LONDON, May 22 (Reuters Breakingviews) - Revolut has hit yet another snag on its journey to revolutionise the financial sector. The startup may only win a UK banking licence if it gets rid of preference shares held by investors including Japan’s SoftBank Group (9984.T). It could turn out to be a solvable problem for founder Nik Storonsky, but the fracas shows that a rampant form of financial engineering in startup land also comes with downsides.
The Bank of England has instructed Revolut to collapse its six classes of shares into one as a condition for a full licence, the Financial Times reported on Friday. The problem is that one of its backers, SoftBank, which wants compensation for giving up the protections attached to its tranche of shares. The technology conglomerate run by Masayoshi Son led an $800 million funding round in 2021, valuing Revolut at $33 billion. The standoff is one reason Storonsky can’t immediately avail himself of the advantages of having a banking licence, which would allow him to attract cheap, insured deposits and lend them out at today’s high prevailing interest rates.
It's not clear what special rights SoftBank’s shares confer, but the practice of giving preferential treatment to investors is common at venture capital-backed (VC) companies. Typically, a big new shareholder might get a guaranteed return on its investment if the startup sells itself. That limits the new VC’s downside and potentially puts them ahead of other equity holders in the pecking order. In some deals, preferred shareholders could get rights to receive double or triple their money. For companies, the benefit is that VCs with preferred shares often acquiesce to puffed-up valuations, helping the startup to report a higher price tag than if it had purely issued common equity.
There may be a way around Revolut’s particular predicament. The startup’s preference shares have a sunset clause, according to a person familiar with the matter, which means SoftBank’s rights will eventually lapse. If he can wait it out, Storonsky could potentially avoid paying compensation. Still, that doesn’t mean the company is likely to win a UK banking licence. An auditing problem, which delayed the release of its 2021 results, won’t help; nor will a standoff with a major investor. It’s also unclear how long the company can wait before it needs more capital.
The episode should remind other startups and VCs that preference shares bring risks of their own. It can be hard for founders to live up to the artificially high valuation, juiced by funky stock classes. And if the company’s price tag starts to slump, especially in the current VC fundraising freeze, the practice effectively pits different types of shareholders against one another. Revolut has stumbled upon one other problem: financial regulators can take issue with practice too.
Follow @karenkkwok on Twitter
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own.)
Regulators told UK digital bank startup Revolut that it must simplify its ownership to win a long-delayed banking licence, the Financial Times reported on May 19.
The financial-technology group has six share classes, according to the report.
Revolut is rushing to reach an agreement with SoftBank Group, because the Japanese investor has demanded compensation for giving up its priority class of stock.
Editing by Liam Proud and Pranav Kiran
Our Standards: The Thomson Reuters Trust Principles.
Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.