One of the perverse pleasures of reading the S-1 filings of Internet
companies planning to go public is the section called “risk factors,” in
which registrants are required to spell out in excruciating detail the
numerous reasons why only a fool would invest in their company.
But the majority of “risk factors” listed by companies with pending IPOs
are boilerplate items designed to cover all legal bases and keep the SEC
uninvolved should things turn bad and some stockholders get ugly.
The fact is, most IPO registrants really don’t expect possible
complications from Y2K to “have an adverse effect on our revenues,” nor
do they lie awake nights because the company’s success “is substantially
dependent on continued growth in the use of the Internet.”
Likewise, while experienced investors certainly expect to be made aware
every conceivable disaster scenario, they in large part focus more on things
like market size, financials and technology. Thus the risks involved in
a company’s reliance on third-party suppliers or the outcome of a
pending lawsuit, often are overlooked or rationalized away if the
potential upside is attractive enough.
Once in a while, however, one of those “boilerplate” risk factors emerges
to make things a little messy, like the shady, drunken uncle who shows
up on your doorstep and needs a place to stay. Such is the case with
iVillage, whose uncle is an ugly legal battle that erupted into
headlines last week on the eve of the company’s highly anticipated IPO,
slated to price as soon as Tuesday.
The lawsuit was filed by former iVillage executive Todd Kenner, who
alleges that iVillage co-founder and CEO Candice Carpenter reneged on a
promise to give him 100,000 stock options to become chief financial
officer. Kenner took the job last August, relocated to New York from
Tennessee, and was fired in a company reorganization less than two
months later.
IVillage hopes to raise $47.45 million in an offering of 3.65 million
shares at $12 to $14 each, so Kenner’s options would be worth $1.2
million at the low offer price.
Now, lawsuits are not uncommon sights on S-1 documents, and a good
number tend to involve former employees claiming to be mistreated or
deceived in some way. And like that troublesome uncle, if you throw a
few bucks at it, usually a lawsuit will quietly disappear, though you
may find yourself missing some silverware.
In and of itself, Kenner’s complaint about not getting a piece of the
action would have no effect on iVillage’s ticker performance. But
another accusation, made in an affidavit supporting Kenner’s lawsuit,
could.
In the affidavit, Joanne O’Rourke Hindman, also a former iVillage CFO,
says she was fired after voicing concerns about the company’s accounting
practices. Hindman also claims that she’s owed stock options.
IVillage has staunchly denied any accounting sleight-of-hand, noting
that financial statements in its prospectus were audited by
PricewaterhouseCoopers.
The short-term impact of iVillage’s legal woes are likely to be slight.
Expect heavy trading at prices well above the offer price when the IPO
debuts, as befits an Internet company tabbed as a rising star.
In the long-term, however, allegations of accounting misdeeds – if not
effectively disproved — could diminish the valuation of a company with
heavy losses and a reputation for burning through cash. After all,
investors like to know what they’re betting on, and have little stomach
for what boxing promoter Don King calls “trickeration.”
