SA国际传媒

At the end of May, Teespring, the beleaguered tee shirt sales platform funded by the likes of Y Combinator, Andreessen Horowitz, and Khosla Ventures, underwent . According to our sources at the time, these layoffs reduced headcount to just 鈥渢wenty to thirty鈥� people at headquarters as the company pursued a 鈥渞estructuring.鈥� SA国际传媒 News was the that latest round of layoffs at the company.

According to multiple sources at the time, Teespring鈥檚 management and existing investors were considering a recapitalization of the company. In practice, that often means old voting, corporate, and equity structures are dissolved, with a new corporate entity, of the same name, created in its place. Shares in the old entity are converted to shares in the new entity 鈥� or bought out entirely 鈥� and, usually, stockholders in the old entity are significantly diluted unless they participate in the financing of the new entity.

Since our report,聽聽confirmed the recapitalization of Teespring.

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SA国际传媒 News has viewed certain documents related to the recapitalization and new financing round. What we’ve been able to gather from these聽documents, in concert with discussions with sources close to the current transaction, confirm some assertions made by the Journal, as well as provide additional details about the state of Teespring. When reached for comment on a summary of our findings, Teespring’s CEO, Walker Williams, said he would not make any additional statements on the company’s behalf.

State聽Of The Business

Back in May, sources suggested that Teespring has achieved profitability due to a reduction in operational expenses brought on by the latest round of layoffs. If this is indeed the case, it鈥檚 a notable change in course for the company. Historically, it has not been profitable, on an annual accounting basis, for any year since its inception.

Through the end of April 2017, the company generated a GAAP-compliant net loss of $3.5 million on $42 million of revenue. On an annualized basis, it puts the company on a path to take in less in 2017 than it did in 2016鈥攗nless the company can grow聽its revenue numbers.

Below, you鈥檒l find a chart based on information we have been told about Teespring鈥檚 finances.

Beyond these revenue figures, a source tells us that, based on documents they鈥檝e reviewed, the company has an accumulated deficit of around $93 million as of the end of 2016.

So what happened to the company’s revenue?聽The Wall Street Journal came to a similar conclusion that we did back in May: Teespring appears to be a textbook example of so-called 鈥減latform risk.鈥�

Tomasz Tunguz, a partner at , illustrated this particular kind of risk in : 鈥淚s the startup building atop YouTube, Twitter or Facebook? How strong is their relationship? Are their product plans in the direct path of the platform or complementary?鈥�

Based on conversations with our sources, a proximal cause of Teesping鈥檚 financial woes was its reliance on third-party social platforms like Facebook as its primary sales channel. Facebook it allocates advertising space in the newsfeed , and Teespring was caught in the crossfire. An algorithm change, combined with so-called 鈥減ower sellers鈥� leaving the platform, culminated in the significant revenue declines shown above.

Back in May, a spokesperson for the company told us, 鈥淸r]estructuring the company was a difficult decision, however making these changes enables us to run a healthy and profitable business moving forward.鈥� The statement was echoed, word-for-word, by , Teespring鈥檚 VP of Commercial, to the Wall Street Journal.

Inside Teespring鈥檚 Series 1

SA国际传媒 News has confirmed reporting by Wall Street Journal and Pitchbook data that Teespring is raising a $5 million 鈥淪eries 1鈥� financing.

The company has closed $4.3 million from a number of investors, including and 9Point Ventures. Khosla Ventures led Teespring鈥檚 , and , a partner at the firm, currently sits on the company鈥檚 board. 9Point Ventures is led by , brother of Y Combinator president Sam Altman, who previously sat on the company鈥檚 board.

As an aside, Jack Altman, the third Altman brother to Max and Sam, was a general partner at alongside Sam. Hydrazine Capital is a holder of Common Stock in Teespring, which, as we鈥檒l show later, means that the fund鈥檚 position is effectively wiped out. Jack was also the VP of Business Development for Teespring before co-founding as that startup鈥檚 CEO.

Andreessen Horowitz鈥檚 co-founding partner, , is the signatory for the fund on Teespring鈥檚 paperwork. It’s an interesting twist considering that was a16z鈥檚 investing partner on both Teespring鈥檚 Series A and Series B rounds. Dalgaard also previously represented the venture capital firm on Teespring鈥檚 board since 2014.

Board Shakeup

Teespring鈥檚 new board will consist of five directors, four of whom have already been named: Walker Williams will take the CEO seat, Evan Stites-Clayton will represent Common Stock holders, Keith Rabois confirmed in an email that he will represent Khosla Ventures, and Max Altman of 9Point will also be joining the board. The independent seat remains unfilled.

The appointments represent a minor shakeup in the company鈥檚 board, which once included Sam Altman and Lars Dalgaard, according to . According to reporting by the Wall Street Journal, Sam Altman left the board over a year ago. Whether Zal Bilimoria, who alongside Dalgaard co-led Andreessen Horowitz鈥檚 investment in Teespring, still retains his board observer seat at Teespring is unknown.

Teespring鈥檚 Valuation Haircut

Teespring鈥檚 Series 1 financing will be closed at a significantly reduced valuation from is previous rounds.

Unrelated sources provided data from Pitchbook. Here鈥檚 what that data suggested: Teespring鈥檚 last round was a $35 million Series B financing at a reported $615 million post-money valuation closed in November 2014. VCExperts, another venture capital data provider, that the Series B round was raised at a $611 million valuation.

The Wall Street Journal鈥檚 reporting based on the latest Pitchbook data was directionally correct, but it’s possible Teespring鈥檚 valuation hit聽might not be quite as bad as reported. According to a SA国际传媒 News source, the valuation of Teespring’s new Series 1 financing is closer to $30.8 million. However, it has been suggested by an investor that the $30.8 million valuation may be incorrect due to last-minute deal adjustments. We reached out to the聽Journal reporter and to Pitchbook notifying both parties聽of the discrepancy between our findings and what she received. We haven’t heard back from either.

According to information shown to SA国际传媒 News, the company鈥檚 new capital structure contains three classes of shares. Here鈥檚 what the new capital structure looks like.

Shares purchased by investors in Teespring鈥檚 Series A and Series B rounds are being consolidated into Series 1 Prime Preferred Stock, now priced at $84.375 per share. The $5 million Series 1 round is being raised through the sale of 5 million shares of Series 1 Preferred Stock at a price of $1.00 per share. SA国际传媒 News confirms reporting in the Wall Street Journal that Series 1 Preferred shares have seniority over both Series 1 Common Stock and Series 1 Prime Preferred Stock. The senior status of Series 1 Preferred shareholders gives them first access to any capital made available in the event of a sale or IPO of the company.

SA国际传媒 News also has learned that Teespring鈥檚 board retains the right to issue an 8 percent annual dividend to Series 1 Preferred shareholders. Investors we contacted with this information suggest it鈥檚 tantamount to an 8% interest fee, depending on how the board chooses to call in a dividend.

In addition to the two tiers of Preferred shares, Teespring is also issuing 11,000,000 shares of Series 1 Common Stock at a of $0.001 per share. Virtually all financial value attached to Common Stock has been lost.

A number of sources have expressed disappointment and frustration regarding this fact. According to sources, as of early June, only 675,000 shares of Series 1 Common Stock have been issued. Roughly 4 million shares of common stock shares have been earmarked for an options pool to be drawn from by employees and other service providers, yet those remain unallocated. The fate of the remaining 6.32 million shares of unallocated Common Stock is unclear based on the select documents SA国际传媒 News was able to view.

A Crunched-Down Capital Structure

Recapitalization events oftentimes involve the consolidation of old share classes into new ones, and, somewhat obviously, this process can be painful for certain shareholders. In the case of Teespring, all previous shareholders are in a compromised position, but Series A investors appear to have taken the most significant hit, at least when it comes to the relative size of their ownership stakes in the recapitalized company.

Investors holding shares of Series B Preferred Stock will be issued roughly 1/6.095 shares of Series 1 Prime Preferred Stock for each share of Series B Preferred. Series A investors will be issued roughly 1/36.845 shares of Series 1 Prime Preferred Stock for every share of Series A Preferred they hold. All previous Common Stock shareholders will be issued roughly 1/13.6 of a share of Series 1 Common Stock for each share of Common Stock from before the recapitalization.

Threadbare No More?

Let’s be clear here: the situation Teespring finds itself in is unfortunate for everyone involved, especially for previous shareholders. How the company plans to navigate the difficult path between this combined recapitalization and cram-down financing is not known to us. However, if the聽company has reached profitability 鈥� albeit through deep cuts to its ranks at HQ 鈥� it’s possible that this new round of financing is a fresh start. If a fresh start isn’t possible, there’s now time to find a suitable resting place for the business.

As one source suggested, what’s happened to the company is an example of “flying too close to the sun.” And now one is left to wonder what would have happened if Walker and Co. chose a different path, eschewing VC financing in the first place, making a bunch of money while the going was good, and quietly folding up the shirt business later on.

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