Shareholder Lawsuit

[SANZC02]

Two points in response:

1) Projected Losses: There are a lot of reasons for being unprofitable. If a startup is investing in growth and future capacity, it may not be profitable as an enterprise but still can be cash flow positive on each individual unit. However, if (as appears to be the case with Rivian, pre-increase), each marginal unit is unprofitable, you can't make that up with future growth or scale. If they could never have been profitable at scale at the original pricing, and they knew it, that's an important nuance that they didn't disclose.

2) Customer attraction/retention: They disclosed this risk. But, at least according to the complaint, they knew at IPO that they had to raise prices, which would drive away a lot of customers. In many ways, this can cut against Rivian. Here they are saying that customer retention is key, but allegedly withholding negative information about future price increases that will materially impact that key metric.

And a third point about litigation in general: you may be right that after a full trial on the merits, a jury would say that these risks were adequately disclosed and/or the market was sufficiently aware, so Plaintiffs get nothing. However, even if you're right, that doesn't mean the suit gets tossed out at this stage.

If it is at all possible for a jury to find for the plaintiffs - here, a question of fact about whether the disclosures you highlight were sufficient - then the matter goes the distance. This is:

• expensive (tens of millions of dollars in fees);
• disruptive (the entire c-suite and many others get their emails searched and the key ones turned over to the other side, then they get deposed);
• embarrassing (your stupidest out of context emails get dissected in public);
• extremely risky (you're putting a 9-10 figure decision in the hands of 12 random strangers).

So how confident are you that a jury would agree? 75% 80%? That's pretty confident! But even at those favorable odds, if the potential liability is a billion dollars, you'll rationally pay 2-300 million or more to make this go away and avoid the risk and embarrassment.

No wonder all these plaintiffs' lawyers have their own planes.

And that what sucks about the entire system, it is in my eyes legalized extortion. It could be a coin toss but are you willing to pay millions….

While I’m at it and throwing my opinions around (we all know what people say about opinions and a******s) hate NDAs in a lawsuit settlement that smells like legalized witness tampering.

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[IlliniRivian]

The IPO mentions: Rivian was "a growth stage company with a history of losses and expect(s)to incur significant expenses and continuing losses for the foreseeable future." Rivian also stated in the IPO: "The success of our business depends on attracting and retaining a large number of customers. If we are unable to do so, we will not be able to achieve profitability."

Every company whether in an IPO or during Quarterly and Annual disclosures makes some sort of generic market (and customer and price) risk disclosures. If this is all a company had to do to avoid securities fraud charges, regardless of what other information the company knew and did not disclose, then the securities laws would have no value at all.

 

[RWerksman]

And that what sucks about the entire system, it is in my eyes legalized extortion. It could be a coin toss but are you willing to pay millions….

And that is why you, as a executive in an organization, need to be mindful about the decisions you make. Earlier in the thread, there were a few key decisions that Rivian could have made to reduce the risk of a situation like this. They chose to do none and opened themselves up to liability.

This is one of the reasons why executives are highly compensated with stock options and whatnot - it's to ensure alignment between organization goals and individual ones. This whole scenario could have been stopped by a single individual, he failed to do so, and now both he individually and the organization is (and likely will be) paying the price for it.

Excellent take by @paariv btw.

 

[nc10]

Two points in response:

1) Projected Losses: There are a lot of reasons for being unprofitable. If a startup is investing in growth and future capacity, it may not be profitable as an enterprise but still can be cash flow positive on each individual unit. However, if (as appears to be the case with Rivian, pre-increase), each marginal unit is unprofitable, you can't make that up with future growth or scale. If they could never have been profitable at scale at the original pricing, and they knew it, that's an important nuance that they didn't disclose.

..................................................

..... But, at least according to the complaint, they knew at IPO that they had to raise prices, ...

As a counter point, from reading the S1, looking a raw material prices, etc, I (highly) doubt incremental production is cash flow negative even at old pricing. Additional production will still help improve cash flow (make less negative). I would expect its not realistic at any kind of mainstream pricing to get a decent return on the investment and research if all they ever sold was 160,000 R1 or R2 vehicles out of the Normal plant (or whatever the capacity is). The global infrastructure, research costs, etc are just too big to be covered, need a much larger business. Rivian did disclose the nuance that they wouldn't be profitable at the current scale, that they needed more revenue streams, another factory, more sales volume.

I agree with most of your part 2 statements. Lawsuit is seriously painful. Seems like it could have been avoided with a better strategy. Still doesn't make me feel sympathy for those bringing the suite. Admittedly, there might be something still hidden at Rivian that will..

Rivian did not "have" to raise prices like they did for all pre order holders, they chose to. The price increase would have generated ~~ $1 billion more cash pretax (70,000 vehicles X $15k) over the next couple years. Huge number. But the IPO pricing was more than a billion higher than the original IPO numbers Rivian was thinking, so they had cash to at least have considered holding preorder pricing, or approaching it more slowly, etc.

To me, its also hard to make the case that any investor shouldn't expect a price hike on future sales, likely significant and soon, given all the statements in the S1, and current supply chain woes and inflation.

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