Update: We spoke to Ashesh Shah, founder and CEO of the fund that led Bolt’s $450 million fundraising, to get some much-needed additional details about the deal. You can read the full interview here.
Bolt has issued an aggressive ultimatum to existing shareholders, threatening to buy back their shares in exchange for 1 cent per share, which could be an uphill battle and costly, a person familiar with Bolt's corporate charter told TechCrunch.
In short, everyone was paying attention Tuesday when news broke that one-click payment startup Bolt was looking to raise $450 million at a potential $14 billion valuation.
The company has been through a lot of controversy, including the departure of outspoken founder Ryan Breslow in February 2022. Part of the news of that massive new funding round included Breslow’s return as CEO, after allegations that he misled investors by inflating metrics during a fundraising run and broke securities laws when he last ran the company. Breslow has also been embroiled in a legal battle with investor Activant Capital over a $30 million loan he borrowed.
So it came as a surprise to many when, in a letter to investors, he detailed a significant capital investment and the terms under which Breslow would return to the helm of the company.
The proposed deal was laid out to preferred shareholders in an email from Bolt’s interim CEO Justin Grooms, which read: “We are in the process of closing a Series F funding round of over $450 million from investment firms in the UAE and the UK, which will bring our total valuation to over $14 billion, a significant leap from the $11 billion we were valued at in our Series E1 round in 2022. In addition to the investment from these investment firms, Bolt may also receive additional amounts from existing Bolt investors who may also participate in the Series F funding round.”
Reporter Eric Newcomer reported Tuesday that Bolt’s annual run rate as of the end of March was $28 million in revenue and $7 million in gross profit. The $14 billion valuation is a massive multiple for those numbers and is higher than the $11 billion valuation it reached in January 2022.
But as more details emerged, it became clear that the proposed deal was a modified version of a “pay-to-play” deal that would have allowed Bolt to buy out 66.67% of non-participating investors for 1 cent per share.
According to documents cited by Newcomer, the London Fund and Silverbear Capital were initially seen as the lead investors in the deal, with Silverbear putting in $200 million and the London Fund putting in $250 million in the complex transaction.
But Brad Pamnani, who is listed in the deal documents as replacing Silverbear, told Newcomer that the company was no longer involved in the deal and that “an unnamed Abu Dhabi-based fund is investing $200 million in Bolt at a $14 billion valuation, with plans to invest hundreds of millions more over the next 12 to 24 months.” And The Information reports that some investors are pushing back against the proposed deal, specifically the prospect of Breslow receiving a $2 million bonus and an additional $1 million in unpaid salary if he returns as CEO.
Now the question is: If shareholders don't agree to the proposed deal, can Bolt force a buyout or conversion and actually pay only a penny per share?
In short? Not likely, according to Andre Gharakhanian, a partner at venture capital law firm Silicon Legal Strategy. He looked at the company’s charter. He described the proposed deal as “a variation on the pay-to-play structure.”
“Pay to play” is a term used in term sheets that benefit new investors at the expense of existing investors. It’s become more popular during market downturns (which is why it’s becoming more common in 2024, according to Cooley’s data). Basically, existing investors must buy all the pro rata shares they are entitled to, or the company will take a penalty, such as converting preferred stock to common stock, AngelList explains.
For Bolt, it’s “not really a forced conversion like most pay-to-plays. Instead, it’s a forced buyout. The goal is the same: to pressure existing investors to continue to support the company and reduce the ownership of those who don’t,” Gharakhanian said. “But instead of automatically converting non-participating investors into common stock, we’re buying two-thirds of the non-participating investors’ preferred stock for $0.01 per share.”
The problem, he said, is that nearly all VC-backed companies have provisions in their corporate charters that require such proposed deals to be approved by preferred shareholders, usually a majority. That’s exactly the people Bolt is trying to force.
“There are a lot more nuances to this, but it’s still a long way to go before this gets proper approval,” he told TechCrunch.
He added: “What's happening here is that the company/major investor has simply signed a term sheet (no formal board/shareholder approval required to sign the term sheet) and they are now offering the deal to their existing investors. It's still early days and it's making headlines because of the salacious nature of the pitch and Bolt's crazy history.”
But that doesn’t mean he thinks the deal won’t be approved. The real gun pointed at investors’ heads isn’t forcing them to buy more shares at a price they don’t want to pay, but what happens to the company if new financing doesn’t materialize.
“Everyone involved in this knows that to actually close the deal, they have to get the necessary approvals from existing investors. The non-participants are being duped and everyone knows it,” he said.
So what usually happens next is “a few weeks of hesitation and vacillation” while the deal is negotiated and the final documents are drawn up. “But if the company has no other alternatives, the non-participating investors will often give in and agree to the deal,” he says.
All of this back and forth means that legal fees for pay-to-play deals can be just as high as for takeover deals. But unlike happy exit takeovers, these types of deals “generally create a bad atmosphere,” he added.
Interestingly, Garakanian added an amendment to Bolt's articles of association in May 2022 that would require the company to obtain the consent of a majority of preferred shareholders before entering into any employment or compensation agreement with Breslow before October 7, 2024.
He said that under the charter, the proposed transaction would “likely still require the consent of a majority of existing preferred shareholders”.
TechCrunch has reached out to Bolt, Grooms, Breslow, The London Fund and Pamnani for comment.
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