Freesteel Blog » Battery Venture’s missing money

Battery Venture’s missing money

Monday, June 21st, 2010 at 7:23 pm Written by:

Further to the Vero Sellout, I have been trying to make the figures add up.

According to the 30 page document:

The value [of £7.19million] attributed to the existing issued and to be issued share capital of Vero is based upon the 37,261,166 Vero Shares in issue on 17 May 2010, the 2,600,000 Vero Shares which are the subject of options granted under the Vero Share Option Schemes and the 1,232,820 Vero Shares which are the subject of the Warrant [all at 17.5 pence].

This adds up, because (37261166+2600000+1232820)*0.175 = 7191447.55

But what’s this Warrant?

Well, this goes back to to last November when they securred a mezannine loan to a “respectable third party institution” [a government subsidised VC firm] in return for:

“a Warrant to subscribe for up to 3 per cent. of the equity share capital of the Company (on a fully diluted basis) on the date of exercise of the Warrant at no cost to the lender and that the rights granted pursuant to such Warrant will be exercisable by the lender on the occurrence of an Exit Event.”

This sale to Battery Ventures is undoubtedly an Exit Event. And the value of the Warrant is set so that: 1232820/(37261166+2600000+1232820) = 3%

Where are the other two sets of shares from?

The total number of Vero Shares in issue as at the date of this announcement is 37,261,166 and there are approximately 300 registered shareholders. The market capitalisation of Vero, based on the mid-market price of a Vero Share of 18 pence as at the close of business on 14 May 2010 (being the last Business Day prior to this announcement) was approximately £6.71 million.

This corroborates with the number on their shareholdings page.

And the final number can be gleaned from the 2009 annual report

25. Share options
Details of employees share options are as follows:
As at As at
1 January Lapsed in Option Period
31 December
2009 year price exercisable
Unapproved 900,000 – 14p 21/10/07 – 20/10/11
EMI Scheme 1,700,000 – 14p 22/10/07 – 21/10/11

Total 2,600,000 –

These are options, and it doesn’t look like the employees have actually bought them. So I don’t know why they are counted, unless the employees can still buy into them at 17.5p till 2011, even though there’s none for sale.

I mean, we can calculate from the declared shareholdings how much they’re getting. For example, Don Babbs receives £858,091 for his troubles (in addition to his executive salary which he has been drawing all these years). And the Capital for Enterprise (government) sponsored Maven Capital Partners trousers £215,743 for being rich enough to loan £2million to Vero in a tight spot when all the banks decided to stiff the economy even further by calling in all their loans.

But who’s going to get this £455,000 for the 2600000 shares which don’t exist and the employees (through the Enterprise Management Incentive) haven’t bought?

You know, writing software is a darn side easier than this made up deliberately opaque financial nonsense. All those redundant bankers that we hear about could do worse than turn their hands to it in order to try to be productive members of society.


  • 1. JH replies at 23rd June 2010, 6:21 pm :

    Just from a brief read through I see nothing particularly unusual or any “deliberately opaque nonsense”. I’m afraid you may have misread the deal document and perhaps gone too far in some of your comments. In particular I see no missing money here, and I’d suggest you should be careful about making such statements.

    The company itself has three classes of equity-type instruments, with different rights and obligations. There are some existing ordinary shares, and two classes of warrants and options. I read it as saying that the EMI options require management to pay 14p (not 17.5p) per share and the warrants require payment of 0.5p per share.

    Almost certainly the EMI options are to create new shares to give to management, rather than being options over existing shares. There are plenty of authorised but currently unissued shares (see note 24 to the consol FS). This is why the shares involved don’t currently exist – there is no mystery here, they will be issued when the EMI options are exercised.

    They do not say that the warrant and option holders will receive 17.5p in the buy-out. See section 11 in the deal document where they explain that they are excluded and will be contacted separately with proposals from the acquirer. Your abridgment “[all at 17.5p]” therefore appears to be incorrect, as only the shareholders on the register at the Scheme Record Time are being offered that. Warrant and option holders are not going to be on the share register.

    What they are saying is that the buy-out price for the shares implies a total value for the company of 7.91 million, assuming that as the price is now high enough, it will be economically rational for the warrant and option holders to use their rights to purchase discounted shares.

    There is a big difference between saying “The Proposals value the entire issued and to be issued ordinary share capital of Vero at approximately £7.19 million” and “The Proposals involve purchasing the entire issued and to be issued ordinary share capital of Vero [for] approximately £7.19 million”.

    In the same way, when people talk about BP’s market capitalisation falling by £x billion, they do not mean that every single share has been sold at lower and lower prices every day, just that if you use the current prices of those shares that have been traded recently and apply that across the board to all the similar shares you get a loss of £x billion.

    Here the calculation is a little more complicated because you have to account for the dilutive effect of the additional shares that will be issued, and the anti-dilutive effect of the cash that the option holder will be contributing.



  • 2. Julian replies at 24th June 2010, 10:29 am :

    Fantastic! Someone who knows what they’re talking about — ie not me!

    So does Section 11 mean they are playing poker with the Warrantholder, because they can threaten a walkout on the deal vs the Warrantholder exercising their full rights to 3%?

    As to my attitude to this financial hogwash, I am a programmer, and I believe that the quality and quantity of the software assets of a software company ought to feature occasionally in some company report of some kind.

    The fact that information of this nature never features is a sign that the management or the financiers or both have not the slightest concept of what this means.

    For example, the buyers will have sent in accountants to sweat through various minor peripherals to do with the employee share option schemes, but do you think Battery Ventures called in an expert to comb through the source code and assess their bug lists to get an idea of how expensive the code will be to maintain?

    This would be standard practice in, say, buying some building assets, where you send in a surveyor to check out if there are any problems, like concrete cancer, and so forth. But it never happens for software assets where the liabilities can be equally significant.

  • 3. JH replies at 24th June 2010, 12:23 pm :

    Well, I have no special knowledge of this deal but almost certainly they will offer to buy the warrants and will then tear them up. The alternative is that the warrant holder can refuse to sell but then will be left with 3% of the company – ie no real voting control and probably no dividends. It’s also very probable that the warrants will have a clause in them saying that if the share capital is bought out then the purchaser has to immediately offer a price for the warrants that is consistent with the price for the shares. However this would not be public information. There are also various protections for takeovers in the Companies Act that protect people from being left with tiny minority stakes.

    Internally generated intangible assets (ie the software assets) are not generally recognised in a company’s accounts, but they can be recognised on a takeover under IFRS 3 if a separate part of the consideration (ie cash or shares) offered for the takeover can be reasonably attributed to the assets. This is not because accountants don’t realise that software under development has value, but because unless there is a sale to an unrelated third party there is no objectively assessable evidence that the cost so far is actually recoverable. The directors are hardly likely to admit wasting hundreds of thousands of pounds voluntarily.

    I understand that you feel that software quality is very relevant to software companies and so should be more prominent in the financial reports. However you also have to consider the reliability, comparability and understandability of the numbers that would be disclosed. Companies awarding themselves 9/10 for “software quality” every year would be pointless if the number is unauditable and there is no general definition of “software quality”. Plus there is a risk as a director that if you put in disclosures that are poorly defined and someone (a regulator or investor) mis-interprets them, they could attempt to sue you over it.

    There is already a requirement in the Operating and Financial Review for the directors to disclose Key Performance Indicators – these are typically a mix of financial KPI (eg earnings per share) and non-financial (eg accidents per worker-day). Perhaps software companies should be better at disclosing quality information here.

    I would also disagree with you about software quality reviews. I have no knowledge of this particular firm’s procedures, but I know that similar firms will certainly do due diligence quality reviews over important projects. Even if you have worked at a firm that has been taken over, you will not be aware this has taken place as for legal reasons it is done secretly and the number of people who are even aware the exercise is taking place is strictly limited. It’s (relatively) easy to make a duplicate of a source control system or bug-tracking system and for the acquirer’s expert to examine it off-site.

  • 4. Freesteel&hellip replies at 21st July 2011, 8:59 am :

    […] staffed entirely by people from the finance industry. I learnt about it only when Vero Software got bailed out by a benefactor of this […]

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