By now, you may have already heard of Elizabeth Holmes. She dropped out of Stanford to become the founder and CEO of the hugely successful biotech company, Theranos. Last year, Elizabeth Holmes topped Forbes magazine’s list of the “Richest Self-Made Women,” with an estimated net worth of an astonishing $4.5 billion. However, Forbes has recently changed its estimate, now valuing Holme’s net worth at “nothing”. So, what happened? Below, we highlight the two main reasons why and how Elizabeth Holmes went from a billionaire to broke in the space of just one year.
Although not a public company, Forbes states that external investors purchased shares in Theranos in 2014 at a share price that implied a $9 billion valuation. The value of the company is now approximately just $800 million. While this is partly because the company is under federal investigation, questions are also being asked as to whether applying a hardware and software business culture to biotechnology is, in fact, dangerous. Holmes owns over 50 percent of the shares in the company. The plummeting valuation means that her shareholding is now worth just $400 million (as opposed to $4.5 billion in 2014).
Company Share Structure
Theranos issued both ordinary and preference shares. While Holmes still owns over 50 percent of the shares in the company, they are all ordinary shares. As such, all shareholders with preference shares will receive repayments before her in the occurrence of a liquidation event.
As previously discussed, the company is now valued at approximately $800 million. However, external investors injected over $720 million into the company in exchange for preference shares. Even if the preference shareholders only have a 1x purchase price preference (in the event of liquidation, they will receive a one-time payment of the money they invested), they will receive their $720 million before ordinary shareholders (including Holmes) receive any payments.
Further, if the preference shareholders have a higher liquidation preference, they will be entitled to more than the $720 million they invested. For example, if the preference shareholders have a 2x purchase price preference, they will receive twice the amount they invested before the ordinary shareholders are entitled to receive anything. If the company is worth just $800 million, in the case of a 2x purchase price preference, there wouldn’t even be enough to repay the preference shareholders what they are owed, and the ordinary shareholders will receive nothing.
Although in Australia, it is unusual to have anything above a 1x purchase price preference, in the US, it is not uncommon. Accordingly, by the time the preference shareholders have been repaid all money owed to them, there may be nothing left for the shareholders with ordinary shares. There may not even be sufficient funds to repay the preference shareholders.
To find out how to avoid going from billionaire to broke like Elizabeth Holmes, check out our article, Elizabeth Holmes and Theranos: 5 Lessons for A Founder. If you have any questions on how to set up your business or raise capital while protecting yourself, please get in touch with one of our startup lawyers on 1300 544 755.