Zynga's Confusing Deal Terms Result in Acquisitions, Padding in Case of Hard Times

Zynga has been assembling a big cash hoard in the last year. Between the $180 million it said it raised in December from a consortium led by Digital Sky Technologies, and $147 million that it has not confirmed it has raised from SoftBank, the company could have something like $327 million in new funding. Except it doesn't, according to a string of deal terms pieced together over the last year by finance data company VC Experts. Here's a quick look at what data we have available, and what it might mean; note that Zynga has steadfastly not commented on any of its funding moves in years, aside from announcing the DST deal. Up until last fall, Zynga had a pretty typical-looking set of filings: when it raised money, the company would authorize stock and sell it as you'd expect, with filings showing up afterward. The situation got stranger in mid-November, when a regulatory "Form D" filing showed up stating that the company had raised $15.2 million from previous investors as an extension to its second round of funding from back in 2008. A reliable source had told us in the spring of 2009 that the company was raising around this amount of money, but that was never confirmed. The filing that appeared last November may have actually been raised then, and just filed later -- more on this, further down. Then the DST deal got announced in December. That $180 million stock purchase by investors has never shown up in a regulatory filing -- at least not all at once, and not yet. Instead, there has been a trickle of stock authorizations and small stock sales, beginning in late April of this year. [Editor's note: Full copies of the filings and more details are available on VC Experts' Valuation & Deal Term Database.] The most notable recent filing happened on May 11th, when the company authorized new shares of class "Series B-2" preferred stock; when valued at the latest share price, the value of this class increased from around $25 million to $315 million. Preferred stock is intended for investors, often connected to strategic partnership agreements or other deals. The amount is also just $13 million less than the combined DST and SoftBank funding. This filing could represent the majority of the stock that DST and SoftBank are getting, meaning Zynga delayed any filings related to DST from last December through when it finalized SoftBank's deal. There are other complications, to this idea, though. The company also made a few much smaller adjustments and added smaller new stock classes to its capitalization table in the past few months. Some of these may have had to do with recent acquisitions, including Challenge Games and XPD Media. The big new investors may also be getting other types of stock, which helps explain the difference between the $315 million worth of B-2 shares and the combined $327 million of the latest investment. A third complication is that Zynga may be issuing more stock for employees that it does not bring in through acquisitions, but rather because of individual hires or compensation package increases. Finally, it could be that DST and/or SoftBank have some sort of "subscription agreement," where they agree to buy stock over a period of time at agreed-upon terms. The bigger question is why the filings are happening this way. Authorizations, stock purchases and announcements about new investors normally happen within a month or three of each other, and investor data services, finance news publications and competitors track them closely to try to understand what hot companies are doing. Zynga's unusual approach, while not unheard of, is likely because the company has wanted to tightly control what everyone else knew about its strategies. For example, it launched what became its biggest hit, farm simulation FarmVille, in June of 2009. By this point it already had figured out how to get a solid return on investment in Facebook's performance advertising system -- well before most other developers had. By delaying that funding until many months later, it may have helped hide its intense focus on launching FarmVille until after the game had gotten going. Then, by delaying filings related to DST, the company was able to obscure the fact that it was doubling down on its business even as many other social gaming competitors raised smaller amounts or sold. This interpretation is, to be clear, speculation based on possibly incomplete filings and an unusual and drawn-out process. If there is any clear takeaway here, it is that Zynga is willing to keep raising the stakes even as its traffic on its core platform, Facebook, has ebbed, and as it has faced new monetization changes like Facebook Credits. And it's raising the stakes in ways that potentially confuse the rest of the market. While Zynga has had some successful new games this year, like Treasure Isle and now FrontierVille, it faces a slow-growing, increasingly expensive Facebook platform, and risky or inadequate alternatives. The new money does not look like it's just going towards more growth, but also towards a more mature and challenging period for social gaming. The long-term goal is still, we assume, for Zynga to go public eventually.

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Zynga's Confusing Deal Terms Result in Acquisitions, Padding in Case of Hard Times

Eric Eldon

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Eric Eldon