Zappos had raised $49.1 million from venture investors since its inception, most of it from Sequoia, according Thomson Reuters (publisher of PEHub.com). 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.
Sequoia forces a sale, rakes in the dough on a 3.5x liquidation preference, then if they got participating preferred, double dips again as a common shareholder. They must have cleared ~$100MM at least, though probably much more.
Update: Interesting thought... why would a VC want cash so badly? Are Sequoia LP's refusing capital calls? Why the sudden need for liquidity?
Caveat entrepreneur! There's a happy ending, but maybe not as happy as Tony Hsieh wanted.