It looks like Box was backed up against a wall this summer after its delayed IPO.

The last round of investors in Box demanded some very strict terms that will give them a guaranteed minimum return if Box goes public after July 7, 2015. That return increases the longer Box delays.

Here's the background: In July, Box announced that it had raised $150 million from a new round of investors, including hedge fund Coatue Management and private equity firm TPG Growth. The round was unusual because Box had filed for an IPO in March, but was forced to delay that IPO after market conditions soured for public tech companies who sell subscriptions — called software-as-a-service (SaaS) companies — like Workday and Salesforce. 

The terms of that Series F round were first published in a July filing, but were more clearly explained in the latest amended S1, filed yesterday.

Basically, if Box goes public before July 7 of next year, these investors can convert their shares into normal shares at a minimum price of $20 per share (with some pretty standard downside protection).

But if Box delays its IPO past that date, these investors' shares will be worth a minimum of $23 per share. Every quarter after that, the minimum value goes up another $0.75. In other words, the investors get a guaranteed minimum return, starting at 15% the first year, and slightly less each year after that.

The special preferences for these investors mean that the longer Box delays its IPO, the more diluted earlier investors — and the founders and employees who hold early shares — will be.

This won't be a problem if Box prices its IPO higher than $23 per share after July 7 next year. But based on the company's own internal valuations, that's looking unlikely. In March, when Box first filed to go public, it valued its shares at $17.85 to calculate stock-based compensation expenses. In October, it valued its shares at only $13.05.

Here are the relevant passages from the latest filing (emphasis ours):

In connection with any conversion of the Series F Preferred, if we consummate an initial public offering on or prior to July 7, 2015, each share of Series F redeemable convertible preferred stock will convert into shares of Class A common stock equal to $20.00 divided by the lesser of 90% of the price per share of Class A common stock or $20.00.

If we consummate an initial public offering after July 7, 2015, holders of Series F redeemable convertible preferred stock will receive shares of Class A common stock with a value equal to the Series F Return (see definition in the “Liquidation” section below).

From slightly later, here's the definition of "Series F Return": 

In the event of any liquidation, dissolution, or winding up of Box, Inc., whether voluntary or involuntary, the holders of the Series F Preferred shall be entitled to receive, prior and in preference to any distribution of any of the assets of the company to the holders of any other series of Preferred Stock and Common Stock, (i) an amount equal to $20.00 (as adjusted for any stock dividends, combinations, splits, or recapitalizations), plus (ii) an additional amount equal to $3.00 per year, which additional amount shall accrue quarterly following the original issue date for the Series F Preferred on the basis of a 360 day year with no compounding (the sum of (i) and (ii), the “Series F Return”), per share of Series F Preferred, plus (iii) all accrued or declared but unpaid dividends on such shares.


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