Calix in Billion Share Bind?

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

rtk 12/4/2012 | 11:58:25 PM
re: Calix in Billion Share Bind? You Go, rogerramjet! Sounds like FUDman's 25W bulb went out. Or maybe he's just not tall enough to change it. I bet I know who it is (Troy). Nice try, once again you show how little you know. Maybe you should have gone to college. By the way, how are those 401k loans holding out?
rogerramjet 12/4/2012 | 11:58:54 PM
re: Calix in Billion Share Bind? Great observation Mr Fudbuster - However maybe I am competitor who wants to downplay these companies - for whatever reason ..Yet I am not but a REBOC tester (1 of the top 3 - South and west to give you something of a clue since you appear to be as bright as a 25 watt light bulb in a 100 watt light) I just make my comments to reflect a reality from all the Marketing crap that is posted from employees who post these great comments about company a b or c. Actually there are alot of great start-ups that we are working with and have aproved and are actually going to start deploying in the near future and have already done so this year - I decided to put a little reality into this forum between all the FUD that is actually posted - FUDBUSTED - I do not think so - BS BUSTED is more like it - Are you goin to be at Supercomm ??? Love to continue this talk.

Have a Proton Pill

fudbuster 12/4/2012 | 11:58:59 PM
re: Calix in Billion Share Bind? rogerramjet, your recent posts toward Tropic and Calix lead me to believe that you have an axe to grind with startups in general. I suspect this is nothing more than FUD from a worried incumbent competitor.

This FUD is busted!
rogerramjet 12/4/2012 | 11:59:00 PM
re: Calix in Billion Share Bind? Since I have had the "opportunity ??" to work with CALIX first hand in Labs ...Their products DO NOT work like the Product SPECs.. Kinda like the old days when we asked "What was the best machine that Oracle worked on ??" Answer: " Well the Overhead projector" There DSL Video dies when you have more than 15 customers on a single 24 port card (others do it a lot better..even oven 40) .Nice .. for a company that beats their chest on the DSL quality.. Now with over a billion shares at "2 cents per share " and the long list (???) of Customers ... Good luck I am looking forward to hear your (BS) story at Supercom this year !!! I will make sure that I drop in and mention this product spec !!!

Proton Pill Time ....
BobbyMax 12/4/2012 | 11:59:04 PM
re: Calix in Billion Share Bind? What Calix has done would sirly anger its investors and shareholders. It is very strange that the company has not settled after spendong over 200 million dollars. It is hard to evaluate the quality of products manufactured by Calix unless the list of customers is known
signmeup 12/4/2012 | 11:59:27 PM
re: Calix in Billion Share Bind? I would think, given the state of the economy, that most people working there are just happy to have a job. Who really cares about options nowadays anyway, except maybe the investors and founders?

Given the choice between a job that offered $80k and 250k options versus a job that offered $120k and 100k options is a no-brainer for me. But then again, perhaps the past couple of years have just jaded me. One good point is that I have been able to claim substantial losses on my taxes due to the purchase of pre-ipo startup shares that have gone belly up.

I think I would much rather pay taxes on income versus take losses on stock.

Just an opinion,

Scott Raynovich 12/4/2012 | 11:59:28 PM
re: Calix in Billion Share Bind? I think it's a service to the readers to explain what happens behind the scenes in a venture deal. Believe it or not, not everybody is aware that their stock options are being diluted.

Because we received new information on Calix, that qualifies as news. It also serves as a good example to explain the dilution quagmire that many startups may be in. This is a timely issue.
jackall 12/4/2012 | 11:59:29 PM
re: Calix in Billion Share Bind?

Could you explain why this is news. Mahi had more
than two billion at one point. I had the impression a lot of companies hit hard times over
the last several years. Why is it news that Calix is one of them.

Scott Raynovich 12/4/2012 | 11:59:33 PM
re: Calix in Billion Share Bind? A wash-out round is as subset of a down round (a more extreme case), so I believe you guys are splitting hairs here.

It's not clear what happened in the Calix case but based on the information avaiable it looks to have been a steep down round, not necessarily a wash-out round. But who really knows execept the board?
optical 12/4/2012 | 11:59:35 PM
re: Calix in Billion Share Bind? So, does this mean that my 100 Calix shares won't be worth very much? I was planning on early retirement with those shares. Oh well, I guess I'll keep working until Social Security kicks in.
GO_PHOTON 12/4/2012 | 11:59:42 PM
re: Calix in Billion Share Bind? Can Light Reading do further study,
and list the # of shares for the
recently acq'd companies:
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.
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 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.

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 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.
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 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.
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 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.

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.
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