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5 December 2014 By Robert Cyran

Uber is really flipping the bird at critics with its latest financial deal. The taxi app’s valuation soared to $40 billion in its latest funding round. But a plan to issue securities that convert to stock at a discount to its eventual IPO price shows how firmly Chief Executive Travis Kalanick remains in the driver’s seat. Uber can raise money at a potentially massive premium.

After a top executive said the company could look into media critics’ personal lives and families, Kalanick apologized. Now he’s telling its detractors off, Silicon Valley-style, by raising vast sums of money at ever-escalating valuations.

After bringing in $1.2 billion six months ago, the company has raised another $1.2 billion. And it has done so at a valuation of $40 billion – more than twice as much as the previous round. The mulled terms on its convertible debt are even more astounding.

The debt securities would convert to equity at the time of the initial public offering, at a 20 to 30 percent discount. The securities contain incentives to ensure the company floats soonish. If it dawdles more than a year, holders receive a bigger discount. After more than four years, the coupon steps up.

That’s an incredibly good deal for insiders because it allows them to borrow money for expansion, but potentially suffer little dilution. Uber’s worth doubled in six months. If it keeps up this pace for a year, those who bought equity at the current valuation would quadruple their money. Convertible investors would reap a fraction of this.

Of course, Uber might not be worth $40 billion. The company has been parsimonious with disclosure. Its gross revenue run rate will hit $4 billion this year, and $10 billion next year, according to Re/code. The company only keeps about a fifth of this, meaning it is currently valued at more than 20 times next year’s revenue. Margins are a bigger mystery.

Kalanick wrote in a blog post that the new money would allow the company to expand, especially in Asia. The rapid pace of its capital-raising may suggest the business doesn’t scale well, or its existing business burns lots of cash. Those lending money to Uber get substantial risk, but limited gains.

 

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