Indian fashion e-tailer Jabong has been acquired by Indian e-commerce company Flipkart’s subsidiary Myntra for $70MM cash.

Based on information available, the entrepreneurs who started the business likely earned $0 from the sale.  This should neither be shocking, but is a critical reason why entrepreneurs need to understand how preferred shares work, and what preference on liquidation means.  These are but two of the many terms we are covering in a series of venture capital definitions posts over the next few weeks.

An example such as Jabong isn’t ideal; the company was losing money hand over fist; no one should expect to make anything in that situation.  However, there are other examples where the share rights conveyed in financing agreements end up costing the entrepreneur almost all value on a successful exit.  You as an entrepreneur need to understand how this can happen, and how to avoid it happening to you.

As for Jabong, Flipkart, which beat other Jabong suitors such as Snapdeal, will pay 70MM in a cash only deal for the acquisition, according to a statement by Global Fashion Group (GFG), which owns Jabong.

As per Livemint: “The sale marks one of the most dramatic declines in India’s online retail business. At the end of 2013, Jabong was worth as much as €388 million (about $508 million). In that financial year (year ended March 2014) Jabong reported sales of Rs438 crore. Even though its sales increased to Rs 869 crore in the last financial year, Jabong’s value collapsed because of a combination of leadership issues, market share losses and a funding crunch.

“GFG, which is jointly owned by Rocket Internet and AB Kinnevik, houses the German e-commerce company’s fashion businesses from emerging countries, including Jabong, Latin America’s Dafiti, Russia’s Lamoda, Namshi in the Middle East and Zalora in South-East Asia and Australia.

“Earlier this month, Jabong expedited its sale process as Kinnevik and Rocket Internet were reluctant to pump more capital into the company in a gloomy e-commerce market.”

With the declared operating losses and considering the amount of capital that was used to shore up the company, it’s almost certain that all $70MM was returned to GFG to compensate for the losses.  The entrepreneurs who started the business may have still had equity, but will see nothing for it.

Do not imagine for a minute that this does not also sometimes happen in successful, profitable company exits.  If you don’t understand how the terms in your financing agreements, shareholder agreements, etc. work, it very easily could happen to you too.  Just because a term is “standard” does not mean it is ideal.  For reference, consider what happened to Michal Arrington in his first venture, and he’s a very bright, well educated person.

“When I started my first company, Achex, we raised $18 million in venture capital in 2000 from DFJ,” Arrington wrote to Business Insider in an email. “The company later sold for $32 million, but due to a 2x liquidity preference (common in those days), the founders essentially got nothing, just a few hundred thousand dollars to not block the deal.”



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