Zappos CEO Wanted To Stay Independent, Sequoia Wanted Liquidity—Sources

The decision to sell hot online shoe retailer Zappos to Amazon.com was more in line with the interests of Sequoia Capital than the company’s CEO, according to two sources close to the company.

One of the sources says Zappos was financially strong enough to wait for the IPO market to recover, if it chose to go that route. The source, a Zappos shareholder who has seen the company’s income statement reports, said that the company did over $1 billion in gross revenue in 2008, $625 million in net revenue and had an EBITA greater than $40 million.

Zappos had raised $49.1 million from venture investors since its inception, most of it from Sequoia, according Thomson Reuters (publisher of PEHub.com). The Zappos shareholder, who says he has seen the company’s capitalization tables, says Sequoia had a 3x or 3.5x liquidity preference associated with the shares it purchased.

“When Mike [Moritz, a GP with Sequoia] came in, he came in at a high valuation, but he countered that with a very high liquidation preference,” the shareholder says. “It puts management on one side of the table and investors on the other. Then there’s always pressure to sell the company.”

At least two sources who do not hold board seats, but are directly involved with Zappos, indicated that Moritz and Zappos CEO Tony Hsieh came into conflict about the company’s future. Moritz, the sources say, wanted Zappos to sell while Hsieh wanted to remain independent.

Efforts to verify this indirect information have not yet been successful.

Moritz did not immediately respond to request for comment.

Amazon.com announced today that it agreed to buy all of the outstanding shares of Zappos and assume its outstanding options and warrants in exchange for return for 10 million shares of its common stock. In addition, Amazon said it would give Zappos employees $40 million in cash and restricted. That gives the overall deal a value of close to $928 million, based on Amazon’s closing price of $88.79 today.

The company’s early funding, some $6.2 million, came primarily from Venture Frogs, an investment vehicle controlled by Zappos’ CEO Tony Hsieh, records show.

Sequoia Capital came in as investor in October 2004, participating in a $20 million Series E financing five years after Zappos was founded, records show.

The venture capital firm invested again, next to Venture Frogs, in a July 2005 $20.5 million Series F, records show.

These two investments were made from Sequoia Capital XI. The firm also invested in a $2.4 million supplemental financing in 2006 through its Franchise Fund, records show.

Other investors involved in Zappos’ financing include Draper Richards and Millennium Technology Ventures, records show.

UPDATE: Zappos has (sort of) responded.

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56 Comments

  • [...] shopping experiences. Some sources say that Zappos didn’t want to sell itself, but was pressured by its investors. The value to Amazon seems clear on several [...]

  • [...] shopping experiences. Some sources say that Zappos didn’t want to sell itself, but was pressured by its investors. The value to Amazon seems clear on several [...]

  • [...] Alexander Haislip has a financial angle on the [...]

  • [...] shopping experiences. Some sources say that Zappos didn’t want to sell itself, but was pressured by its investors. The value to Amazon seems clear on several [...]

  • Correct me if I’m wrong but 23x EBITA isn’t all that bad vs. IPO, no?

  • [...] shopping experiences. Some sources say that Zappos didn’t want to sell itself, but was pressured by its investors. The value to Amazon seems clear on several [...]

  • [...] shopping experiences. Some sources say that Zappos didn’t want to sell itself, but was pressured by its investors. The value to Amazon seems clear on several [...]

  • [...] shopping experiences. Some sources say that Zappos didn’t want to sell itself, but was pressured by its investors. The value to Amazon seems clear on several [...]

  • [...] according to the Private Equity Hub blog, there was conflict between company management and investors: essentially, the company thought it could ride out the economic downturn and eventually launch on [...]

  • [...] story” is that Sequoia wanted an exit now and forced it on the company. According to peHUB: One of the sources says Zappos was financially strong enough to wait for the IPO market to [...]

  • [...] Zappos CEO wanted to IPO, but liquidity-needy Sequoia made him to sell [peHUB] [...]

  • [...] PeHub reports that Tony wanted to IPO, but Zappos’s VC backer, Sequioa’s Michael Moritz, craved liquidity and forced the sale. [...]

  • [...] the reality is much different. Hsieh was apparently pressured by his VC investors to sell while the sellin’ was good. Even so, it’s a nice payday for [...]

  • [...] PeHub reports that Tony wanted to IPO, but Zappos’s VC backer, Sequoia’s Michael Moritz, craved liquidity and forced the sale. [...]

  • [...] Mystery solved. Sources discuss it peHUB which Hsieh didn’t wish to sell out though relented underneath vigour from [...]

  • When you take the King’s money, you’ll do the King’s bidding.

  • [...] Well… perhaps not. According to reports we only tangentially understand, Sequoia Capital — the venture capital firm that originally invested in Zappos — forced you to make the sale instead of holding out for an IPO. (More details here.) [...]

  • I really enjoyed your insight here. It’s refreshing to hear some of the strategy behind these big investments, as opposed to a regurgitation of their respective press releases. Great post!

  • There’s just simply no truth to this whatsoever. A more official comment with be forthcoming.

    Anyone who has worked with MM knows he pushes hard, as do Goguen, Leone and others at Sequoia but they push for the big exits not the early sale (See: Rackspace…).

    YouTube is a good example, Sequoia didn’t push that exit, quite the contrary. They felt it’d be worth much more by continuing to build it; and based on Google’s recent quarter, they might have been right.

    This sounds like a good “VCs are evil” story, but it’s just not true. VCs are generally stupid, and young ones are amateurs and make moves like this occasionally, but MM doesn’t fit that profile (nor did he have this kind of leverage in this situation.

  • [...] if Zappos was doing so well on its own, why agree to the acquisition? Sources tell peHUB that principal backer Sequoia Capital pushed for the deal because it wanted “more [...]

  • [...] gets sucked up into a corporation like Amazon. Some are actually saying that Zappos’s board members pushed the company into the deal. But nevertheless, Amazon’s vast resources will be an asset to the smaller online retailer — and [...]

  • @Just Wrong:

    (A) You say I’m wrong but provide no evidence to the contrary. Your opinion is interesting, but perhaps not grounded in fact. Point to a fact that is wrong, provide better information and I’ll correct it.

    (B) This story isn’t a “VCs are evil” story. That’s your interpretation rather than what’s reported.

    In fact, a lot of the comments and Internet trackbacks to this story seem to have a big dollop of interpretation and extrapolation.

    From the story above: Moritz and Zappos CEO Tony Hsieh came into conflict about the company’s future. Moritz, the sources say, wanted Zappos to sell while Hsieh wanted to remain independent.

    This scenario is very normal. In fact, I would be surprised if a VC didn’t want his or her company to achieve liquidity for shareholders. Founders and executives generally have good reason to want this too.

    The two groups may disagree on how best to serve shareholders, but typically end up working it out.

  • l

  • [...] Chris Parandian says:this is a great clip by @egoldstein.  i believe it…Clipped from http://www.pehub.comThe decision to sell hot online shoe retailer Zappos to Amazon.com was more in line with the [...]

  • Investors had always had nice control over Zappos. They always seemed a little wary of the big spending at Zappos, Free catered lunches… open bar happy hours 3 offices in 1 complex. All were great but not needed what so ever. Oh well gotta learn the hard way…

  • [...] the VC crunch force a Zappos-Amazon deal? That’s the question swirling around today. PeHUB reported that the decision to sell hot online shoe retailer Zappos to Amazon.com was more in line with the [...]

  • [...] shopping experiences. Some sources say that Zappos didn’t want to sell itself, but was pressured by its investors. The value to Amazon seems clear on several [...]

  • VCs usually want to let the hits ride, so I’d say the situation is usually the opposite: the entrepreneur wants to sell and the VCs don’t. (The fact that the VC has eggs in 10-20 baskets and the entrepreneur has his eggs in 1 also supports this theory.)

    But assume here that the situation *is* inverted; the VCs want to sell and the CEO doesn’t. Even in that case, I don’t see how liquidation preferences come into play. $50M x 3.5 = $175M and the ~$900M valuation is way above that. Ergo, unless I’m missing something, preferences should play no role?

  • On reconsideration, my prior comment has incorrect logic. I should be looking at the valuation of the round compared to the exit valuation to determine whether the preferences kick in and not just the amount of money subject to the preferences.

    For example, if the last round had a 3.5x preference and was done at $200M, then it would not kick in because 3.5×200 = 700 ~900. Sorry for any confusion.

  • [...] peHUB » Zappos CEO Wanted To Stay Independent, Sequoia Wanted Liquidity—Sources PE Hub hat die Theorie aufgestellt, die Investoren wollten Ihre Liquidationspräferenz ausüben und haben so den Deal erzwungen. Sicher eine Möglichkeit, gerade bei den genannten Zahlen. Wenn sie allerdings schon so lange auf eine Liquidierung gewartet haben, würden sie auch ein paar Jahre mehr auf diesem Wachstumskurs noch aushalten. Ich glaube, da kann etwas dran sein, muss aber nicht. (tags: zappos) [...]

  • Although I have a hard time believing Sequoia would have forced an all stock deal (wouldn’t they have wanted cash, if they were forcing a deal?), I’m still not understanding this transaction. Zappos has great brand equity and growth prospects. There are so many reasons to believe they could have gotten a richer valuation either through an IPO (see Open Table) or better negotiation (taking 100% equity of a retail stock that’s trading at a two year peak in this market just doesn’t feel like a win, especially at the deal’s implied sales multiple (see gilt.com’s raise of $40 million at a $400 million valuation on sales of +/- $150mm)).

    I’m not really up on broader market deal structures, so I’m wondering where an all-stock deal fits in the landscape of VC exits these days. It seems unusual to me, but maybe I’m missing data points. Anyway, still trying to wrap my head around they “why” of this one (Although strategically and culturally I do think it makes a lot of sense for both sides. Maybe that’s all I need to understand).

  • [...] http://www.pehub.com/45388/zappos-ceo-wanted-to-stay-independent-sequoia-wanted-liquidity%E2%80%94so… On Tony Hsieh’s, CEO of Zappos, experience with feeling the pressure of VC’s. [...]

  • [...] PE_Hub on Amazon acquisition of Zappos (+/or check the Jeff Bezos video about customer centric biz) : “Zappos was financially strong enough to wait for the IPO market to recover, if it chose to go that route. The source, a Zappos shareholder who has seen the company’s income statement reports, said that the company did over $1 billion in gross revenue in 2008, $625 million in net revenue and had an EBITA greater than $40 million. Zappos had raised $49.1 million from venture investors since its inception, most of it from Sequoia, The Zappos shareholder, who says he has seen the company’s capitalization tables, says Sequoia had a 3x or 3.5x liquidity preference associated with the shares it purchased. “When Mike [Moritz, a GP with Sequoia] came in, he came in at a high valuation, but he countered that with a very high liquidation preference,” the shareholder says. “It puts management on one side of the table and investors on the other. Then there’s always pressure to sell the company.” Moritz, the sources say, wanted Zappos to sell while Hsieh wanted to remain independent.” [...]

  • [...] list (via PEHub):First round: $6.2 million, came primarily from Venture Frogs, an investment vehicle controlled by [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...]  Powered by Max Banner Ads   Powered by Max Banner Ads If Zappos was a forced sale, would someone please come force me a [...]

  • [...] 27, 2009 ·Filed Under Technology News If Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] Everyone Made from the Zappos Sale July 27th, 2009 If Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] 果然,peHUB這邊有一篇文章透露了他們所謂的「真相」── [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos was a forced sale, would someone please come force me a [...]

  • [...] Zappos CEO Wanted To Stay Independent, Sequoia Wanted Liquidity-Sources Say PEHub Zappos Financials View more documents from Development Corporate. Leave a Reply 3 views, 3 so far today | [...]

  • [...] have been reports that Tony Hsieh, Zappos’ chief executive officer, wanted to hold out for an initial public [...]

  • [...] an IPO with a valuation greater than $1B, but Zappos was reportedly forced by its investors into an acquisition by Amazon valued at ~$928M. The acquisition provided a quick exit for the investors without having to go [...]

  • [...] PEHub: Zappos CEO Wanted To Stay Independent, Sequoia Wanted Liquidity—Sources [...]

  • [...] tensions between Hsieh and his board (for which read Sequoia GP Mike Moritz) were reported by PE Hub at the time, and then dismissed by the NYT; it seems PE Hub was right. This is a lesson for anybody [...]

  • [...] Hsieh put out a statement rebutting a piece by peHUB that Sequoia Capital, one of Zappos’s main backers, was pushing for a sale sooner rather than [...]

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