Photo by Donnie Weatherhead

LivingSocial CEO Tim O’Shaughnessy told his employees yesterday that the company recently received $110 million in new capital from some of its longtime investors and the daily deals giant is on its way to profitability. But the reality might not be that rosy.

In fact, according to PrivCo, a research firm that tracks privately held companies like LivingSocial, the funding round was actually a “last ditch attempt” to avert “imminent financial ruin.” Furthermore, PrivCo reports that the agreements under which the funding was secured effectively transferred ownership of the entire company to the entities that fronted yesterday’s cash infusion.

“LivingSocial essentially threw itself at the mercy of its investors—who had already sunk over $823 Million in the company before today’s $110 Million additional lifeline—to avoid a total collapse of the company that would have occurred within days,” PrivCo CEO Sam Hamadeh says in his firm’s report. The investors, PrivCo says, are hoping to sell off LivingSocial, which is now said to be worth as little as $165 million, by the end of 2013.

PrivCo’s analysis bodes even worse for LivingSocial’s shareholders—aka the company’s employees:

• 4,000 employees’ stock is rendered worthless
• Employees’ stock options are worthless
• Founder stock is worthless

O’Shaughnessy refuted much of PrivCo’s report in a memo today to senior employees and obtained by DCist. In the note, O’Shaughnessy writes that the $110 million amounted to 7.5 percent of LivingSocial and while “there were some bells and whistles associated with those shares,” employee shares were not that significantly affected. He also writes that PrivCo reported inaccurately the venture capital funds that put up the new funding and that the money is new equity, not emergency debt financing.

O’Shaughnessy’s full memo:

Hey folks,

In light of a recent report on our financing round that contained significant inaccuracies and errors, I wanted to provide some additional details on yesterday’s round.

If you’ve seen some of that misinformation, here’s the real story:

• This was not an emergency round. We received our first term sheet on December 23rd, nearly two months ago, and this has been an organized, thought-out process.
• This was an equity round, not a debt infusion.
• There was no re-pricing of investor shares from previous rounds.
• There were no warrants issued as part of this round.
• There were no “double-digit” cash dividends. (Typical of many financing rounds, including our own past rounds, there was a nominal 3% dividend for a class of shares.)
• There is no “4x liquidation preference.” (Once again, typical of almost all venture rounds, there is a liquidation preference, but it slides up or down based on a key metric and gets nowhere near 4x.)
• The quotes from a “senior LivingSocial communication executive” are straight up fiction.
• Two of the three investors listed on the PrivCo site as participating in the round didn’t participate, and one isn’t even an investor in the company.

On valuation, people always seem to be overly enamored with market value, which has puzzled me because as a private company, there is no liquid market on which to buy and sell shares, so a valuation is established without any degree of market efficiency. In short, it’s an educated guess between the company and a set of investors at one particular snapshot in time.

But nevertheless here goes. Yes, this was a down round, which I’m sure is not a shock to anyone. Our main comp in the market is down significantly from when we last fundraised. In this round, we sold 7.5% of the company for $110mm. Although there were some bells and whistles associated with those shares, as mentioned above, this should give you some idea of the current valuation of the company.

So how does this round impact employee stock? In short, some, but not much. Basically, the preference stack is a little higher now. At any valuation over $1B, though, we clear that stack by quite a bit. For comparison, our major competitor’s market cap is now $3.9B. In the event of an IPO, all preferred stock becomes common stock, and the preference stack goes away.

We are a company that does over half a billion in revenue. If we stay diligent, we hope to turn the corner to become profitable soon. Thanks to this round, we have significantly more capital to be able to be opportunistic and drive the future growth of the business.

Hopefully this will help clear up any questions you may have or get on yesterday’s round. Now it’s back to executing on our plan.

– Tim