Sell for Half a Billion, Get (Almost) Nothing: FanDuel exit fiasco explained
The below is from a LinkedIn Post by Chris Harvey, a lawyer, slightly redacted for brevity. The original post is more fun however :)
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FanDuel was acquired for $558M in 2018. The founders and employees reportedly received nothing. What happened?
The crux of FanDuel's exit woes comes down to liquidation preferences.
Liquidation preferences are a standard feature in VC financings. These provisions give investors the right to be paid back their investment, sometimes at a premium, before founders and employees receive a cent.
For obvious reasons, they can impact the outcomes for shareholders in an exit situation.
• FanDuel's Funding Journey
Here's the play-by-play: By mid-2015, the Daily Fantasy Sports (DFS) industry had raised only $223M. FanDuel, the kingpin next to DraftKings, was rolling strikes. Between 2009 - 2014, FanDuel raised $88M. And then, in 2015, it secured $275M Series E from KKR, Shamrock Ventures (Disney’s family investment firm), Google, NBC, and other institutional LPs.
The company hit a valuation of $1.2B, but that would be its last equity raise. Two convertible note rounds followed, bringing the total financing to $444M—leaving no room for gutterballs.
By 2017, FanDuel was spending cash like it was buying rounds at the bar for the whole league. It had annual revenues of $124M, while it spent $400M on marketing. That's when trouble ensued.
Running out of cash and options, a new anchor CEO was brought in to turn things around to spare the $1.2B company from a final frame disaster.
Later that year, DraftKings offered to merge with FanDuel but the deal was squashed due to anti-trust concerns from government regulators.
An Irish bookmaker gave a final offer to acquire FanDuel for $465M in stock (not cash). But it wasn't even enough to clear the liquidation preferences. Plus, FanDuel had taken $158M in debt that needed to be cleared prior to closing the set. If a sale went through, it meant the team would end up with double zeros, while the investors would walk away with their pockets full.
Was this a forced sale through investor Rights of First Refusal? No—the drag-along right allowed the two major investors to force minor shareholders to accept the M&A deal, but not the board.
What was the real reason why the team sold out? As part of the sale, the CEO, as a former KKR employee, was allocated $11M+, the Chief Legal Officer $6M+, and the remaining executive team was set to receive up to $13M for golden parachutes/earnouts.
The FanDuel exit underscores the importance of understanding your capital stack and knowing who you are rolling with—including your investment partners and your core team.
Epilogue: 100 ex-employees sued in 2020! But they apparently lost on appeal in 2022. Does not look like they're going to be able to bring home the bacon. https://archive.ph/AL4WC#selection-223.5-665.58
Jason M. Lemkin adds: The $30m carve out for management is the part of the story folks miss. Deals like this don't clear without a carve out for current management
