According to a Bloomberg report, Ripple’s successful $500 million strategic funding round, which valued the company at $40 billion, included unusual protections for investors. These concessions reportedly gave investors the right to sell their shares back to the company at a profit, along with preferential treatment in the event of bankruptcy.

The report characterized these protective clauses as a crucial form of financial insurance, reportedly mandated after two unnamed investors critically assessed that an overwhelming 90% of Ripple’s staggering valuation was tethered to XRP, the native, highly volatile token of the XRP Ledger. This scepticism is validated by recent market performance of XRP: since its peak near $3.66 in July, XRP’s market capitalization had already plummeted from over $210 billion to a sobering $126 billion by Dec. 8.

Read more: Fortress, Citadel, and Galaxy Join $500 Million Ripple Funding Round

For traditional investing firms, the volatility of XRP and cryptocurrencies in general makes investments in digital asset companies like Ripple inherently risky. To mitigate this, the investors that participated in Ripple’s funding round included a mechanism that effectively guaranteed a profit: the option to sell their shares back to Ripple after three or four years at a guaranteed 10% annualized return.

This guarantee would only be triggered if Ripple failed to go public within that same period, the Bloomberg report added. If Ripple chooses to buy back the shares within the same timeline, the report, citing unnamed sources, states the company would have to offer investors an even higher 25% annualized return.

By agreeing to these stringent investor protections, Ripple made a strategic trade-off: it effectively paid a “premium” to validate the high $40 billion valuation. These concessions mitigated investors’ concerns about the significant risk linked to XRP volatility, ensuring the deal closed at Ripple’s target valuation. The resulting successful round provided Ripple with a crucial “stamp of approval” from top-tier institutional backers.

Meanwhile, Kyle Stanford, director of U.S. venture capital research at Pitchbook, called the terms—which essentially function as a put option with a guaranteed return—“not very common and tend to appear more with investors who aren’t typical venture capitalists.”

Stanford added that these situations could potentially harm the company: “Such situations might force the company to use its cash or seek additional funding rounds to liquidate those investors’ rights, which can reduce funds available for operations and growth.”

Steve McLaughlin, CEO of FT Partners, commented on the unusual terms, saying that while deals with a minimum return for shareholders are not uncommon, they are not typical for a “red-hot, high-growth company.”

• How much did Ripple raise in its latest round? Ripple secured $500M, valuing the company at $40B.
• What unusual protections did investors receive? They can sell shares back with a guaranteed profit and get priority in bankruptcy.
• Why were these clauses included? Investors saw high risk since 90% of Ripple’s valuation is tied to XRP volatility.
• What returns are guaranteed if Ripple doesn’t go public? A 10% annualized return, rising to 25% if Ripple buys back shares.

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