Yeah but insider trading is different than fraud. The line is blurry, but I'm sure everyone at that level has some level of inside knowledge they have traded on at one time or another.
Holmes on the other hand was directly defrauding investors, why would you want her on an executive team/board trying to get investments?
The problem with insider trading is that it creates perverse incentives. It, in itself, does not necessarily defraud.
If I work for Apple, and I sneak a glance at their balance sheet, and short its stock, I did not rob APPL shareholders. It's still illegal, and insider trading (Because otherwise, I'd have an incentive to actively sink the company, while benefiting from a short.)
There is no comparison between the two. Martha Stewart was running a real business and made the mistake of talking to police without a lawyer -- that's very different from running a giant sham operation that defrauded many.
The mistake she made was not that she talked to police without a lawyer, but that she lied to investigators. Yes, I'm sure the lawyer would not have let her make up those lies, but it's not like she just behaved well and got railroaded some how. And I never understood why she lied in the first place. If your paid broker gives you a tip that a CEO is dumping his shares, are you not allowed to act on it?
Some interrogators are really good at phrasing and intoning a question making it seem like they're inquiring about something very wrong, worth trying to cover up, e.g., "you didn't have any information about XYZ selling his shares, did you?" It shouldn't work if the target is thinking straight, but the whole point is to trigger a knee-jerk emotional reaction.
Martha Stewart wholesale lied by saying that she and her broker had a pre-set price point of $60 for when to dump ImClone. That part is completely fabricated by Stewart. It's impossible to mess up 'My stock broker told me CEO was dumping his shares' with 'We agreed to sell at $60'
Kissinger might be a lesser human being than her, but he made a lot of people very rich, and has enormous political clout. (E.g., he was the initial chair of the 9/11 commission, when the Bush administration was still trying to cover it up.)
Not only did she raise a lot of money and good PR without a product, but she also kept the company running for so long that it's almost old enough to drink. I can definitely imagine worse CEOs on a board.
I mean, sure, the truth eventually came out. But I doubt "honesty" is at the top 10 priorities of most big companies.
Yes, but she did so in part by using fraud and deception. When you're an early stage company trying to raise money from investors there's a large component of "trust us to do the right things with your money" that is going to be hard to sell investors with her on the board.
well, she can't be a director or officer of a publicly traded company for 10 years, per her agreement with the SEC.
i guess a privately held company could pick her up, but when you've got that sort of thing hanging over your head, you're not exactly going to instill a lot of confidence.
We get it. Theranos is finally suffering through fate it deserved in the first place. Justice is happening. Serious question, is this news or tabloid at this point?
> This letter and its contents are confidential. We request that you not share or discuss this letter with others, except your attorneys, accountants and other advisors bound by confidentiality obligations. The unauthorized disclosure of this letter could violate the terms of agreements between you and the company, and could additionally depress the amount realizable upon a sale of our assets.
This whole article is about a fantasy where someone would loan $10M+ more to Theranos or make another investment. Is there any chance of that happening at all?
Asking as someone less involved in reading about the funding side of starts than probably many of you, can someone explain this quote?
>The most viable option that we have identified to forestall a near-term sale or a potential default under our credit agreement is further investment by one or more of you.
Surely, the company can't in earnest expect any more VC or angel funding after their most recent round of layoffs, right?
Is it common for startups to ask for funding when it's very clear that the company is in such bad shape, with very little chance of recovery?
Based on John Doerr's statements about Theranos, it seems like it's more of a religious belief in the company and it's founder than a rational approach to investment.
Of course, prior investors are incentivized to continue to act like it was a viable company lest their clients, the investors for their funds, realize that there was no due diligence on this deal and possibly on other deals these firms have engaged in.
>Based on John Doerr's statements about Theranos, it seems like it's more of a religious belief in the company and it's founder than a rational approach to investment.
You've just described the entire reason for Theranos's existence
I imagine it’s kind of a form thing - “how could this be mitigated?” When there’s a fat chance of that ever happening, or some IP the investor might want to buy perhaps.
Have you ever worked so long on a project at work that you know will fail but it just keeps going cause the management can't bring themselves to kill it cause of everything they have invested into it already?
Nearly as ironic: the first public big splash article about Theranos was a puff piece in the WSJ by a Pulitzer Prize winner (the investigative story was from a 2-time Pulitzer winner, John Carreyrou)
Yes, they're making a last-ditch effort to obtain funding from existing investors. Elizabeth Holmes may still have hope that she can somehow turn things around. Having founded a startup that burned through millions and then crashed and burned myself, I can tell you that every passionate founder sees a path to redemption no matter what the status of the company is, because they fundamentally believe in the idea behind their company. It's hard to acquiesce to market realities after pouring your soul into a venture for X years.
Unfortunately, I think Ms. Holmes has a long road ahead even after the company officially closes. Based on what I've seen there is a non-zero chance that she goes to federal prison over all of this. I think she genuinely believed that she could make it all work, but there's no room for lying to investors in this game.
I've too been in the position of trying everything I could think of to avoid being shot in the head (my company that is), and then watching it get destroyed by the bank ... I can and do empathize with those in this position now.
Obviously I don't and won't condone the lying to investors, the apparent falsifying of test modalities, and so on. But I know what watching your baby, that you poured your life blood, your energy, your soul into, feels like[1].
Slightly more than a year for me. I empathize with the Theranos people. And though I don't agree with her tactics, I have a sense of what the CEO is going through watching it die. That is, assuming she was a true believer in her company and not a scammer.
I did not enjoy letting my team go. I did not enjoy the repo company collecting the assets, or the auction. I didn't enjoy what the bank did next, after shooting us in the head.
What I've learned from this exercise is that many times when the provisions are triggered, the entity does not actually act in its own best interests. We were in the midst of talks to sell our company when the bank shot us in the head. Scared the other player off. Guaranteed that they would not get what they wanted.
What drivel. They overpromised, lied to people, broke the law. I recall at least one story that also claimed that their blood testing was unreliable, thus endangering people’s lives.
There is absolutely no sympathy necessary here. You may empathize with the feeling of loss, but concluding that they are not scammers because of that is absurd. “Best intentions” do not matter if your actions contrast with them.
If all other options have even lower odds, why wouldn’t they?
Also, there may be (somewhat) rational reasons for investors to invest more.
For existing investors, there’s the statistics. Let’s say you invested a billion in a company that says ”if you don’t pay 10 million now, you’ll lose all of it”.
If you think there is a 1% chance that 10 million will save them and bring back your money, you, statistically, play evens if you give them that money (paradoxically, if, a week later they say they need another 5 million, giving them that at that time is OK as long as you think you still have ½% chance of getting all your money back, but you shouldn’t give them 15 million up front when you thought you had a 1% chance)
Of course, some serious delusion may be needed to believe that, firstly, that 10 million will keep them afloat, and secondly, that it will enable them to recover all of your billion.
For potential new investors, it is almost as if that billion is a plus. It is really hard for a company to have spent a billion and not be worth at least 10 million. Fire sales _can_ be bargains. For the Theranos case, all that money should have produced some patents, some of which may be worth something.
> (paradoxically, if, a week later they say they need another 5 million, giving them that at that time is OK as long as you think you still have ½% chance of getting all your money back, but you shouldn’t give them 15 million up front when you thought you had a 1% chance)
No paradox here... the evaluation of the situation in the first week should be [EV of getting all your money back with the 10M investment + (negative) EV of needing to put in more money later to keep the company afloat].
There's also opportunity cost, though, and the fact that Theranos with a full staff and boatloads of money produced basically nothing.
And $10 million can fund a lot of smaller startups with better odds of success and less baggage.
IMO, the smart investors will move on and hope for some other sucker to give Theranos money. It's rough, but if they can't afford to lose sometimes they shouldn't be in venture capital.
Also, a new investor, giving only $10 million after they've raised nearly $1 billion, is going to be really far down the list of people getting their money back if Theranos turns it around somehow.
Confirming have seen this play out before on a smaller scale.
Some call it the sunk cost fallacy... but actually when someone has invested enough money in you, you actually get leverage over them when the alternative is a smoking crater where their investment used to be.
At this stage almost any sum would get you the assets and keep the operational part of the company going, and you could pretty much name your terms: valuation, op plan, everything. If you were already an investor you might know about something useful in the IP, perhaps something that mgmt doesn't care about.
Note I said assets. Technically the company doesn't appear to be insolvent in which case instead of an ABC you could basically strip what you want away from the obligations.
And those laid-off people? They got 60-day notice; certainly some of them have already jumped but probably not most of them and in such a restructuring you might be able to retain the ones you want (which could be all of them).
If it's true that they own about 1k patents it may look like a sweet deal for some big pharma corporation to buy the whole company and shut it down. Thats the only small light on the horizon imho...
Would Fortress Inv. get the patents if the loan is defaulted on? And in that case, wouldn't they be buying from them instead of outright from Theranos?
This is like the last few rounds of a game of Monopoly where the losing opponent tries just about anything (including begging for money) to stay in the game as long as possible.
FNM is where all the Pro Tour wannabes go to 11. It's why your LGS is packed for Monday Night Modern but can't get eight people to show up to make a top 8 list for FNM. If they don't scoop out of frustration, they'll stare at their hand looking for cards that aren't there.
On a completely different topic , would you know of other high profile young women entrepreneurs in tech and biotech who can serve as role model for girls/high-school kids ?
Investors are warned that there are all sorts of ways that Theranos could be run as a zombie company, for the benefit of insiders, once no further investment appears. New investment would add to that zombie concern, not fund a going concern. The company has had enormous funds at its disposal to invent a blood analyzer using very small blood samples, and has failed. This technical failure is primary; Holmes et al’s misdeeds and Rasputinizations form a superimposed soap opera for authorities to sort through. What’s next is the auction.
The superimposed soap opera probably contributed to the failure of the scientists to invent anything. Without the institutional craziness, all of that money and all of that brainpower would have ended up in something.
It’s a loan covenant. They’re very common in a variety of commercial transactions; that particular requirement (you must maintain a minimum level of cash on hand) is relatively common.
It’s really $X million, not $X minus 3 million, because you should have $3 million from any source other than them (e.g. revenue) and failure to have it represents mismanagement.
This particular covenant does not provide material downside protection to the lender; it’s more designed to prevent an aggressive company from riding things too close to the knife’s edge. There would often exist parallel covenants about borrowing money, assigning assets, increasing management salaries, paying dividends, etc.
(Father worked in commercial real estate; lenders have to get increasingly creative when a borrower’s situation is closer to the brink, which is where I learned about these.)
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[ 3.0 ms ] story [ 93.8 ms ] threadHolmes on the other hand was directly defrauding investors, why would you want her on an executive team/board trying to get investments?
If I work for Apple, and I sneak a glance at their balance sheet, and short its stock, I did not rob APPL shareholders. It's still illegal, and insider trading (Because otherwise, I'd have an incentive to actively sink the company, while benefiting from a short.)
http://www.cnn.com/2002/ALLPOLITICS/12/13/kissinger.resigns/
I mean, sure, the truth eventually came out. But I doubt "honesty" is at the top 10 priorities of most big companies.
i guess a privately held company could pick her up, but when you've got that sort of thing hanging over your head, you're not exactly going to instill a lot of confidence.
“You cannot hold that against her.”
“Most entrepreneurs experience failure.”
“She was fined by the SEC. What are you complainig about?”
“I’m sure she’s learned from her mistakes.”
"A male entrepreneurs wouldn't be held to this standard, don't be so sexist."
So much for that clause
>The most viable option that we have identified to forestall a near-term sale or a potential default under our credit agreement is further investment by one or more of you.
Surely, the company can't in earnest expect any more VC or angel funding after their most recent round of layoffs, right?
Is it common for startups to ask for funding when it's very clear that the company is in such bad shape, with very little chance of recovery?
Of course, prior investors are incentivized to continue to act like it was a viable company lest their clients, the investors for their funds, realize that there was no due diligence on this deal and possibly on other deals these firms have engaged in.
You've just described the entire reason for Theranos's existence
The fact that Fortress already gave them some funding, at arguably the "last minute" is evidence of this.
Fortress, you will note, was probably more of a vulture investor than venture investor here.
Happens to investors and money too sometimes.
I don't think it will here, but I'm just a peon.
https://www.crunchbase.com/organization/theranos/investors/i...
https://www.theguardian.com/media/2016/nov/29/rupert-murdoch...
Nearly as ironic: the first public big splash article about Theranos was a puff piece in the WSJ by a Pulitzer Prize winner (the investigative story was from a 2-time Pulitzer winner, John Carreyrou)
http://archive.is/8dfJ7
Unfortunately, I think Ms. Holmes has a long road ahead even after the company officially closes. Based on what I've seen there is a non-zero chance that she goes to federal prison over all of this. I think she genuinely believed that she could make it all work, but there's no room for lying to investors in this game.
Obviously I don't and won't condone the lying to investors, the apparent falsifying of test modalities, and so on. But I know what watching your baby, that you poured your life blood, your energy, your soul into, feels like[1].
Slightly more than a year for me. I empathize with the Theranos people. And though I don't agree with her tactics, I have a sense of what the CEO is going through watching it die. That is, assuming she was a true believer in her company and not a scammer.
I did not enjoy letting my team go. I did not enjoy the repo company collecting the assets, or the auction. I didn't enjoy what the bank did next, after shooting us in the head.
What I've learned from this exercise is that many times when the provisions are triggered, the entity does not actually act in its own best interests. We were in the midst of talks to sell our company when the bank shot us in the head. Scared the other player off. Guaranteed that they would not get what they wanted.
[1] http://scalability.org/2017/03/requiem/
There is absolutely no sympathy necessary here. You may empathize with the feeling of loss, but concluding that they are not scammers because of that is absurd. “Best intentions” do not matter if your actions contrast with them.
Also, there may be (somewhat) rational reasons for investors to invest more.
For existing investors, there’s the statistics. Let’s say you invested a billion in a company that says ”if you don’t pay 10 million now, you’ll lose all of it”.
If you think there is a 1% chance that 10 million will save them and bring back your money, you, statistically, play evens if you give them that money (paradoxically, if, a week later they say they need another 5 million, giving them that at that time is OK as long as you think you still have ½% chance of getting all your money back, but you shouldn’t give them 15 million up front when you thought you had a 1% chance)
Of course, some serious delusion may be needed to believe that, firstly, that 10 million will keep them afloat, and secondly, that it will enable them to recover all of your billion.
For potential new investors, it is almost as if that billion is a plus. It is really hard for a company to have spent a billion and not be worth at least 10 million. Fire sales _can_ be bargains. For the Theranos case, all that money should have produced some patents, some of which may be worth something.
No paradox here... the evaluation of the situation in the first week should be [EV of getting all your money back with the 10M investment + (negative) EV of needing to put in more money later to keep the company afloat].
And $10 million can fund a lot of smaller startups with better odds of success and less baggage.
IMO, the smart investors will move on and hope for some other sucker to give Theranos money. It's rough, but if they can't afford to lose sometimes they shouldn't be in venture capital.
Also, a new investor, giving only $10 million after they've raised nearly $1 billion, is going to be really far down the list of people getting their money back if Theranos turns it around somehow.
Some call it the sunk cost fallacy... but actually when someone has invested enough money in you, you actually get leverage over them when the alternative is a smoking crater where their investment used to be.
Note I said assets. Technically the company doesn't appear to be insolvent in which case instead of an ABC you could basically strip what you want away from the obligations.
And those laid-off people? They got 60-day notice; certainly some of them have already jumped but probably not most of them and in such a restructuring you might be able to retain the ones you want (which could be all of them).
Well, not without paying them cash money that they don't have. I can't imagine anyone taking an equity-heavy compensation package.
"Were going to lend you X million, but its really only (X-3) million because you must hold on to the other 3 million at all times"
It’s really $X million, not $X minus 3 million, because you should have $3 million from any source other than them (e.g. revenue) and failure to have it represents mismanagement.
This particular covenant does not provide material downside protection to the lender; it’s more designed to prevent an aggressive company from riding things too close to the knife’s edge. There would often exist parallel covenants about borrowing money, assigning assets, increasing management salaries, paying dividends, etc.
(Father worked in commercial real estate; lenders have to get increasingly creative when a borrower’s situation is closer to the brink, which is where I learned about these.)