| For a long time, the US stock market would pay $2 for $1 worth of crypto. If you had a stash of, say, $500 million worth of Bitcoin, you could plop it into a random public company and the market would value the company at $1 billion. Then you could raise more money in at-the-market stock offerings, and use the money to buy more Bitcoin. Each $1 that you spent on Bitcoin would increase your market capitalization by $2, allowing you to raise more money to buy more Bitcoin, etc., in a virtuous cycle that, come on, just had to end badly. If nothing else, this strategy was extremely visible and extremely easy to copy, so everyone did it, driving the premium down. But, for a while, good trade. One oddity of the trade was that, if you did have $500 million worth of Bitcoin, and someone came to you and said “I’ll give you $500 million for your $500 million worth of Bitcoin,” you’d be kind of an idiot to sell. Those Bitcoins were going for $1 billion on the stock market! If you had a big stash of Bitcoin, the proper trade was to start a Bitcoin treasury company, not sell the Bitcoins to someone else who already had a Bitcoin treasury company. I wrote about this problem in July: Doesn’t this seem unsustainable in the long run? How are all of the Bitcoin treasury companies going to buy more Bitcoin, if every big holder of Bitcoin can make more money by starting Bitcoin treasury companies themselves? I mean, there are subscale holders; if you own 0.1 Bitcoins you’re not going to take that public so you might as well sell to Strategy or Twenty One or BSTR or whoever. And I guess eventually there will be stock-for-stock mergers of Bitcoin treasury companies. The ones that trade at lower premiums will sell to the ones that trade at higher premiums. I am excited to read the fairness opinions for those.
Well! Bloomberg’s Isabelle Lee reports: Strive Inc., co-founded by former US presidential candidate Vivek Ramaswamy, agreed to acquire Semler Scientific Inc. in an all-stock deal, marking a new stage of consolidation among Bitcoin accumulators. The transaction values Semler at $90.52 a share, a 210% premium to its Friday closing price of $29.18. The combined company will hold nearly 11,000 Bitcoin, according to a statement Monday. Digital-asset treasury companies have sprung up around the world in recent months as cryptocurrency prices rose, adopting the balance-sheet strategy pioneered by Michael Saylor’s Strategy Inc. Strive’s deal for Semler appears to be among the first between publicly traded crypto hoarders, and it comes a week after Strive turned itself into a Bitcoin proxy. “Strive’s merger agreement to acquire Semler Scientific just one week after becoming a public company shows a level of speed and execution not seen before in the Bitcoin treasury space,” said Matt Cole, Strive’s chairman and chief executive officer. The fairness opinion isn’t out yet. Semler Scientific is a Bitcoin treasury company that, like most Bitcoin treasury companies, also does a random other thing. (Here, “a market leader in digital health technologies that support early detection of chronic disease”; Strive is an anti-woke exchange-traded fund manager.) It owns 5,021 Bitcoins, worth about $567 million at $113,000 per Bitcoin. Time was when that stash would make Semler’s stock worth $1 billion or more, but that golden age has ended, and Semler’s stock closed on Friday at $29.18 per share, for about a $432 million market capitalization. It has about $100 million of debt outstanding, so that’s something like a $532 million enterprise value, but the point is that Semler was trading at a small discount to net asset value. [1] That is not what you sign up for when you start a Bitcoin treasury company! The whole point is to trade at a huge premium to net asset value, so that you can sell more shares to buy more Bitcoin and grow your empire. [2] If you are trading at a discount you might as well unwind the trade: Sell all the Bitcoins for $567 million, pay off the debt, and give the remaining $467 million back to shareholders. But that seems like a disappointing outcome. The better alternative is to sell the whole Bitcoin treasury company to another Bitcoin treasury company, for stock, at a nominal premium to net asset value. Here Semler is getting a nominal price of “approximately $90.52 per share,” based on an exchange rate of 21.05 Strive shares per Semler share and Friday’s Strive closing price of $4.30 per share, though the actual valuation depends on how much the Strive shares are worth. Another way of doing the math is: - Strive has 5,886 Bitcoins in its treasury, and Semler has 5,021, for a total of 10,907 Bitcoins in the combined company.
- So Strive is contributing 54% of the total Bitcoins, and Semler is contributing 46%.
- Strive’s shareholders will get about 54% of the combined company, and Semler’s will get the other 46%. [3]
In other words, on a Bitcoin basis, this is roughly a merger of equals; no one is paying a premium or a discount. By last Friday, Semler’s stash of Bitcoins was no longer trading at a premium on the stock market. But if you roll that stash of Bitcoins into another stash of Bitcoins, maybe the combined company will trade at a premium on the stock market. Why? I don’t know, why does anything ever happen. Some crypto treasury companies sometimes trade at large premiums, so if yours doesn’t you just roll the dice again. What does Strive get out of the deal? Strive is issuing 311.5 million shares in this merger to get 5,021 new Bitcoins, worth about $567 million. Strive’s stock closed on Friday at $4.30 per share, making those 311.5 million shares worth about $1.3 billion. Wouldn’t it be more efficient for Strive to sell that $1.3 billion worth of stock for cash and use the cash to buy $1.3 billion worth of Bitcoin, roughly twice as much as it’s getting in this merger? Why wouldn’t it just do that? Ahahaha no I’m kidding I know why. These days it is harder than it used to be to sell $1 worth of Bitcoin for $2 on the stock market, but it’s easier if the buyer is also a crypto treasury company.  | | | Classically, a private tech company issues common stock to its employees and founders, and convertible preferred stock to its venture capitalists. Employees get a share of the business: If the business ends up worth nothing, they get nothing; if it ends up worth a bajillion dollars, they get their percentage cut of a bajillion dollars. VCs, though, get some downside protection. If a VC invests in a startup at a $2 billion valuation, paying $200 million to buy 10% of the company with a “1x liquidation preference,” then the VC gets its money back first. Much of the time, this works out like common stock. If the startup ends up selling itself or going public for $5 billion, the VC gets back $500 million (10% of $5 billion), a nice return on its $200 million. If the startup ends up worth nothing, the VC gets back nothing, the risk of investing in startups. But if the startup ends up selling itself for $1 billion, the VC gets back $200 million: It has a liquidation preference, and its $200 million gets paid back before the holders of common equity get anything. In this case, if the VC is the only preferred investor, the VC gets back $200 million, leaving $800 million for the common shareholders who own 90% of the company. If you are a 1% common shareholder, you might think “ah, the company sold for $1 billion, so I get 1% of $1 billion, which is $10 million,” but in fact you only get $8.9 million because the VC’s preferred shares get paid back first. That is the optimistic case. More often, a company will do several rounds of preferred-stock financings at increasing valuations (and, thus, increasing liquidation preferences). Sometimes, to get a financing done, the company will give VCs a liquidation preference higher than the amount they put in: If that VC got a “2x liquidation preference,” then it would have to get back $400 million (twice its investment) before the common shareholders got anything. (That is, it gets a preferred return, a guaranteed profit before the common shareholders participate. [4] ) If the company raised $500 million from VCs at a $2 billion valuation with a 2x liquidation preference, and then a few years later sold itself for $1 billion, the VCs would get the whole $1 billion and the common shareholders — who thought they owned 75% of the company — would get nothing. Three things to say about this are: - It’s very common. Most US venture capital deals are for preferred stock, and liquidation preferences above 1x (where the VC gets back a profit before common shareholders get anything) are controversial but not particularly rare.
- The bad outcome — the company sells for less than the liquidation preferences, so the VCs get paid but the employee common shareholders get nothing — is also not that uncommon. Medium is full of warnings to startup employees about “Why You May Never See a Dime From All Those Stock Options” and “How to Exit for $1B and Walk Away With Nothing.” If a startup raises money at the peak and then sells at a lower valuation, it’s entirely possible that the employees will get nothing.
- It makes the headline valuations of a lot of tech startups a bit misleading. If a company raises money at a “$2 billion valuation” by selling 10% of itself to a VC for $200 million and giving the VC a $400 million liquidation preference, then the company’s total equity value is not really $2 billion. The VC paid $200 million for a thing — preferred stock with a guaranteed 100% return — that is worth more than 10% of the equity, which means that a 10% common-stock stake in the company is worth less than $200 million, so the company as a whole is worth less than $2 billion. [5] This can be quantified, and has been. We have occasionally discussed a 2017 paper, “Squaring Venture Capital Valuations with Reality,” by Will Gornall and Ilya Strebulaev, examining the terms of big startup fundraisings and finding “that reported unicorn post-money valuations average 48% above fair value, with 14 being more than 100% above,” because of liquidation preferences and other terms of their fundraisings. (“Common shares lack all such protections and are 56% overvalued.”) So if a startup just raised money from VCs at a $2 billion valuation, and someone offers you common stock representing 0.1% of the company, you should not pay $2 million for it; you should pay more like $1 million.
There are various reasons to dislike this. You might dislike it just as a disinterested observer, because all of this “structure” can make startup valuations misleading and be a way to avoid the embarrassment of a down round. You might dislike it as a startup founder, because liquidation preferences can reduce your return and because there is a Silicon Valley stereotype that VCs who demand too much “structure” in their termsheets are bad to work with. But the people who especially dislike it are startup employees, who are making large undiversified career bets on their startups for years at a time and quite naturally think that, if the startup ends up with mediocre results, they should get some reward before rich diversified VCs get their guaranteed profits. The deals don’t work that way, but you can see why employees would think they should. Anyway here’s a story about “a legal case brought by disgruntled employee shareholders of FNZ” Group Ltd., a financial technology firm, “who say their stake in the company was worth $4.6 billion before three fundraisings diluted it.” The 180 shareholder employees claim that their stake has been unfairly watered down by three fundraising exercises during 2023 and 2024. The raisings, which brought in just over £1 billion, were conducted through preference shares and warrants. The employees argue that the institutional investors who also own shares in the company were able to increase their stakes on preferential terms. As a result the employee shareholders say that if the company were to be sold, in an initial public offering, for instance, their shares could prove to be worthless in certain circumstances. Yes that is definitely something that startup employees dislike. Bloomberg’s Ishika Mookerjee wrote about the case in July: FNZ issued preference shares — which rank higher than ordinary shares — and warrants to institutional investors including Caisse de Depot et Placement du Quebec, Singapore’s Temasek Holdings Pte. and Motive Partners LLC, diluting the employee holders, the claimants said in a Monday statement. … Preference shares offered investors a potential rate of return of as much as 300%, while the issuance of warrants has furthered diluted the claimants’ shareholdings, according to the lawsuit. Employees have also complained about FNZ’s decision to amend its constitution, which they say removed a requirement to issue new equity at fair market value. The case was filed in New Zealand. I am not sure if employees have much legal ability to stop this sort of thing — I suppose it depends on what FNZ’s constitution said and also how off-market the financing terms were — but it is an interesting attempt. In 2000, Vincent Yen and Frederick Ghahramani founded a Canadian software company now called airG Inc., along with a third co-founder who left in 2004. Until 2021, Yen and Ghahramani controlled about 89% of airG’s stock, split equally between them, with the rest in the hands of a few angel investors and one other executive. At some point they had a falling-out and Ghahramani took over most of the day-to-day running of the business, though Yen remained an executive with a salary. In 2021, Ghahramani secretly acquired some angel investors’ shares, got voting control, removed Yen as a director, fired him and stopped paying his salary. Yen sued, claiming among other things that he and Ghahramani were partners and had an agreement that “they would equally participate in all share buybacks from the angel investors.” [6] What kind of agreement? Well in 2015 they signed an “Ongoing Business Partnership Agreement” that, among other things: 1) reduced Mr. Yen’s annual salary to $100,000 and increased Mr. Ghahramani’s annual salary to $500,000; 2) permitted each party to submit $24,000 per annum in personal expenses on their American Express cards, to be paid by airG; 3) required each party to record their personal expenses in a way that would maximize airG’s ability to pass a CRA [Canada Revenue Agency, the tax authority] audit; 4) stated Mr. Yen and Mr. Ghahramani agreed to divide the proceeds of three enumerated “shady” deals 50-50. This term was included in a section entitled “Shady Deals”; In an email to Yen a week later, Ghahramani expanded on the intent of the agreement: […] just so we understand each other, what our arrangement enables is for you and me to not be treated like shareholders, but to get treated like owners of a family business or really "extra special shareholders". If we were just normal shareholders there would be no ayse deals, and there would certainly be no year end split of profits in the structure that we've built. It's possible that we've been doing it so long that we've taken it for granted but if we ran airg "correctly" the only way to get cash into our jeans would be to dividend money into dorian [an angel investor] and cra's jeans too. Which is something neither of us want to do [...] We are negotiating how to *continue* [f***ing] the minorities and cra under our current "partnership" that we've arranged as special shareholders Those quotes are all from last week’s Supreme Court of British Columbia decision in the case and, you know. If you are going to court asking a judge to enforce an agreement with a section titled “Shady Deals,” you have probably already lost. Yen did. The judge wrote: Mr. Yen’s removal as a director was not oppressive, nor did it violate his reasonable expectations. This is because Mr. Yen could not have reasonably expected that he would remain either a director, or an employee, of airG forever. Mr. Ghahramani did not oppress Mr. Yen; he legally outmanoeuvred him.
And: Mr. Yen and Mr. Ghahramani understood that the terms of the 2015 Agreement were prejudicial to the other airG shareholders and probably contrary to income tax laws. Their understanding of this fact is apparent in their communications.
I feel like we should see more of this? If you are a young tech-inclined startup founder, and you are doing shady deals, and you want to split the proceeds of the shady deals with your cofounder … you shouldn’t have an agreement with a section titled “Shady Deals,” but you might, right? It just feels like that has a combination of literal-mindedness, hubris and comedy that would appeal to a lot of tech founders. But not to judges! I sometimes point out around here that “insider trading” in commodities markets is a tricky topic. Unlike in the stock market, commodities traders are supposed to trade on material nonpublic information: The point of a commodities futures market is to allow real-world producers and consumers of a commodity to hedge their risk, and of course those real-world producers and consumers have private knowledge about their own production and consumption plans that will inform their trading. Not all commodities insider trading is legal — you’re still not allowed to trade on someone else’s private information that you have misappropriated; you can’t front-run your employer — but a lot of it is (not legal advice!), which creates weird potential results if sports and election betting are somehow commodity markets. So if you are betting on future electricity demand, you might be very interested to know the details of Meta Platforms Inc.’s plans to power its artificial intelligence projects. If you broke into Meta and stole those plans to trade electricity, no, bad. But if you are Meta, of course go ahead and start a power trading business: Meta Platforms Inc. is moving to break into the wholesale power-trading business to better manage the massive electricity needs of its data centers. The company, which owns Facebook, filed an application with US regulators this week seeking authorization to do so. A Meta representative said it was a natural next step to participate in energy markets as it looks to power operations with clean energy. Buying electricity has become an increasingly urgent challenge for technology companies including Meta, Microsoft Corp. and Alphabet Inc.’s Google. They’re all racing to develop more advanced artificial intelligence systems and tools that are notoriously resource-intensive. Amazon.com Inc., Google and Microsoft are already active power traders, according to filings with US regulators. While big tech companies consume huge amounts of electricity, they also have contracts for power that they can flip around and sell when prices are high. “There will be opportunities to sell electricity into the wholesale markets and make a little extra money doing that,” said Pavel Molchanov, an analyst at Raymond James. Man, remember DeepSeek? There was like a week when DeepSeek’s AI model was new, attracting tons of attention, and specifically making people worry that cutting-edge AI would require far less electricity and processing power than everyone had expected. This briefly took $1 trillion off the market value of tech companies, chipmakers and electric utilities, and I suggested that DeepSeek’s founder — a hedge fund manager! — really should have shorted those stocks before unveiling the model. Similarly if Meta ever does find a way to do AI in a less power-intensive way, I hope they make a ton of money shorting electricity first. We talked last week about a guy who revived Enron Corp. as a bit. But here is a website called “Theranos Labs” — “the New Theranos: the lab test, REE-invented” — and … ? There is a long, wild video. I don’t think it’s a bit? It sure is something, though. They’ve got a thing called “Blue Magic.” Elsewhere in Enron-adjacent revivals, “Andersen Group, a tax and legal services firm, filed for an initial public offering with the Securities and Exchange Commission on Friday.” Anderson developed out of Arthur Andersen, the accounting firm that disappeared in the early 2000s because it audited Enron. Pretty sure this is not a bit at all, just a tax and legal services firm. How top hedge funds can pay traders $100mn. A 50-Pound Book Holds the Keys to Citadel Securities. The Year’s Biggest Deal Could Yield a Record Payout for Bank of America. Reverse dispersion trades. DE Shaw Raising $5 Billion in First Hedge Fund Run by Humans. TikTok’s Algorithm to Be Secured by Oracle in Trump-Backed Deal. Compass to Buy Anywhere, Forming $10 Billion Property Broker. Musk’s XAI Raises $10 Billion at $200 Billion Valuation. PrizePicks Sells Majority Stake to Lottery Operator for $1.6 Billion. Disconnected phone calls leave billions of dollars on the hook for Humana. Samsung confirms its $1,800+ fridges will start showing you ads. “[Sam] Vaknin, who is 64, sounds and looks a lot like Count Chocula with dark nose-diving eyebrows and impressively lush gray hair. His epiphany that he likely had [narcissistic personality disorder] came while serving an 18-month prison sentence for securities fraud.” | 
