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Hot but Not That Hot: Tinder Stake Sale Puts Valuation of Whole Startup at $500 Million

Will IAC's Barry Diller let the popular dating app it controls run wild?

As in dating online, a Bloomberg report from earlier today that put the valuation of popular dating app Tinder at $5 billion was a little too good to be true.

Well, a lot, by a factor of 10, according to numerous sources close to the situation. (Bloomberg has drastically corrected its original inaccurate post, which I can no longer link to.)

In the real transaction, which happened quickly several weeks ago, well-known Silicon Valley investor Chamath Palihapitiya sold his 11 percent stake in Tinder to IAC for about $55 million. That values the Los Angeles-based startup — which recently claimed it makes 12 million “matches” a day — in the $500 million range.

By any yardstick, this is still a hefty number for the nascent company that has yet to earn meaningful revenue and, of course, is unprofitable.

In addition, unlike a lot of comparable startups, Tinder is largely owned by IAC, the conglomerate of Internet and media properties controlled by longtime media mogul Barry Diller. According to sources, IAC owns more than 70 percent of Tinder, with the rest of the shares in the hands of its three founders and handful of employees.

More to the point, though Tinder is run relatively independently by CEO and co-founder Sean Rad, IAC controls about 95 percent of the voting shares.

That puts the very promising Tinder — which has exploded onto the dating scene and captured the imagination of legions of young adults via its addictive swiping app — in the very awkward position of being an extremely hot startup with a very strict parent.

That is one of the reasons, said sources, that Palihapitiya sold his shares. According to those familiar with the situation, within his ownership agreement was a mutual put/call option clause, which gives the holder the right to sell or buy shares that will trigger by early next year. With the large ownership stake by IAC, Palihapitiya apparently determined that he would likely not prevail in keeping his shares and decided to sell now in advance of that clause triggering.

“It was a good time to get out of the way as Tinder moves into the next phase,” said one source.

The transaction, though, will call attention to a long-running debate going on inside IAC and also Tinder about how to best grow the company going forward. Both have been approached by nearly every venture firm in Silicon Valley interested in investing in Tinder, including Benchmark Partners and Sequoia Capital.

But, said several sources, Diller has decided he does not need such an investment for capital alone. Those sources said he is more likely to only bring in one new investor to help Tinder in its efforts to attract talent and scaling expertise and perhaps create an equity structure similar to other startups.

It’s clear Diller has a winner on his hands and now he has to keep it from waning into its most important period of growth.

One option that had been weighed and set aside for now has been to spin off Tinder and other IAC dating properties, and OKCupid, and sell a piece of that entity to an outside investor.

What Diller decides to do will also have to weigh how well he can hold onto Tinder’s founders within the larger organization or if another structure is ultimately needed to do so.

“There are a lot of ways to unlock this incredible property from inside a company, inside a company, inside a company,” said one person close to the situation. “The question is: Will Barry give up some control?”

He might not have to, given other companies have spun out promising properties — EMC did that with both VMware and Pivotal Labs successfully, while also maintaining a large stake.

Interestingly, Tinder came out of Hatch Labs, which was a now defunct joint effort by IAC and Palihapitiya’s Xtreme Labs. He then sold Xtreme to Pivotal last year for $65 million, but kept his stakes in Tinder and several other Hatch projects.

IAC’s stock was briefly impacted by the incorrect Bloomberg story today, rising dramatically, until a company called the valuation inaccurate (math is hard!). In addition, Palihapitiya tweeted that the value of his stake — as much as he probably would like it to be — was not quite that lofty.

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