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 . 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.
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 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.
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.
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.
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