Share reward for founder of blank-cheque company in focus after $4.8bn Opendoor deal

Chamath Palihapitiya, the former Facebook executive who on Tuesday agreed to merge his blank-cheque company with property group Opendoor in a $4.8bn transaction, has defended the economics of the deal after it emerged that he and his co-founder would receive $60m in shares.

Mr Palihapitiya and UK investor Ian Osborne, co-founders of Social Capital Hedosophia II, the special-purpose acquisition company (Spac) that will merge with Opendoor, will now own $82.8m worth of founder shares in the new company — including the $20m initially invested — in what is often referred to as the “promote”.

While this particular feature is not unusual in blank-cheque companies, scrutiny is higher over the large number of shares, usually 20 per cent of the Spac’s proceeds, handed to founders at essentially no cost.

Mr Palihapitiya, who was peppered with questions on the lucrative share reward in an early Tuesday morning interview with CNBC, defended the deal.

In a call with the Financial Times, Mr Palihapitiya said Opendoor chief executive Eric Wu and the company’s board were comfortable with the structure of the transaction.

“I just don’t understand why all of a sudden it’s OK for banks to make money, but it’s not OK for other people to make money,” Mr Palihapitiya said.

Opendoor is a six-year old start-up that allows homeowners to buy and sell homes online, and Tuesday’s deal will provide it with a $1bn cash infusion, a sum that includes the $414m in funds raised in April. The company has also secured $600m from other backers including BlackRock, the Healthcare of Ontario Pension Plan, existing Opendoor investors and Mr Palihapitiya himself. 

The former Facebook executive has been at the centre of the blank-cheque activity that has swept Wall Street over the past few years, merging his first vehicle with Richard Branson’s Virgin Galactic in 2019.

Spacs have become a popular alternative to the traditional initial public offering for companies seeking to list their shares.

The vehicles have raised tens of billions of dollars this year, with high-profile names on Wall Street including hedge fund billionaire Bill Ackman and former Citigroup dealmaker Michael Klein turning to the structure. Paul Ryan, the former speaker of the House of Representatives, is also working on a blank-cheque company.

Opendoor generated revenues of $4.7bn and net losses of $327m in 2019. Last year the company raised $300m from a group of investors, including SoftBank and General Atlantic, at a $3.8bn valuation. 

The business was founded in 2014 by Eric Wu and Ian Wong and said it sold 18,000 homes last year. Opendoor has struggled during the coronavirus pandemic, even as the wider housing market rebounds, and in April cut its staff by a third. 

Opendoor said it expected to have $1.5bn of cash on its balance sheet after the merger with Mr Palihapitiya’s blank-cheque company closes.

Mr Palihapitiya said he views Opendoor as a company that can increase 10 times in value in the next 10 years, similar to his earlier bets on bitcoin and Tesla.

“Before the end of 2021 they’ll be back in a really solid place to where they were and growing again,” he said.

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