An Explainer of Pre-emption Rights for Crowdfunding


(Tristan Thomas) #1

Blog post: https://monzo.com/blog/2017/11/07/investment-announcement/ :tada:

We’ve just raised £71 million, mainly from our new investors Goodwater Capital, Stripe and Michael Moritz, investing through his charitable investment vehicles including the Crankstart Foundation.

In previous rounds, our institutional investors like Passion Capital, Thrive and Orange Digital Ventures, as well as individuals investing through crowdfunding were given something called ‘pre-emption’ rights.

Pre-emption rights allow existing investors to get first dibs on new shares that go up for sale. This means that, if they wish, investors can increase their investments, to keep the percentage of the company that they own the same.

For those not au fait with the intricacies of investments (:raising_hand_woman:) , I thought I might break down what this means.

I find it helpful to think about Monzo’s share capital as a pie, cut into a certain number of slices. With every new investment, the pie becomes larger, as more money comes in and the valuation increases. When new investors sign on, their money makes the pie bigger, but they also now own part of the pie, meaning we need to make more slices and each slice therefore is a smaller percentage of the overall pie.

Usually, pre-emption rights allow existing investors to increase their investments, to keep their slice the same size, even as the pie gets bigger.

In this latest round of fundraising, we have decided to waive pre-emption rights for all previous investors (including institutional investors), in order to prevent the round becoming too large. If everyone was to increase their investment to the full amount under their pre-emption rights, then we would have taken far too much money. That sounds great in theory (lots of money!), but in practice it means we’d be giving up an even larger percentage of the company to existing outside investors, because the overall valuation itself wouldn’t change. Based on this, as a company we made the decision to waive pre-emption rights for existing shareholders, a decision that was agreed by more than 75% of those existing shareholders.

We do want to make sure that crowd investors are still able to increase their investments as much as possible, and have set aside £1.5 million to allow previous crowd investors to do so. Each person will be given a specific allocation of shares, that they can choose to buy or not. To keep things as fair as possible, this allocation is based on the amount initially invested. For those that invested a smaller amount of money, that will only be one or two shares. For others, it might be significantly more.

Bringing in new investors dilutes the overall percentage each investor owns (that includes employees!) But it also makes the overall pie bigger, meaning the current value of your shares increases. Each share is now worth £2.3566, more than double what it was at the beginning of the year, and four times as much as in the first crowdfunding round!

Waiving pre-emption rights does not affect the value of your individual shares at all.

We’re 100% committed to crowdfunding and we’ve already begun work on a new crowdfunding round for next year. We’ve got a few tricks up our sleeves to make sure that everyone who wants to can get involved. It’s going to be spectacular :wink:

If you have any questions, please don’t hesitate to ask. As always, we’re committed to being transparent about why we make these decisions. We firmly believe it’s in the best interests of the company to do so (and therefore the shareholders too)!


Monzo £71 Million Investment (November 2017)
Monzo £71 Million Investment (November 2017)
(Justin) #3

Well done on raising so much more capital. That is a huge show of confidence in the business, and a clear evidence of your successful approach so far.

As an existing crowdfunding investor, I’m interested to understand more about why pre-emption rights were waived - in particular why the decision was taken not to raise less from your new investors and allocate a larger share to existing crowdfunding investors. For example, it might have been possible for you to raise just £60M from those new large investors, and allocate the extra £11M to crowdfunding investors. Was this decision taken due to the cost and complexity of crowdfunding, or were there other reasons?

Either way, well done :thumbsup:


#4

I quote from your pitch in the last crowd funding round:
“Total capital requirements over five years is forecast to be in the region of £75m, and will be agreed with the Bank of England.”

Will you be commenting on that in this round. Has this new round fully satisfied your capital requirements for the next five years and the BoE regulatory requirements?


(Tristan Thomas) #5

Good question. So these are specific capital requirements that as a bank we’re required to hold, basically as a backup as I understand it. We can’t use that money for things like paying salaries, renting office space, hiring people etc. So the £71m we’ve just raised will go towards both ongoing operational expenses, as well as meeting our ongoing capital requirements :slight_smile:


(James) #6

First - this is amazing news, so exciting to see to rate of acceleration and such great new investors coming on board!

I have a question - if we have participated in both previous crowdfunding rounds will the amount of shares we are offered be based on both - or just the most recent round?

Thanks!


#7

Interested to know why the biggest shareholders have waived the rights of the smallest here re: pre-emption? If not enough shares to go around why not waive the rights of Passion Capital rather than thousands of supporters and users? :thinking:


(Naji Esiri) #8

They will be based on both :slightly_smiling_face:


(Alex) #9

Great news for the Monzo team (and investors!). It would be great to get a breakdown on what the shareholder structure looks like after this raise and understand how much each of these new investors is contributing, is this disclosable?


(Tristan Thomas) #11

Hey! Would recommend reading through the whole thing above :slight_smile: All previous investors agreed to waive their rights, including Passion Capital.


(Fin) #12

Hi @tristan, I’m sure this would be covered in the email from Crowdcube - but presumably each optional allotment is enough to cancel out the dilution from the funding round? Or a portion of the dilution?


( related to Monzo CEO, Investor in Monzo ) #13

from Tristans post at the start of the thread

“We do want to make sure that crowd investors are still able to increase their investments as much as possible, and have set aside £1.5 million to allow previous crowd investors to do so. Each person will be given a specific allocation of shares, that they can choose to buy or not. To keep things as fair as possible, this allocation is based on the amount initially invested. For those that invested a smaller amount of money, that will only be one or two shares. For others, it might be significantly more.”


(Fin) #14

I got that bit Ian, my query was just, “is the allocation (assuming it’s taken up) enough to fully counteract the dilution” - which is not clear in the post above.


(Duncan) #15

Who rebelled against the decision?


#16

Sorry. How do I change my nick to TLDR? :kissing_closed_eyes:


(Tristan Thomas) #17

Sorry, that wasn’t clear. I believe it requires more than 75% agreement to happen, and there was that :slight_smile: That’s all I meant!


( related to Monzo CEO, Investor in Monzo ) #18

No it won’t be if both funding round shareholders take up their allotments … :slight_smile:

logically if we have had a funding round of £1m and £2m+ and the shares in this round have doubled in price and we are being offered half of amount of whats been put in in other funding rounds


(Mark) #19

So, my very rough calculations/thoughts on share allocation if it is to be based on what we have previously invested.

Crowd funding 1: £1,000,000 @ £0.5133 a share means a total of 1,948,178 shares.
Crowd funding 2: £2,500,000 @ £1.0058 a share means a total of 2,485,584 shares.

As the 3rd round will be for a total of £1,500,000 @ £2.3566 a share there will be a total of 636,510 shares available for allocation. If there are done on a pro-rata basis (636,510 / 4,433,762) it will mean c 0.143 new shares for every share that is previously owned.
A lot of presumptions on how Monzo will calculate, but again - a rough calculation.


(Adam) #20

Great news about the latest raise!

Just wondering if there is a plan for any of the £1.5m not taken up by existing crowdfunders?

Particularly interested being someone who committed a small amount in the last round!


#21

Probably a but off topic here but just wondering if other investors have received any news from crowdcube for the latest round of crowd funding.


( related to Monzo CEO, Investor in Monzo ) #22

answered in the 71 million raise thread -