Dear Revel Employees: Your Shares Are (Probably) Underwater & Will Be for A While


When Square IPO’d in late 2015 it was at half the value of its last private financing. So while private investors thought Square would be worth $6B, the public markets beat it down to $2.9B. Square is still trading at less than a $6B market cap today.

The real losers are Square employees who joined after Square’s Series E in October of 2014 because it looks like they’re never going to be in the money. And even employees who were issued shares before the Series E were out of the money for two plus years. At least founders can tap secondary capital – that is, money from investors that buys shares from existing shareholders and not the company itself, providing a liquidity event for early investors and founders.

Let me explain.

Let’s say you raise money from investor A that values the company at $100. You have 100 shares, so each share is worth $1. You give investor A 20 shares for $20 and you can now use that $20 to grow your company.

A lot of time passes and investor A is getting antsy. They request that you raise more money and use those proceeds to buy their shares, not sell shares of the company. So you find investor B who is willing to pay $2 per share, thus making the company worth $200 (100 shares x $2/share).

But investor A wants investor B to buy their shares directly. So investor B writes a check for $40 ($2/share for 20 shares) and investor A cashes out, netting a 100% ROI. In this move the company share price goes up – the company is worth “more” – but investor B’s money didn’t go towards growing the company: it only went to cash out existing shareholders.

Now we need to think of this as it relates to Revel.

When Revel raised its $100MM Series C from Welsh Carson (WCAS), WCAS purchased 25% of the company. When it broke that WCAS purchased a “majority stake” for a further $65MM, one can do that math pretty simply to arrive at a valuation of the company.

As a most conservative case, assume “majority” means 51% ownership. If WCAS already owned 25%, they would need to acquire 26% to reach a 51% ownership.

So if $65MM = 26%, the company’s value at acquisition was $250MM – less than half of Revel’s last valuation of $540MM.

But that still feels like a lot of money for an asset that might be earning $25MM ARR but could also be losing that amount in cash annually.

Therefore it’s probable that WCAS purchased more than 26% for $65MM. In that case the exit valuation could be $150MM – $200MM. WCAS can justify this – even if it’s less than the aggregate amount they invested – because a righting of the ship could yield a company with $30MM ARR and some EBITDA with a strategic EV/EBITDA multiple if positioned right – all within 12 months. This could give WCAS a cash-on-cash exit of 2x+ over a relatively short period of time.

What this means for Revel’s employees, unfortunately, is that their shares might be underwater for some time. Such is the roulette of working at a startup.