Solyndra Looking for $350M in High-Wire Financial Play

Solyndra, the secretive developer of copper indium gallium selenide (CIGS) solar cells, is trying to raise $350 million in an effort to get into mass production, but the deal is causing some in Silicon Valley to shiver.

The Fremont-based company, which raised $79 million in venture funds in 2007, wants the money to build a 420-megawatt solar plant, according to sources and documents reviewed by Greentech Media. Under the deal, Goldman Sachs, the lead bank on the deal, is trying to sell $120 million of convertible securities to existing investors and $230 million to newcomers. The convertible securities could be converted to Solyndra shares in the event of an IPO.

Assuming an IPO can be pulled off, the owners of the securities would get Solyndra stock at a discount of the IPO price. If Solyndra eventually sells shares at $10, for instance, investors holding the convertible securities would be able to get shares for $8 dollars. The exact discount isn’t specified in the document, but sources say Goldman is telling investors that they will get a discount of 20 percent.

But the discounts increase if Solyndra fails to hit certain deadlines. If the company does not file a registration statement to go public or undergo a fundamental change (i.e. get acquired) within twelve months of the issuance of the convertible securities, the security holders get another 10 percent discount.

If the SEC has not declared a filed registration statement effective in 18 months, security holders also get a 10 percent discount. Thus, at the $10 hypothetical price, the holders of these securities would get shares at $7 or even $6. Solyndra, after all, could file a registration statement in 13 months (a ten percent penalty) and then get approval in 20 months (another ten percent.).

And it’s not over yet. The holders of convertible securities earn 6 percent interest on their shares in the pre-IPO phase. The interest rate will be bumped by 1 percent if Solyndra misses its 12-month deadline and by 1 percent if it misses the 18-month deadline.

The interest rate jumps to ten percent or the prevailing interest rate, whichever is greater, if an IPO or a fundamental change transaction has not occurred in 24 months.

Solyndra did not return calls for comment.

Other companies have used convertible funding to move into mass production, but the numbers and circumstances surrounding this one appear to push the stakes somewhat high. First, Solyndra hasn’t sold any products yet. Second, it’s got quite an unusual product: a cylindrical solar cell. By being cylindrical, the solar cell can gather direct sunlight, as well as convert light reflected from the roof into power.

In theory, it sounds great. Taming the chemistry of CIGS, however, is not easy—most CIGS companies are not in production yet and some have faced delays. The vast majority of solar cell makers, CIGS and otherwise, are or are planning to build their solar cells on flat, planar surfaces, not cylinders. Some of Solyndra’s early key employees—such as Benny Buller, Ratson Morad and Jonathan Michael—have left the company. Many VCs have begun to discuss a solar bubble and fear that many companies are overvalued. Combined, the leadings CIGS companies—a list that includes HelioVolt and Nanosolar—have already raised hundreds of millions of dollars.

Several analysts (including some at Goldman) also expect the silicon shortage to ease next year, which could dent some of the appeal of CIGS by lowering the price of silicon solar cells. Many silicon solar cell manufacturers are expected to bring manufacturing capacity online over the next several years.

So, in a nutshell, Goldman Sachs wants to raise over one third of a billion dollars on an experimental product that will enter an increasingly crowded market.

Then again, Solyndra recently landed a contract to supply Solar Power with $325 million worth of solar cells between 2008 and 2012. Germany’s Phoenix Solar also announced a deal to buy approximately $681 million worth of solar cells from Solyndra over the same period of time. That’s over a billion in sales, assuming mass manufacturing can take off.

Nonetheless, two VCs contacted by us deemed the deal risky and are declining to join. After the investment, Solyndra may be too expensive as an acquisition, noted one.

The people who could be hurt the most in this, potentially, are employees because of the dilution that will occur when the new stock is issued. The additional discounts that the later investors may get if Solyndra fails to hit its deadlines will further depress the value of existing shares, said some.