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Calix in Billion Share Bind?

Light Reading
News Analysis
Light Reading
5/28/2003

Could it be possible that a startup has issued more than a billion shares of stock?

Sources say it may be so for Calix Networks, which has made quite a splash over the past few years with its $260 million in funding raised and its claim that it's sold more than 500 systems to more than 50 customers.

Two sources close to Calix, including one former employee, tell Light Reading that Calix now has some 1.2 billion shares outstanding -- meaning held by investors, employees, and executives. For a company that was once reportedly valued at $525 million, it will be interesting to see what Calix ultimately brings in, either from the public markets or an acquirer, and yet more interesting to see how its employees fare in the deal. The privately held company declined to comment on its finances and ownership structure.

Of course, share dilution is a problem that isn't particular to Calix. It points to the troubles of any startup that raised money at the stratospheric valuations of 1999 and 2000.

Things started out modestly enough for Calix. According to the company's articles of incorporation, Calix was authorized to issue 25 million shares as of December 1999. But then it issued more than 81 million shares as of August 2000, and then more than 87.7 million shares as of February 2001.

That brought the share count to nearly 200 million by February 2001 when the public records of investment ended. After that, it's likely that Calix had to issue many millions more to draw in new investors in later rounds, at much lower valuations. This is commonly referred to a washout or down round in VC parlance, in which earlier investors are heavily diluted to pave the way for new money at lower valuations (see Washed Out in the Valley).

Light Reading's sources say this is exactly what happened -- and that Calix issued more than 900 million shares in just a little more than two years.

Bart Schachter, founder of Blueprint Ventures, said he is not familiar with the specifics of Calix. But he said the idea of a company having a billion shares is not so surprising, considering the scale of dilution that has happened in the startup industry.

"This is a way for the new investors to say 'I don't care what happened before, I'm only willing to pay market pricing if I'm going to invest in the company at all,' " he explains. "Diluting prior investors by a factor of 100 times is 'market' today, no matter how deep the pockets of current investors. In fact, these rounds are affecting those who invested the earliest and the most, especially in equipment companies."

In the case of Calix, what's not clear is the price paid per share for each of Calix's funding rounds, thus, Calix's valuation remains a mystery. Such a spike in outstanding shares also suggests that Calix's most recent funding round and the latest round of executive hirings have cost the company dearly. Indeed, unless early employees were issued new stock, it's likely that the holdings of early shareholders have been massively diluted.

Light Reading attempted to contact several of Calix's board members, particularly those hailing from venture capital companies, but got no responses.

— Phil Harvey, Senior Editor, and Scott Raynovich, US Editor, Light Reading

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drone387
drone387
12/4/2012 | 11:59:54 PM
re: Calix in Billion Share Bind?
A layofff followed by a 1 for 30 reverse split.

I heard Carona networks had 3-4 billion shares at one point so Calix isn't leading the pack in that regard.
GoBlue
GoBlue
12/4/2012 | 11:59:52 PM
re: Calix in Billion Share Bind?
This really is a non-story. Many companies, because of down round financings and anti-dilution clauses in their financing docs, end up with over a billion shares. The normal thing that is done is to do a reverse split simultaneously with the financing so that you end up with 20-50 million shares outstanding. If Calix did not do the reverse split, it is unusual but not unheard of. The good news for remaining employees is that almost universally the option pool gets refreshed and new options handed out. The old options, just like the old money become worthless, but at least the people that are still with the company are given a chance to profit if the company is successful.
yakatori_guy
yakatori_guy
12/4/2012 | 11:59:52 PM
re: Calix in Billion Share Bind?
I don't think that these terms are interchangeable. A down round simply means your pre-money valuation for round N is less than the post-money valuation for round N-1. Depending on the term sheets for rounds 1 to (N-1), this can have some unpleasant effects.

In a washout round, the company valuation is near zero. It may just be an *extremely* down round. Or it can be a tool for the current investors to "wash out" some previous investors.

I would guess that any circa-1999 startup still kicking has taken at least one down round. Whether or not they "washed out" depends on many other factors.

In either case, after a dilutive round, a good CEO will do his or her best to negotiate overall employee equity back to the 20-25% level.

y_g
GoBlue
GoBlue
12/4/2012 | 11:59:51 PM
re: Calix in Billion Share Bind?
Often times they are used interchangably, but your right that they are different. The biggest difference is that in a washout round all of the prior rounds of preferred shares get converted to common - the biggest effect of which is that the liquidation preference of those shares goes away. While this may also happen in a down round, it often times doesn't. It always happens in a washout round.
Amused
Amused
12/4/2012 | 11:59:51 PM
re: Calix in Billion Share Bind?
Not to mention all the Calix employees and ex-employees who owe massive loans for the worthless stock. Or how much of said stock was issued so Russo could use it to entice his old Cerent cronies to come to Calix to dismantle it.
moose
moose
12/4/2012 | 11:59:50 PM
re: Calix in Billion Share Bind?
"Many companies, because of down round financings and anti-dilution clauses in their financing docs, end up with over a billion shares. The normal thing that is done is to do a reverse split simultaneously with the financing so that you end up with 20-50 million shares outstanding."


Exactly. Because the mechanics of anti-dilution are often iterative, often times the Excel Goal Seek function is used. To converge on a solution, the price per share gets lower and lower, with the number of shares getting higher and higher. Once the solution converges, a reverse split is usually done to return the number of shares and price per share to reasonable levels.
JGS
JGS
12/4/2012 | 11:59:50 PM
re: Calix in Billion Share Bind?
It is obvious that the author is not a finance guy. I agree with yakatori_guy in his explanations regarding down rounds and washouts.

These equity transactions can be very complex especially in a down round scenario. Preferred shareholders have protective provisions and legal rights that can protect their ownership rights in the event of a down round.

Dilution occurs in all rounds regardless of valuation. The lower the pre-money value the greater the dilution ceteris paribus. The question is who got diluted and how much ownership do the non-executive employees have of the company?

The number of shares in my view is an irrelavent number, but what is important is how these shares are distributed. It is customary in a down round for the new investors to reload the option pool and give the knowledge base (employees) a meaningful share of the company. This is usally done prior to setting the share price of the round.

If there are a large number of shares this can be adjusted in a reverse split. It would probably be fair to say that there was a down round, but difficult to ascertain how the employees equity ownership was affected.
verstand
verstand
12/4/2012 | 11:59:48 PM
re: Calix in Billion Share Bind?
Of course, there are other solutions. Some investors refused to get diluted or tired of "pay to play". They may simply choose to shut down the company. Some will let the company go down to the drain and restart a new one with the same group of guys and bought the original IP at fire sale price.
______________________________________________

"......and its claim that it's *sold* more than 500 systems to more than 50 customers."
______________________________________________

LR, what do you mean *sold*?
sevenbrooks
sevenbrooks
12/4/2012 | 11:59:48 PM
re: Calix in Billion Share Bind?

Not to mention the fact that Russo flies himself back to Santa Barbara every weekend. I know he is really committed as he has a Dodge Vyper that he drives around the North Bay while he is here. Not sure that he is pushing the employees that hard from his airplane.

seven
mumbogumbo
mumbogumbo
12/4/2012 | 11:59:43 PM
re: Calix in Billion Share Bind?
Reverse split. Doesn't hurt the valuation of the company, just alters the amount of slices in the pie.

Isn't that what most companies do in that situation? Don't see the "bind" here.
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