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

The decision to sell hot online shoe retailer Zappos to 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 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. 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.