Coinbase S-1 Filing Reveals Early Investor Stake Reductions

Coinbase’s S-1 filing became publicly available this morning, generating significant attention. While my colleague Alex Wilhelm provided an overview of the key details, a notable aspect emerged regarding the crypto trading platform: two of its initial investors appear to have reduced their ownership positions prior to the IPO.

Union Square Ventures’ Stake Reduction

The most prominent instance involves Union Square Ventures (USV), a well-known venture capital firm. Fred Wilson co-led the Series A funding round for Coinbase in 2013, marking the first investment made under the firm’s newly established blockchain investment strategy.

Over the preceding two years – the period covered by Coinbase’s S-1 disclosures – USV engaged in a series of transactions, progressively selling off its holdings, primarily to other venture firms already invested in the company. Since late 2019, the firm has divested approximately 28% of its Coinbase shares.

Currently, USV holds roughly 7.3% of Coinbase’s outstanding shares, equating to approximately 13.9 million shares out of a total of 191.3 million, as disclosed by Coinbase. The firm executed four separate transactions to sell nearly 5.5 million shares in secondary market deals.

Ribbit Capital Also Reduced Position

Ribbit Capital, another early-stage fintech investor who participated in the Series A round, also engaged in a secondary transaction in November 2019. They sold slightly less than 5% of their outstanding shares, representing 559,228 shares out of a total of 11,995,949.

The significance lies not only in USV’s substantial sales but also in the prices at which they were willing to sell. Coinbase’s filing indicates that USV sold 3.35 million shares at $23 per share in late 2019, and subsequently sold approximately 2 million shares at $28.83 per share in mid-2020.

These prices were lower than Coinbase’s Series E share price of $36.19, received in late 2019. They were also below the price obtained by Coinbase CEO Brian Armstrong and Paradigm founder Fred Ehrsam in late 2018, who received $32.57 per share in secondary transactions.

Nuances in Share Sales

It’s important to consider that sales of preferred shares typically convert to common shares. This conversion results in fewer investor rights and provisions, inherently reducing the value for investors. Coinbase disclosed this in its filing, potentially explaining some of the price difference.

The timing of USV’s investment is also relevant. A significant portion of USV’s investment in Coinbase originated from its 2012 fund, which, following standard industry practice, has a targeted 10-year lifespan. This means the fund is designed to distribute returns by 2022, creating potential pressure to liquidate some holdings to satisfy limited partners.

Furthermore, USV and Ribbit primarily sold their shares to existing investors, such as a16z and Paradigm. This demonstrates continued strong interest in Coinbase from investors already deeply involved in the company.

A Rare Move Before a Major IPO

Despite these factors, it is unusual for a prominent fund like USV to sell a significant portion of its most important investment shortly before a potentially major IPO. At a $100 billion valuation, USV’s remaining stake would be worth approximately $7.3 billion. However, the shares sold over the past two years could have been worth several billion dollars at exit, yet were sold for around $140 million.

Fred Wilson addressed a similar strategy in a 2018 blog post, discussing “taking money off the table” in earlier investments like Twitter, where the firm realized a 2x return on its fund through secondary transactions.

He then applied this thinking to cryptocurrency, stating that a financially prudent, risk-adjusted approach sometimes involves leaving potential returns behind. A16z and Paradigm are undoubtedly pleased with their purchase.