There’s a market in everything, including accounting standards, corporate governance, and liquidity. If they can get it, they can get it. But can they? A selection from the premium newsletter, sign up here to get all of them.

Not sure if you’ve been following the continued shifts of Groupon’s proposed public offering, but they have been taking a beating by the SEC and the court of public opinion on their accounting and reporting methodology. It’s a topic I’ve highlighted before (letters #41, 51, 59, 81), but is worth an update given the reaction and the broader context of investor reactions to Zynga and Airbnb.

Groupon
Groupon has restated their financials multiple times since their original S-1 filing to go public as the SEC and public investors have put considerable pressure on Groupon to reconsider how they report their financials. Accounting is as much an art as a science, and Groupon has been a pretty poor artist here, failing to create the artistic sheen needed to gloss over the financial realities. And as Groupon has continued to restate their financials, the interest, potential valuation, and buzz about the business (especially in volatile macro market conditions) has dropped significantly.

Let’s summarize what’s happened to Groupon and their market power in their accounting standards vs. the market:

1) Originally created a new accounting metric called ACSOI as a measure of core profitability that stripped out massive marketing and customer acquisition costs by making the case that these costs were not “core”.

2) Used a gross revenue metric that measured the amount that customers paid merchants for their Groupon-offered purchases, instead of the revenue that Groupon earned from these deals. Because Groupon generaly takes a 50% share of the revenue in the deals, this doubled their revenue.

Massive changes. Cut the revenue in half (actually, more, considering the deals on some of their biggest offers), and add back in by far their largest expense, and that’s an entirely different business.

Yes, part of this is a question about what’s “right” and “accurate”, but it’s also a simple question of what they can get.

Can they get what the accounting standards they want from the public markets? Time will tell, but early signs have been negative.

Zynga
Zynga has caught a bit of flak for their accounting measures, altering their reports to focus on Zynga-specific metrics like average daily users and average bookings per daily users, which obviously doesn’t punish Zynga for changes in inactive users, an otherwise important metric of their operations.

They have also altered the estimate life of their virtual goods, adding revenue simply by changing accounting standards. Now, this might indeed be a better reflection of performance or user behavior and in no way malicious accounting, but it’s still important to note the accounting impact.

But the bigger question is about governance. Upon IPO, Zynga’s share structure will give very different voting rights to different classes of shares. The CEO will own 70 votes per share, the VCs and employees will own 7 votes per share, and ordinary shareholders will own 1 vote per share.

Part of this is a question about what’s “right” and “accurate”, but it’s also a simple question of what they can get.

Can Zynga get the corporate governance they want from the public markets? Time will tell, but I’m more apt to think they will, because this is a more obscure topic most of the public doesn’t value and doesn’t understand.

Airbnb
It’s somewhat of a surprise that this ever became a public issue, but an extraordinary leak of an email from a VC to Airbnb exposed a pretty big issue in growth-stage VC: the amount of money that founders are getting paid in later financing rounds.

In short, Airbnb was proposing for $21 million of the proposed $121 million financing round go directly to the founders as a dividend. Now, it’s common for founders to “take money off the table” in financing rounds, because it’s often difficult for founders to get the liquidity necessary to diversify their own investment portfolio, and it’s happened in many big startups as they raise growth equity rounds. Sometimes the founders sell their shares and dilute down their stake; but sometimes, they don’t.

The issue raised by the prospective VC investor in this case is that the payment was a dividend, not a stock sale, and that it was going only to Airbnb’s founders and not going to be shared with the rest of Airbnb’s employees. His issue was that the entire company should share in the payout, and that this was against the principle and “spirit of building a good, long-term business.”

In this case, in the end Airbnb altered their plan to include a way for employees to share in the liquidity, the VC invested, and everyone came away happy.

We can debate what’s “right” and “accurate”, but this was also a simple question of what they could get.

Could Airbnb get the proposed cashout they wanted from the private markets? In the end, yes, but not exactly as they had originally intended. Although the attempt to cash out only the founders was an out-of-line initial request, in my mind, what happened was a normal part of the negotiation process between investors and companies, it just happened that a typically private exchange was played out in public.

At the end of the day, everything is a signal, and everything is a negotiation with the market: the fact that Groupon had 11 underwriters for their IPO was a strong negative signal, having to change accounting standards is a signal of some underlying issues, having to change an issuance structure is the result of a negotiation. Believe it or not, there’s a market in everything.