High-profile venture firms including those of John Doerr and Michael Moritz are taking a financial hit in Google's revamped IPO by not pocketing any immediate gains from the much-hyped offering.
Google announced Wednesday that it would not only reduce its pricing range--to between $85 and $95 per share--but also cut the number of shares offered to 19.6 million from 25.7 million. This reduction is the result of so-called selling shareholders--in this case, Google executives and early investors--changing the number of shares they will sell in the IPO.
Problems add up as market
debut draws near.
Several Google executives, including its two founders and its chief executive, agreed to slice the number of shares they will sell by roughly half. The venture firms of early investors Doerr, a partner with Kleiner Perkins Caufield & Byers, and Moritz, a partner with Sequoia Capital, will now sell no shares in the IPO.
In its latest filing with the SEC, Google noted that an unusual move. Previously, Doerr and his firm planned to sell 2.1 million shares in the IPO, and Moritz and Sequoia planned to sell 2.4 million shares, according to a Google filing with the Securities and Exchange Commission.
For Kleiner and Sequoia, this means the firms will now have to wait until their lock-up periods expires, which generally occurs six months after an IPO launches.
Although both venture firms are losing out on an opportunity to sell as part of the IPO, an opportunity of this magnitude usually doesn't happen in the first place, one venture capitalist said.
Traditionally, a company's management and its early investors only represent a small percentage--if anything at all--of the shares being sold in an IPO, the venture capitalist said. In most cases, all of the shares being sold in an IPO are being sold by the company.
That said, however, the venture capitalist noted he would have thought that if any one was to forego selling shares in the IPO, it would have been the company's management, rather than its early investors.
"The fact that Doerr and Moritz aren't selling is interesting," the venture capitalist said.
Typically, venture capitalists look forward to the day their portfolio companies go public or are sold. That's when they're able to finally reap the profits of their earlier investments and return some of that wealth to investors in their venture funds.
Moritz and the firm's spokesman did not return phone calls Wednesday, and a staff member at Doerr's office said Doerr is on vacation and not available.
But one venture capitalist offered his thoughts on why Kleiner Perkins and Sequoia are no longer selling shares as part of the IPO.
"The (institutional investors) wouldn't buy into that valuation with the early investors heading for the door," said Charles Lax, managing general partner for GrandBanks Capital. "These guys had to stay in the deal, in order to get this IPO done."
One opportunity for the firms to sell in the IPO may come if demand for Google's shares rises with the reduction in the pricing range.
Selling shareholders can supply the underwriters with 2.9 million additional shares if needed, according to the SEC filing. The firms may be able to participate through that avenue.
While Doerr and Moritz are stepping aside from participating in the IPO, some institutional investors have previously noted they were hoping to see Google's founders and management sit on the sidelines for the IPO.
CEO Eric Schmidt is cutting the number of shares he will sell in the IPO to 368,965, down from 737,930. Meanwhile, co-founder Sergey Brin plans to sell 481,113 shares, down from 962,226, and co-founder Larry Page will sell 482,415 shares, down from 964,830.
"They've violated all 10 commandments of doing an IPO," said Tom Wyman, a portfolio manager for Husic Capital Management, in an earlier interview with CNET News.com.
Wyman noted that Google senior executives are selling their shares as part of the IPO, which is unusual for initial public offerings. Typically, executives, as well as employees, cannot sell their shares for some period after the IPO is completed.
Schmidt, Brin and Page should "stand next to (Google's) investors" by waiting for the lockup period to expire, rather than selling their shares as part of the IPO, Wyman said.
Another venture capitalist, however, had a different take on the founders and CEO selling.
"I always insist that the founders of my portfolio companies sell in the IPO (if there is an over-demand for the shares)," Lax said. "If they can pull some money out of the IPO and take care of their basic needs like buying a house or putting their kids through college, then they're more focused on managing the company."
Companies often find that their shares dip from the height of the first day of trading. And while the shares sometimes pick up momentum later on, they may dip again before the lockup expires and more shares potentially come into the market.
Google has 4.6 million shares that have the potential of hitting the market 15 days after its IPO. A much larger wave will come in 30 days when the lockup expires for another 24.9 million shares, according to the company's SEC filing.