Sequoia pressure led to Zappos sale to Amazon, CEO Hsieh says

Pressure from Sequoia Capital amid the financial crisis pushed Zappos’ chief executive Tony Hsieh to sell his company to Amazon for $1.2 billion in stock, he said today.

Hsieh wrote today in an excerpt of his book on corporate culture that even though he was reluctant to sell, the board of directors were concerned about popular shopping site Zappos’ access to credit just as the commercial paper market and short-term access to capital froze during the economic crisis:

“…our board of directors had other ideas. Although I’d financed much of Zappos myself during its early days, we’d eventually raised tens of millions of dollars from outside investors, including $48 million from Sequoia Capital, a Silicon Valley venture capital firm. As with all VCs, Sequoia expected a substantial return on its investment — most likely through an IPO. It might have been happy to wait a few more years if the economy had been thriving, but the recession and the credit crisis had put Zappos — and our investors — in a very precarious position.”

Apparently the company had a $100 million line of credit to buy inventory. Furthermore, the line of credit was asset-backed, meaning the company could only borrow between 50 and 60 percent of its inventory, and Zappos’ lending agreements required it to hit certain revenue targets. That meant that banks could easily demand repayment if the company missed its goals by even a slight amount.

Zappos’ Sequoia investors were also unconvinced by Hsieh’s relentless focus on building a corporate culture that could “spread happiness.” It’s one of his key talking points and beliefs that he espouses constantly in public appearances. The company is so intent on having happy employees that it pays new ones $2,000 to walk away if they’re unsatisfied with their work experience and it tracks friendships between employees.

Ultimately, Hsieh rekindled talks with Amazon, which has long been interested in the company. He secured an agreement from Amazon’s chief executive Jeff Bezos that Zappos could operate relatively independently and maintain its corporate culture. He also negotiated an all-stock, rather than a cash agreement, so that long-term incentives for both companies were aligned.

Sequoia capital ultimately earned $248 million in Amazon stock from the sale on its initial $48 million investment. It’s more than a five-fold return.