Beverage Business INSIGHTS
Published 90 X a year Vol 12, No 57 Jun 9, 2015
Publisher: Benj Steinman Editor: Gerry Khermouch Senior Editor: Jim Sullivan
Legal vet of hundreds of capital transactions for early-stage food and bevcos offered financing clinic at last week’s BevNet conference in NY, exhorting listeners to opt for convertible financing if they can in initial round and to go with LLC corporate structure.
At issue in presentation by Nick Giannuzzi, founder of The Giannuzzi Group, was how to build strong foundation for your co without giving away rights inadvertently, getting overly diluted or finding yourself evicted from your own co. “It’s too late to think about this when you’re about to go down to 49% with the next round,” he warned. Of course, cos operating in desperate straits may have no choice but to give away rights, and even successful ones can expect plenty of dark days, he warned. “Every single entrepreneur who gets there (to exit) has to suffer,” he declared.
Giannuzzi is familiar figure in bevs, running 10-lawyer firm based in NY’s Meatpacking District that over past 10 years has focused exclusively on food/bevcos – 180 clients in total. This year co will likely do 120-130 rounds of financing. First client, he reminded audience, back when he was half the staff, was Vitaminwater marketer Glaceau. (Nick’s also investor in restaurants like STK and Bagatelle via The One Group, where he’s board member.)
Given need for feet on street, sampling, etc, bevs is capital-intensive biz in which founders generally must undertake a round of financing virtually every year unless they have a rich benefactor, Nick reminded. That constant demand is “ultimate challenge for the founder, because finding money is hard, finding people who believe in you is hard, finding people who believe in your concept is hard.” Even when you do, there are lotsa pitfalls to avoid.
First round, perhaps to raise $300K to $1 mil to fund first production run, typically goes friend-and-family route. Entrepreneurs confront 3 choices there. First, used often in tech sector, is convertible note round – say, $500K on terms where money loaned to co converts to next round of financing, generally at 20-25% discount. Advantage of convertible is “you don’t really have to deal with valuation, at a time your valuation is terrible because you haven’t sold anything yet . . . it’s one of the ways to kick that can down the road,” Giannuzzi offered. Some prospective investors reject convertible notes as way too speculative, he warned, but if anyone bites, it’s great. Failing that, founders should consider common equity round. To Nick, that’s much better choice than 3d option: preferred equity, which effectively gives investor downside protection. That means, if co needs to be sold at lower valuation, “they get their money back first.”
“My position is, if there is any way to do a convertible note on good terms, that can often be the right choice,” Nick exhorted. That flies in face of some lawyers’ view that, if you’re dealing with friends and family in first round, why not sell preferred? The trouble comes, Giannuzzi warned, when new investors want their round to be preferred, and superior to prior investors’. “Every time you give preferred, new investors say they want their B to be superior to A,” to point where, as rounds accumulate, “by time you’re done stacking all these preferred on top of each other, you have a board of 18 people and all kinds of blocking rights and other rights,” Nick said. “That’s why giving friends and family preferred sets a horrible precedent – I’ve almost never seen an exception to every other set of investors demanding preferred shares.” For those who go convertible note route, next round, maybe for $1 mil, is likely to involve common shares.
Problem with preferred is compounded in current climate where multinationals buy into promising cos earlier and earlier, “eating into rounds 4 or 5,” in turn pushing private-equity funds to start funding round 3 or round 2. That means you’re still small, untested co, not likely to get a great valuation, but now sophisticated funds are coming in writing $850K checks for 2 board seats, 16 blocking rights, preferred shares – all in round 2. That creates “really tough decision: Do you take the money at that cost?” Nick said he spends hours each day discussing issue with clients, but “it’s a person-for-person decision. Some of my founders will not be answerable to anyone, will fight for as long as they can to maintain full control of their company.” They’ll fight “like hell to get to round 4 or 5″ until a really great PE firm comes along with $10 mil and demands some concessions. This, of course, is for cos doing very well; otherwise, money may be hard to find on any terms.
Giannuzzi also waded into issue of fundamental corporate structure. Should you start out as corporation or limited liability co (LLC)? Tho in some industries it’s hard to find a buyer if you’re not incorporated, in food/bev “I’ve always advised clients to start as an LLC,” Nick offered. That offers 2 advantages: First, if you grow your co and instead of selling want to distribute your profits upward, you have a single layer of taxation vs corporation with 2 layers and “an absolute mess.” And 2d, LLC confers certain advantages with respect to retention of employees, consultants, celebrity investor/endorsers, etc. Unlike a corp, an LLC can award profits interest, rather than stock options, and recipients can get capital gains tax treatment. Of Giannuzzi Group’s 180 clients, probably 150-160 are LLCs. As for often-expressed fear that at some future time co will have to convert to corporate status, “in all our deals, only twice did we do a deal where somebody said you have to convert your LLC to a corporation,” Nick reassured.
Another issue pertains to mgmt control: derived from partnership law, not corporation law, LLC makes shareholders key, with general partner making all decision even if there are 100 limited partners, Giannuzzi said. Power can be put in a single person or, more likely, a mgmt board that decides everything. At start, agreement is put in place “that puts you in charge of your company – we call it our ‘god agreement,’” that all employees must sign acknowledging they have no rights at all. All other members are merely “along for the ride,” he said.
Technical aspects aside, Nick acknowledged during Q&A that it’s partly power game: “Are you hottest girl at the dance? You need to feel the market out . . . You need to be realistic with yourself.” As with another BevNet speaker, Sherbrooke Capital’s John Giannuzzi (BBI, Jun 4), Nick warned founders not to always reach for highest valuation possible. “That’s not always so smart. It’s better sometimes to bring it down a little bit to give away less rights,” he said. You may end up weighing several term sheets from prospective investors – the highest, say, at $27 mil valuation but demanding lots of rights. “Maybe the guy with the $20 million valuation will actually let you run your biz,” Nick suggested.
Launch of STK Rebel Represents Next Phase of Company’s Growth Platform
Restaurant Projected to Open in 2015
NEW YORK–(BUSINESS WIRE)–
The ONE Group Hospitality, Inc. (“The ONE Group”) (STKS) today announced that it has completed an agreement to open an STK Rebel in Denver. STK Rebel maintains the unique features, vibe and energy of STK, with a menu and price point targeted to a broader national and international market. The venue is expected to open in 2015.
The new STK Rebel will be located at 16th and Market in the heart of the popular LODO district of Denver. The restaurant is situated in a brand new mixed use building developed by Integrated Properties, Inc.
“The launch of STK Rebel is a milestone for The ONE Group, and we are thrilled to be bringing this concept to the Denver market,” said Jonathan Segal, CEO of The ONE Group. “STK Rebel reflects an expansion of our STK brand that will provide a more accessibly priced option for guests across the country, while offering the same innovative culinary features, energy and vibe dining experience that has driven the success of STK. We are extremely excited for the STK brand to become part of the Denver community.”
“The ONE Group has been built on a foundation of innovation and reinvention – and STK Rebel is the next step in this evolution,” Segal continued. “Our development pipeline is tracking at the pace we have been communicating to the investment community since we went public, and STK Rebel will be a key element of our growth strategy moving forward as we expand our presence both in the US and abroad. We look forward to sharing more updates soon.”
The ONE Group will host a conference call to discuss third quarter 2014 financial results on Thursday, November 13, 2014 at 5:00 PM Eastern Time. Hosting the call will be Jonathan Segal, Chief Executive Officer, and Sam Goldfinger, Chief Financial Officer. A press release containing the third quarter 2014 financial results will be issued after market close Thursday, November 13, 2014.
The conference call can be accessed live over the phone by dialing 877-407-3982 or for international callers by dialing 201-493-6780. A replay will be available after the call and can be accessed by dialing 877-870-5176 or for international callers by dialing 858-384-5517; the passcode is 13593354. The replay will be available until December 13, 2014.
About The ONE Group
The ONE Group is a global hospitality company that develops and operates upscale, high-energy restaurants and lounges and provides hospitality management services for hotels, casinos and other high-end venues both nationally and internationally. The ONE Group’s primary restaurant brand is STK®, a modern twist on the American steakhouse concept with locations in major metropolitan cities throughout the U.S. and in London. STK Rebel SM, a more accessibly priced STK ® with a broader menu, is an extension of the STK ® brand. The ONE Group’s food and beverage hospitality services business, ONE Hospitality SM, provides the development, management and operations for premier restaurants and turn-key food and beverage services within high-end hotels and casinos. Additional information about The ONE Group can be found at www.togrp.com.
Cautionary Statement on Forward-Looking Statements
This press release includes “forward looking statements” within the meaning of the “safe harbor” provisions of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the use of words such as “anticipate”, “believe”, “expect”, “estimate”, “plan”, “outlook”, and “project” and other similar expressions that predict or indicate future events or trends or that are not statements of historical matters. A number of factors could cause actual results or outcomes to differ materially from those indicated by such forward looking statements, including but not limited to, (1) the ability to recognize the anticipated benefits of the business combination, which may be affected by, among other things, competition, our ability to open new restaurants and food and beverage locations in current and additional markets, grow and manage growth profitably, maintain relationships with suppliers and obtain adequate supply of products and retain our key employees; (2) factors beyond our control that affect the number and timing of new restaurant openings, including weather conditions and factors under the control of landlords, contractors and regulatory and/or licensing authorities; (3) changes in applicable laws or regulations; (4) the possibility that The ONE Group may be adversely affected by other economic, business, and/or competitive factors; and (5) other risks and uncertainties indicated from time to time in our filings with the SEC, including our Annual Report on Form 10-K filed on April 1, 2014.
Investors are referred to the most recent reports filed with the SEC by The ONE Group Hospitality, Inc. Investors are cautioned not to place undue reliance upon any forward looking statements, which speak only as of the date made, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise.