By Peter Kafka
Here's a funding story you don't see often, recession or no: A startup buying back its shares from its venture capitalist, at a premium.
But that's the transaction that video chat firm Paltalk and Softbank have completed. Paltalk, which sold off 20% of its equity to Softbank for $6 million in 2004, has bought the shares back. No one has spelled out a purchase price, but I'm told the deal will be considered a "single" for Softbank -- it gets its capital back, plus a return -- which in this economy ought to be a homerun.
This is different than the "baby buybacks" we're seeing as the economy sputters, in which founders reclaim all or part of their companies at distressed prices after their investors give up -- think eBay (EBAY) and StumbleUpon (and perhaps Skype), or more recently, ManiaTV.
Paltalk can afford to buy its shares back because it's an Internet video company that actually makes money, which it does via a "freemium" model: Most users can hope on the service for free, but about 5 percent pay for some extra features, like virtual conference rooms. People familiar with the company tell me it should be on track to throw off $4 milllion in cash this year off of revenues of $20 million. It also has extra cash on hand these days as a result of a settlement it extracted from Microsoft (MSFT) in a patent lawsuit in March.
There are a whole lot of Web companies -- let alone Web video or Web chat companies -- that would like those financials. But Paltalk is a steady grower, not a rocketship, and while the company has supposedly gone down the road with potential acquirers in the past, it's unlikely to get acquired at a huge premium. So it makes sense for Softbank to take money off the table; I'm told Paltalk was their last open investment made from an Internet fund they raised way back in 1999. Paltalk CEO Jason Katz says he now owns 80% of his company.