Hey Lightspeed: Do The Right Thing

Limited partners usually look forward to stock distributions from their general partners. It’s not quite the liquidity of a cash distribution, but still superior to the erethral dryness of a printed IRR. But there are exceptions to any rule – and sometimes they are large enough that an LP will call me to say: “We got screwed.”

This is one of those exceptions.

Last Thursday night, Lightspeed Venture Partners distributed over $100 million in Riverbed Technology (Nasdaq: RVBD) stock. The deal was tagged with around a $42.22 per share distribution price, which was based on the five-day trading average prior to distribution. This is also the mark that Lightspeed used to determine its carried interest, as specified in its limited partnership agreements. No official harm or foul.

Unofficially, however, the distribution was a show of bad faith. Riverbed stock had mostly traded above $40 for months, even surpassing $50 in mid-day trading a few weeks ago. But that all came to a crashing halt last Wednesday, following the release of disappointing earnings. Riverbed stock last Wednesday sunk more than 28%, to close at just $34.61 per share. Things got even worse the subsequent day, with a $32.67 per share close.

It was at this point that Lightspeed decided to make its distribution, using a five-day average that included three high days and two low days. In other words, LPs were told to pay carry on over $42 per share, on the very day that the stock is trading at under $33 per share? Simply unfair.

There are plenty of times when a stock spikes or tanks after a distribution, in which case either the GP or LP is honestly chagrined. But that is not what happened here, as the tank had already occurred. Lightspeed knew that the distribution price would be significantly higher than what LPs could actually sell the stock for, which would be particularly tough for those LPs who are mandated to sell distributed shares immediately.

Lightspeed declined to comment, but perhaps would argue that the tank is precisely why it distributed on Thursday, under the premise that Riverbed would not regain its past glory. Get in those three good days… Fine, but then it should amend its LP agreements and take a lower carry. Not because it has to, but because it’s the right thing to do.

It’s also the best strategic move. Lightspeed plans to raise another fund (likely next year), and LPs tell me that they’ll remember this incident when due diligence comes back around. All it takes is a few sour LPs to sour the bunch.

It’s not too late Lightspeed. Do the right thing. Do the smart thing.