filings declines from record highs

Source: Bloomberg
Data for most recent week is through mid-day April 1.

Last week, blank-check companies filed plans to raise a combined $8.4 billion through U.S. IPOs, down 36% from the previous week. Their combined fundraising target, as well as the number of deals, both represented the lowest weekly tally since the end of January.

On Wednesday, for the first time in a long while, there weren’t any new SPACs that lodged registration documents. The brief drought marked a big change from recent months, when particularly prolific dealmakers were filing for three IPOs in a single day.

For now at least, some banks have something new to shout about with rivals and clients.

Source: Bloomberg – Wall Street’s $100 Billion SPAC Boom Upends the League Tables

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Equinox Group Draws SPAC Interest After $350 Million 2020 Loss




  • Company fielding SPAC interest at at least $7 billion value
  • Earnings turned negative after gyms shut down during pandemic

Equinox Group is fielding interest from blank-check firms that would take the company public after it lost around $350 million last year amid the pandemic, according to people with knowledge of the matter.

Despite the loss, the gym chain has started to solicit interest from suitors including special purpose acquisition companies that value Equinox, including its SoulCycle entity and other brands, at $7 billion or more, said the people, who asked not to be named discussing private results.

Equinox Group’s consolidated revenue was around $650 million last year, the people said. Cash at gym unit Equinox Holdings was $50 million after the company paid down part of a revolving credit line, one of the people added.

Members were able to freeze or cancel their accounts when the spread of Covid-19 first shut gyms last year, pressuring the company’s financial results and forcing it to furlough thousands of workers.

A representative from Equinox didn’t respond to requests for comment. Sportico previously reported that the chain had received interest from SPACs and private equity firms.

The entire fitness industry is reeling from forced closures tied to the pandemic. Chains including Gold’s Gym International Inc., 24 Hour Fitness Worldwide Inc. and the owner of New York Sports Clubs sought bankruptcy protection last year.

Gyms have been allowed to reopen in many cities, though social distancing, cleaning guidelines and capacity limitations remain in place. Indoor fitness classes like SoulCycle recently started up again in New York, and the spin chain has also been offering outdoor classes in select locations. Equinox bought a majority stake in SoulCycle in 2011.

The company last year secured funding from private equity firm Silver Lake to build a digital platform, now known as Equinox+, and add as many as 50 locations annually.

Closely held Equinox received a minority investment in 2017 from L Catterton, a consumer-focused private equity firm, and is backed by principals of billionaire Stephen Ross’s Related Cos. Price quotes on the fitness company’s $1.02 billion loan due 2024 have hovered around 93 cents on the dollar.

Source: BloombergEquinox Group Draws SPAC Interest After $350 Million 2020 Loss

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Interest in SPACs—Special Purpose Acquisition Companies—is booming…and so is the risk of litigation.




Following these ten steps will prepare SPAC boards, sponsors, and advisors for the likely shareholder suits and potential regulatory investigations that are increasingly becoming part of the SPAC landscape.

If 2020 was the “year of the SPAC,” 2021 may be the year of SPAC litigation. SPACs—Special Purpose Acquisition Companies—are publicly traded companies launched as vehicles to raise capital to acquire a target company. Often called blank-check companies, SPACs are companies in which shareholders buy shares without knowing which company the SPAC will target and acquire. Investors place their faith in the sponsor: the entity or management team that forms the SPAC. The SPAC generally has around twenty-four months to seek out and acquire a target, or else must liquidate and return the capital.

Hundreds of new SPACs were launched in 2020 alone. Booming M&A or other transactional activity in any sector can invite litigation driven by plaintiffs’ attorneys, and SPACs are no exception. In just the first three months of 2021, more than 40 suits targeting SPACs have been filed. The nature of these claims evidence growing sophistication, as lawyers used to challenging traditional M&A transactions begin to tailor their claims to the unique characteristics of the SPAC lifecycle. And with SPACs going mainstream—and attracting attention from outside the usual financial circles—regulators are closely examining transaction disclosures and other aspects of SPAC deals.

Preparing in advance—throughout the SPAC transaction cycle—for the prospect of litigation or regulatory scrutiny could make the difference between a quick resolution and an existential threat. Following these ten steps will provide SPACs, their boards, their sponsors, and their advisors the edge in future litigation or regulatory inquiries.

1. Document all board meetings in formal minutes—and make sure they are approved.

The typical public company has a corporate secretary who takes minutes at each board and committee meeting. The typical SPAC has no such employee and corporate housekeeping is sometimes delayed in the urgency to secure a binding acquisition transaction. Nevertheless, formal minutes, formally approved, are important and this detail should not be ignored or delayed unreasonably. Accurate, complete, contemporaneous, and board-approved minutes are important in demonstrating the board’s compliance with its fiduciary duty of due care. The absence of board minutes unfortunately can demonstrate the reverse.

2. Carve out time at each board meeting for private, executive sessions of independent directors—without the sponsor—and document in the minutes that these sessions occurred.

There have been persistent concerns about conflicts between SPAC sponsors and public investors. Plaintiffs’ attorneys are targeting these potential conflicts—arguing that sponsors have wielded their influence to push through deals on terms that favor their own interest in consummating a transaction within the required timeframe at the expense of other shareholders. To guard against the appearance that a SPAC board was captive to the sponsor, boards should reserve time for private deliberation by independent directors, free of the sponsor’s watchful eye, and board members should carefully evaluate the performance by sponsors.

3. Provide SPAC boards detailed due diligence reports before deal approval.

Rare is the SPAC litigation that does not claim the SPAC hastily agreed to a deal without adequate diligence. There are multiple ways to mitigate these claims—adopting exculpatory charter provisions can help—but there is no substitute for a well-informed board. Even if fulsome diligence, financial analyses or other assessments were performed, that information must be communicated to the board with adequate time for board review to put directors in the best position to argue that the transaction is the product of informed deliberation and that the board was afforded adequate time to review and sign off on the accuracy of the deal disclosures.

4. Make a record of looking for initial business combination opportunities.

The objectives of a SPAC are to identify a partner for an initial business combination and to complete that transaction. The sponsor should aggressively seek out these opportunities. The sponsor should also periodically inform the board of its efforts in this regard, and that should be reflected in the minutes. If an initial business combination is completed and the board is sued, it will be helpful if the minutes reflect efforts to identify a partner. The absence of that record could make it appear that what was being sought was any business combination, but not necessarily the best one.

5. The audit committee should scrutinize the target’s financials.

For the target company, the requisite disclosures that must be made to complete the de-SPAC transaction are more akin to an IPO than a typical acquisition by an existing, public operating company. Extensive, detailed audited financials are required, and the review of these disclosures by the SPAC board should be performed in consultation with competent advisors and/or delegated to the experts on the audit committee.

6. Consider obtaining a fairness opinion—and/or a formal presentation from the financial advisor.

Fairness opinions tend to be the province of target companies, not buyers. But the SPAC’s very existence centers around this acquisition, and a fairness opinion, like proper deal diligence, can bolster the board’s decision-making process—particularly if the target company has connections to the SPAC or the sponsor. Obtaining the opinion is not a mere box to check on the closing checklist.  Regardless of whether a fairness opinion is obtained, the board should consider whether a financial advisor presentation is desirable.

7. The merger proxy statement should be carefully prepared.

The merger proxy statement for the initial business combination should be as scrupulously prepared as an IPO prospectus. So, for example, if the target company relies heavily on one customer or supplier, or if major competition is expected to be faced, or if its products are relatively untested, it is not enough to mention that in boilerplate “risk factors.” And if potential business issues have been identified by consultants or in due diligence, those should be fully disclosed. Finally, it is often the case that forecasts will be included in the proxy statement for the business combination. Are those the only forecasts the SPAC has seen? If not, you should consider what you should do about the other set of forecasts.

8. All public statements should be closely scrutinized for accuracy—including social media posts.

Rule 10b-5 does not contain a social media exception. High-profile leaders of public companies are finding themselves on the receiving end of securities fraud claims and enforcement actions for statements made on Twitter and other platforms. SPAC boards should have policies in place to guard against these missteps, which should include a process to review, identify and correct potentially misleading claims or risky puffery.

9. Beware the late-stage deal.

The appearance of potential conflicts between SPAC sponsors and ordinary shareholders approaches its zenith as the deadline for liquidation looms. SPAC leadership should be aware that multiple suits have been filed against SPACs that embraced a deal target at the eleventh hour, claiming that the SPAC sponsors and boards put their interest in closing a deal ahead of the SPAC and its investors.

10. Disclose, disclose, disclose.

Plaintiffs’ lawyers use the SEC’s guidance on disclosure considerations for SPACs like a playbook. SPAC boards should carefully review disclosures that touch on the topics flagged by the SEC, particularly disclosures relating to conflicts (such as interlocks between the sponsor, the SPAC, and the target; the liquidation timeline; and underwriting fee structures) and details about how the SPAC board settled on the acquisition target.

Source: JDSupra/Cadwalader, Wickersham & Taft – Interest in SPACs—Special Purpose Acquisition Companies—is booming…and so is the risk of litigation.

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The ‘March SPACness’ Final Four Is Set: Are These The Best Former SPACs




On “SPACs Attack,” the latest SPAC mergers, rumors and headline news is broken down Monday through Friday.

To coincide with the 2021 March Madness Tournament, “SPACs Attack” held a March SPACness Tournament featuring a bracket of 64 companies that have completed the SPAC process and are now publicly traded companies.

The winner of each round was decided by the live audience on YouTube based on which company would have the highest percentage increase from March 16, 2021, through the end of the year.

A Final Four has been set and features the following former SPACs.

Romeo Power: Battery maker Romeo Power Inc RMO 0.6% emerged into the Final Four with a narrow victory over online sports betting and iGaming operator Rush Street Interactive RSI 0.3%.

Romeo Power shares traded for over $40 back in December and have fallen since completing the merger.

The company reported earnings on Tuesday with fiscal 2020 revenue of $9 million, which was lower than the $11 million listed in the company’s investor presentation.

Guidance from the company of $18 million to $40 million for fiscal 2021 was significantly lower than the $140 million projected by the company at the time of the SPAC deal announcement. Supply chain issues were listed as an explanation for the lowered guidance.

Desktop Metal: 3D printing stock Desktop Metal Inc DM 3.16% grabbed a spot in the Final Four with a win over online home buying and selling company Opendoor Technologies Inc OPEN 2.64%.

Desktop Metal is a large player in additive manufacturing seeking to power the next industrial revolution printing items for large customers. The company also recently expanded through acquisitions and the launch of a healthcare division.

DraftKings: Online sports betting and iGaming company DraftKings Inc DKNG 2.53% landed a spot in the Final Four with a victory over rare earth mining company MP Materials Corp MP 2.15%.

DraftKings has a presence in more states than any other competitor in the online sports betting space. The company continues to be viewed as a leader in the space and analysts have raised projections for revenue, market share and the iGaming opportunity for the company.

Butterfly Network: Rounding out the Final Four is Butterfly Network Inc BFLY 3.21%, a portable ultrasound company backed by Bill Gates. The company beat out Skillz SKLZ 1.26% in a close Elite Eight battle.

Butterfly Networks has been a favorite of Cathie Woods with the Ark Genomic Revolution ETF (BATS: ARKG) taking a position shortly after the deal was announced.

The company is seen as a long-term winner in the emerging health market with a device that could help hospitals with costs and expand ultrasound availability in emerging markets.

What’s Next: Romeo Power will battle Desktop Metal for a spot in the championship, while DraftKings battles Butterfly Network.

To see who wins and makes it to the championship, tune into “SPACs Attack” next week and vote for your favorite in the chat.

Source: Benzinga – The ‘March SPACness’ Final Four Is Set: Are These The Best Former SPACs?

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