7 Lessons from Zantaz firesale

As the saying goes, a thing is worth what someone is willing to pay for it. But as the founder of Zantaz greviousy discovered July 3, this adage doesn’t always apply to a startup. When multiple layers of professional financings are in place, sometimes a company is worth merely the price for which one group of investors is willing to _sell_ it.

Zantaz, which makes email archiving software, is being acquired by Autonomy for $375 million in cash, yet apparently *its founder will get comparatively zilch* when the deal closes in August. Our friends at “VentureBeat wrote of this sad tale first”:http://venturebeat.com/2007/07/06/zantazs-375m-payday-and-the-unfortunate-back-story/ last weekend, and posted alongside their story several alarming documents from Zantaz’s protesting parties who believe their stakes were inappropriately diluted in a 2002 Series E round.

The dispute over who got paid and who got burned in the deal will probably go to court. But for now we’ll use this ugly charade to call out a few cautionary tips on fundraising for the benefit of all founders. File them under your *”There but for the grace of God”* references, and uh, *reread ’em frequently.*

(Excerpts in italics below are taken from “docs #3 and #4 as footnoted”:http://venturebeat.com/2007/07/06/zantazs-375m-payday-and-the-unfortunate-back-story/ in the VentureBeat story.)

*1) Never put off fundraising until your company needs the $$:*
_One interpretation of the history of Zantaz… is that the Board delayed any serious effort towards obtaining additional funding until the Company was on the verge of a liquidity crisis…in the year 2001 while the Company had almost $20 million in cash, it did not … raise additional capital._

*2) You can _always_ hire a banker — they work on comission:*
_No investment banker was retained on a commission basis, to assist in preparation of a business plan, fairness of opinion, and capital raise when the Company could afford to do so._

*3) Closed auctions aren’t auctions at all:*
_[defendant directors] did not distribute the projections to interested investors, nor did they provide them to any of the shareholders asked to vote on the various Series E financings._
And _one email from the Chairman said that the Board wanted to keep the terms of the proposed transaction secret until the offering was presented as a completed deal._

*4) Be wary of sudden discounts:*
_In July 2002 the Board considered that the valuation of Zantaz (pre-money) was at least $48,000,000 … in connection with a proposed $5 million funding mostly to *non-insiders.* However, when the board decided to change plans and raise $11 million mostly *from insiders* one month later…the valuation of the company was now only $16 million._

*5) Warrants are a four-letter word, unless they’re yours:*
_The number of shares actually issued, and to be issued upon exercise of Warrants (mostly to the VCs represented on the Board)…would produce $383,128,970 for the Company [but] the amount the Company will actually receive ($11.3 million) leaves a damage claim amounting to $371,834,672._

*6) Late stage investors pressuring for a down-round or a sale is a red flag:*
_The Common Shareholders, in sufficient numbers, consented to the financing. However, they were not given any information about the Company’s prospects (i.e., the projections, contracts in the pipeline, etc). Instead, informally they were threatened with a bankruptcy filing if they did not acquiesce._

*7) If you decide to sell, but what you’re hearing doesn’t sound right, get a 2nd Opinion:*
_[defendant directors] said that they had not seriously tried to sell the Company because no one was interested in buying it … [yet] Iron Mountain said they would be in interested in purchasing Zantaz for $150 million._
_[defendant directors] said the company went to “great lengths” to get financing before deciding the *only source* would be those already invested at the Board level.”_

When push comes to shove, hire your own banker or financial consultant. It will be spendy, but worth it. This reporter once interviewed a woman caught-up in a contested sale of her company. Short on funds, she hired her daughter’s high school economics teacher to advise her. Against all odds, the teacher drummed up the high bid and the woman is now a billionare. _For real._