why do start up firms issue toxic PIPEs rather than a standard PIPE? what are the advantages when the downside is almost infinite (unless it has collar provisions)
I have a toxic pipe most sunday mornings…
if the company expects their stock to keep going up, then they are not concerned about a toxic structure, as they wouldnt be affected. Other times, the start up is at the mercy of the investors who dictate the terms in a position of leverage.
ther terms of what? i thought it was the firm who had to authority to sell pipe securities to whomever they want
I’m not especially up on this, but I thought toxic PIPES were pretty much gone. I can’t imagine why anyone would sell a PIPE now which enables anybody to drive the stock into the ground and have the infinite dilution of the PIPES of 7 or 8 years ago. The reason that someone sells securities that give downward adjustment is because they have to because they can’t raise financing any other way (or they are stupid).
there is only a certain amount of instituational investors who participate in the pipe market. depending on the attractiveness of the company (or lack thereof), companies can be forced into unfavorable terms… but like JDV said, toxic structures are a thing of the past…
well, the whole idea behind it was that the entrepreneur gets diluted more and more if s/he destroys value, ultimately losing control of the entity to the investors. standard pipes have fixed purchase price, and the security bought is straight up common stock. structured pipes have floating purchase price, and the security bought could be common stock with price resets, or convertible preferred stock, convertible bond resets, etc. as the common stock falls in market value the purchase price gets reset lower, creating the dilution scenario. structured pipes need not be toxic by the way, if they include a floor.
I’ve been seeing more of these simply because of the weakness in the small cap space. I’ve seen a number of standard equity/warrant pipes come back as death spiral converts because that’s the only way the company would get anything done.
Can you give us any more color than that? How many of these have you been seeing and are they doing anything to avoid the death spiral?
Not really. The sales guy usually says something like “well they’re thinking about a convert deal now…” and that’s the last I hear of it. I can’t think of any of them that got done in the last 6 months.