Groupon Tale Continues to Offer Caution to Small Business Startups in Chicago

As we reported recently on our website, Groupon, the online coupon phenom, is facing a class-action lawsuit regarding overtime pay. We used it as a cautionary tale about the need for tech startups in Chicago to invest in the kind of experienced legal help necessary to keep them out of legal trouble through the incubation and gestation period.

Now the New York Times is reporting on "red flags" raised during IPO negotiations. Finance is another critical area where contacting a Chicago business lawyer can pay huge dividends while keeping your rights protected.

The Times reports the suit and a number of other accounting and disclosure gaffes have been brought to the attention of the Securities and Exchange Commission, darkening the company's Initial Public Offering Prospects and raising questions about its credibility. When Goldman made the successful pitch as one of the underwriters of the IPO this summer, the company was being valued at $30 billion. Analysts now believe the company would be lucky to fetch an evaluation of more than $10 billion.

The IPO is also debuting as the company's triple digit growth has slowed.

Also at issue is the unearthed business history of Groupon's chairman Eric Lefkofsky, which the media describes as a lawsuit-prone entrepreneur who flipped a dot-com in 1999 that quickly went bankrupt on its new owners. He also reportedly took home $319 million of an investment round in January that fetched $950 million. Most of the rest was paid to employees and investors, which the Times cited as a red flag to other would-be investors.

Some of this is undoubtedly legitimate. But never forget that perception is often nine-tenths of reality. Once a company stumbles, it can be hard to get back up for all the piling on. Experienced legal advice and careful planning can often help a company avoid some major pitfalls and common errors.

Industry watchers are now questioning why Wall Street investment firms didn't catch the red flags earlier, or whether they may have turned a blind eye to problems in the quest for profit. "Underwriters are supposed to be gatekeepers, not just a sales and marketing agent," said Lynn E. Turner, a former chief accountant for the S.E.C.

The information Groupon filed with its prospectus is also now being called into question. According to that information, the company has $250 million in the bank and lost $102 million last year on revenue of nearly $1 billion. The need for additional cash, either through an IPO or otherwise, quickly becomes apparent. It has also left some scratching their heads at the $30 billion valuation. Especially when matched against $376 million in assets and $681 million in liabilities -- including nearly $400 million currently owed to vendors.

And despite spending nearly $500 million on advertising in the first six months of the year, the company's revenues are up only 13 percent in August, compared to 96 percent during the first six months of the year.

In its quiet period ahead of the IPO, the company has not commented publicly but its founder expressed optimism in a recent note to employees.

Jeremy A. Gibson & Associates is a law firm dedicated to business litigation in Chicago and elsewhere in Illinois. Call 877-452-4529 for a free consultation.

Additional Resources:

The Missed Red Flags on Groupon, By Andrew Ross Sorkin, The New York Times.