USV has been aggressively selling off shares in Coinbase in run up to IPO

Coinbase's S-1 publicly dropped this morning with much anticipation. My colleague Alex Wilhelm has the high-level details, but there was one major wrinkle for the crypto trading darling: two of its early investors seem to be cutting down their stakes pre-IPO.

Coinbase files to go public in a key listing for the cryptocurrency category

The most notable case is Union Square Ventures, the prominent venture firm where Fred Wilson co-led the Series A round into the company back in 2013, which was the first investment made under the firm's then newly christened blockchain thesis.

Over the past two years - which is the extent of disclosures that Coinbase includes in its S-1 filing - USV has been rapidly selling off its holdings in the company across multiple transactions, mostly selling to other venture firms around the cap table. Since late 2019, the firm has sold off approximately 28% of its holdings in Coinbase.

USV currently owns about 7.3% of Coinbase's outstanding shares, or roughly 13.9 million of a total of 191.3 million based on Coinbase's disclosed share count. As the following table indicates, USV has conducted four separately-dated transactions to sell nearly 5.5 million shares of its holdings in secondary transactions.

Fellow early-stage fintech investor Ribbit Capital, which joined USV in the Series A, also conducted a smaller secondary transaction in November 2019, selling a bit less than 5% of its outstanding shares (559,228 of 11,995,949 shares).

What's interesting is not just that USV in particular is selling a large part of its holdings, but also the price they were willing to sell at. According to Coinbase's filing, USV sold 3.35 million shares at $23 per share in late 2019, and later sold about 2 million shares at $28.83 per share in mid-2020.

Those prices are well-below Coinbase's Series E price per share of $36.19, which it received in late 2019. It's also below the price set by the secondary transactions of Coinbase CEO and co-founder Brian Armstrong and Paradigm founder and Coinbase co-founder Fred Ehrsam, who received $32.57 for their shares in late 2018.

Now, there are a couple of nuances to consider here. The secondary sale of preferred shares will typically convert to common (even if the sale is to another preferred shareholder), which means that the shares sold would hold fewer investor rights and provisions, and therefore, are intrinsically worth less to investors. This was the case with Coinbase as it disclosed in its filing, and that may explain at least some of the gap in the price.

The timing of USV's investment is also perhaps notable. The bulk of USV's investment in Coinbase comes from its 2012 vintage fund, which if it follows default industry practice, has a targeted 10-year shelf life. That means that the fund is designed to pay out its returns by 2022 - which was quickly coming up for the firm back in 2019 and 2020. There may have been some pressure to sell at least some of the firm's stake early to make the firm's LPs happier.

It's also useful to note that USV and Ribbit mostly sold to other, existing investors like A16Z and Paradigm, which shows that other investors deeply burrowed on the cap table were quite excited to put more money to work in Coinbase, even at a fairly late stage.

Nonetheless, it's rare for an ambitious fund like USV to sell arguably its single most important investment of all time just a year or two before what may well be one of the largest blockbuster IPOs of 2021. At a valuation of $100 billion let's say (which is what Coinbase priced at a recent private market transaction), USV's stake would be worth about $7.3 billion. Yet, the shares it sold over the past two years would have been worth several billion at exit, and it sold them for about $140 million in cash.

If Coinbase is worth $100 billion, what's a fair valuation for Stripe?

The mystery here is perhaps solved a bit. Fred Wilson, in a blog post from early 2018, talked about taking money off the table" in earlier USV investments like Twitter, where the firm sold about 30% of our position in those two secondary transactions for about $250mm and returned 2x the entire fund to our investors." Then referring to crypto, he said:

If you are sitting on 20x, 50x, 100x your money on a crypto investment, it would not be a mistake to sell 10%, 20% or even 30% of your position. Selling 25% of your position on an investment that is up 50x is booking a 12.5x on the entire investment, while allowing you to keep 75% of it going. I know that many crypto holders think that selling anything is a mistake. And it might be. Or it might not be. You just don't know.

Clearly, he took money off the table. It's a financially-astute, risk-adjusted approach, even if it left billions of returns behind. A16Z and Paradigm are, I am sure, quite pleased to have made the purchase.