A second director, Accel Partners’ Kevin Efrusy, won’t stand for re-election at the company’s Jun 19 board meeting. As the board rep from a key investor, usually someone like Efrusy would be replaced by another member of his firm. Instead, his slotted successor is Robert Bass, a vice chairman of Deloitte LLP, now nominated for election at the annual meeting. (The changes were reported first by AllThingsD, then confirmed by Groupon.)

But Groupon’s lightning-rod-in-chief –CEO Andrew Mason — isn’t going anywhere. Yet. Mason, the co-founder and one of the largest individual Groupon shareholders, has been criticized for his eccentric management style, which could be forgiven or at least overlooked when he was delivering results.

Investors get a lot less forgiving when growth is in question and you have to restate your first public quarter’s results, especially if accounting methods aren’t the norm. Groupon is being sued by shareholders and may face an SEC investigation .

Howard Schultz is no financial slouch but he’s not a finance guy. Replacing him with the CFO of a major company who speaks fluent transactional and e-commerce adds a kind of financial gravitas. Henry and Bass aren’t investors on a board; they’re experts in managing corporate finance — and doing it in the spotlight of a public company.

Both new directors will join the audit committee chaired by early-in Groupon investor Ted Leonsis. Leonsis also serves on a corporate board that oversees one of the new directors: he joined the AmEx board in 2010 following the credit card giant’s acquisition of Revolution Money. At AmEx, he heads the Innovation and Technology Committee.

As for Mason, I don’t know what it would take to remove him as CEO — or for him to step away voluntarily — but that would be a logical next step if this move doesn’t help the company find more secure financial footing.

The stock dropped 10 percent in late trading to $10.71, continuing a sharp downward trend since the restatement.

GRPN data by YCharts

Thumbnail image courtesy of Shutterstock user [Monkey Business Images].

The latest complaint is a so-called “derivative suit” in which shareholders seek to stand in Groupon’s shoes and enforce the company’s rights against CEO Andrew Mason and other executives.

This is different from an earlier suit in which shareholders are seeking fraud damages based on Groupon’s alleged violation of the Securities and Exchanges Act.

Shareholders are upset over Groupon’s admission in an SEC filing of “material weakness” in its controls. In practice, this meant that the company pulled an accounting fast one over its refund policies — this in turn may have led people to buy Groupon shares at artificially high prices.

The derivative suit not only accuses the executives of abuse of control and breach of duty. It also seeks to shake up  Groupon’s corporate governance, in part by letting shareholders nominate at least three candidates for the Board.

The success of the case will depend on the plaintiffs’ ability to show that it’s “futile” to expect the company’s existing leadership to take action themselves.

The lawsuit says “futility” exists because many executives are longtime friends who will not bring a lawsuit against each other. It also says the executives won’t sue because that would forfeit their directors and officers insurance.

Groupon has gained a reputation as the enfant terrible of the IPO world by racking up a series of legal and accounting scandals in its short life. At least four suits have already been filed over the latest scandal.

Here’s a copy of the derivative suit:

Groupon Derivative Suit Copy

It’s not unheard of for senior execs to do a reverse once they find out the grass isn’t greener or allergy free. But it’s never a good sign when you lose two COOs in a month. Going back to Google as president of the Americas is one thing; doing that instead of sticking with a company on the verge of an IPO and what would usually be seen as a big payday, can send a very different message, no matter how nicely it’s worded.

Then add in this — CEO Andrew Mason, criticized for the way he has handled the company in recent months, is taking over most of the COO role himself. Here’s how he explained it:

We’ve built a fantastic team that has proven itself highly capable, so this change won’t have an impact on operations. In fact, we are using it as an opportunity to reorganize in a way that reflects our evolving strategic priorities. Sales, Channels, International, and Marketing will now report directly to me.

Here’s a note from Margo: “Groupon is a great company and I feel privileged to have worked there even for a short time. It was a hard decision to leave as the company is on a terrific path. I have complete confidence in the team’s ability to realize its mission.” We wish her well.

But the biggest hit comes from the revenue restatement in an amended S-1/A filed with the SEC Friday afternoon, according to a report from AllThingsD. That follows a canceled road show and other missteps surrounding the IPO, including controversy over a leaked memo by Mason.

It’s safe to say quite a bit of the luster on Groupon has worn off over the past couple of months, which has also dovetailed with a rough patch for the stock market in general. The company still hopes to go public in October, according to reports from last week, and it posted a 36 percent in revenue during its last quarter under the old method of counting the money.

The memo, first reported by AllThingsD, was written by Andrew Mason, Groupon’s co-founder and CEO.

Although the company is in a quiet period leading up to the IPO, Mason writes that he was motivated to compose the memo when his threshold for bad Groupon press went from “negative” to “hilarious”, after reading an article about the company questioning its cash position. “I’ve never been more confident and excited about the future of our business,” he wrote to counter that claim.

But this is no ordinary, short staff memo rallying tired workers’ spirits and inviting them to a company barbecue. It runs to nearly 2,500 words and feels more like a well-thought out defense of the company, covering areas like accounting practices; revenue projections (12 percent growth expected this month over last month); and even an explanation of why Groupon is spending 20 percent of its revenue at the moment on marketing.

(That last bit is particularly messy — even Mason admits that his explanation is difficult to understand. Only time will prove if it’s a lot of puffery or a significant and new approach to how to grow and then maintain marketing businesses.)

Given the quiet period rules, WSJ points out that the “leaked” letter may well have been a simple and indirect route to bigging up the company at a time when it isn’t allowed to speak about itself publicly, for fear of influencing its IPO, even as others are allowed to say whatever they want to about the company:

“While we’ve bitten our tongues and allowed insane accusations…to go unchallenged publicly, it’s important to me that you have the context necessary to brush this stuff off,” he tells his staff — and maybe the rest of us would-be investors, too.

The negative press, however, does appear to keep coming. Just today, Experian Hitwise released its latest figures assessing traffic going to Groupon and its biggest competitor, LivingSocial.

Notably, it says that Groupon traffic as of last week has dropped off by nearly 50 percent since its peak in June 2011, while LivingSocial saw growth of 27 percent during the same period. But overall, the daily deal / aggregator category of sites had 25 percent fewer visits in that period. (These numbers cover web-only traffic and do not include mobile or app-specific traffic, the researchers note.)

One thing that Mason doesn’t touch on in his memo is the quality of the service that Groupon is offering. Hitwise says that a survey of users in June found that while 44 percent said they use daily deal websites, 52 percent said they felt overwhelmed by the number of bargain-boasting emails they receive on a daily basis. Hitwise further suggests that the more recent drop-off in usage is the result of “deal fatigue” and/or a lack of relevant deals.

Appropriately enough, the Groupon memo came to light on the same day that one of Groupon’s competing services, Facebook Deals, was canned by Facebook — no specific reason given for the cancellation, but it’s not the brightest message to give out for the daily deals sector, either.

Given all that, it only makes sense that his letter to prospective shareholders introducing Groupon’s IPO, initially listed at $750 million, would have a kind of personality you don’t often see in an SEC filing.

Think Google (NSDQ: GOOG) IPO manifesto crossed with Midwestern sensibilities and a desire to be viewed as staunchly independent after you’ve raised more than $1 billion and filed to raise more from the public. Here’s the letter:
————————————————————
Dear Potential Stockholders,

On the day of this writing, Groupon’s over 7,000 employees offered more than 1,000 daily deals to 83 million subscribers across 43 countries and have sold to date over 70 million Groupons. Reaching this scale in about 30 months required a great deal of operating flexibility, dating back to Groupon’s founding.

Before Groupon, there was The Point-a website launched in November 2007 after my former employer and one of my co-founders, Eric Lefkofsky, asked me to leave graduate school so we could start a business. The Point is a social action platform that lets anyone organize a campaign asking others to give money or take action as a group, but only once a “tipping point” of people agree to participate.

I started The Point to empower the little guy and solve the world’s unsolvable problems. A year later, I started Groupon to get Eric to stop bugging me to find a business model. Groupon, which started as a side project in November 2008, applied The Point’s technology to group buying. By January 2009, its popularity soaring, we had fully shifted our attention to Groupon.

I’m writing this letter to provide some insight into how we run Groupon. While we’re looking forward to being a public company, we intend to continue operating according to the long-term focused principles that have gotten us to this point. These include:

We aggressively invest in growth.

We spend a lot of money acquiring new subscribers because we can measure the return and believe in the long-term value of the marketplace we’re creating. In the past, we’ve made investments in growth that turned a healthy forecasted quarterly profit into a sizable loss. When we see opportunities to invest in long-term growth, expect that we will pursue them regardless of certain short-term consequences.

We are always reinventing ourselves.

In our early days, each Groupon market featured only one deal per day. The model was built around our limitations: We had a tiny community of customers and merchants.

As we grew, we ran into the opposite problem. Overwhelming demand from merchants, with nine-month waiting lists in some markets, left merchant demand unfilled and contributed to hundreds of Groupon clones springing up around the world. And our customer base grew so large that many of our merchants had an entirely new problem: Struggling with too many customers instead of too few.

To adapt, we increased our investment in technology and released deal targeting, enabling us to feature different deals for different subscribers in the same market based on their personal preferences. In addition to providing a more relevant customer experience, this helped us to manage the flow of customers and opened the Groupon marketplace to more merchants, in turn diminishing a reason for clones to exist.

Today, we are pursuing models of reinvention that would not be possible without the critical mass of customers and merchants we have achieved. Groupon NOW, for example, allows customers to pull deals on demand for immediate redemption, and helps keep merchants bustling throughout the day.

Expect us to make ambitious bets on our future that distract us from our current business. Some bets we’ll get right, and others we’ll get wrong, but we think it’s the only way to continuously build disruptive products.

We are unusual and we like it that way.

We want the time people spend with Groupon to be memorable. Life is too short to be a boring company. Whether it’s with a deal for something unusual, such as fire dancing classes, or a marketing campaign such as Grouspawn ⁽¹⁾, we seek to create experiences for our customers that make today different enough from yesterday to justify getting out of bed. While weighted toward the measurable, our decision-making process also considers what we feel in our gut to be great for our customers and merchants, even if it can’t be quantified over a short time horizon.

⁽¹⁾ Grouspawn is a foundation we created that awards college scholarships to babies whose parents used a Groupon on their first date.

Our customers and merchants are all we care about.

After selling out on our original mission of saving the world to start hawking coupons, in order to live with ourselves, we vowed to make Groupon a service that people love using. We set out to upturn the stigmas created by traditional discounting services, trusting that nothing would be as crucial to our long-term success as happy customers and merchants. We put our phone number on our printed Groupons and built a huge customer service operation, manned in part with members of Chicago’s improv community. We developed a sophisticated, multi-stage process to pick deals from high quality merchants with vigorously fact-checked editorial content. We built a dedicated merchant services team that works with our merchant partners to ensure satisfaction. And we have a completely open return policy, giving customers a refund if they ever feel like Groupon let them down. We do these things to make our customers and merchants happy, knowing that market success would be a side effect.

We believe that when once-great companies fall, they don’t lose to competitors, they lose to themselves-and that happens when they stop focusing on making people happy. As such, we do not intend to be reactive to competitors. We will watch them, but we won’t distract ourselves with decisions that aren’t designed primarily to make our customers and merchants happy.

We don’t measure ourselves in conventional ways.

There are three main financial metrics that we track closely. First, we track gross profit, which we believe is the best proxy for the value we’re creating. Second, we measure free cash flow-there is no better metric for long-term financial stability. Finally, we use a third metric to measure our financial performance-Adjusted Consolidated Segment Operating Income, or Adjusted CSOI. This metric is our consolidated segment operating income before our new subscriber acquisition costs and certain non-cash charges; we think of it as our operating profitability before marketing costs incurred for long-term growth.

If you’re thinking about investing, hopefully it’s because, like me, you believe that Groupon is better positioned than any company in history to reshape local commerce. The speed of our growth reflects the enormous opportunity before us to create a more efficient local marketplace. As with any business in a 30-month-old industry, the path to success will have twists and turns, moments of brilliance and other moments of sheer stupidity. Knowing that this will at times be a bumpy ride, we thank you for considering joining us.

Groupon SEC filing 6.2.2011

Much like Twitter, which grew as a side project out of failed startup Odeo, Groupon emerged in 2008 from a startup called The Point. Offering one deal a day, in its first year the company brought in revenue of $98 million; last quarter alone it had revenue of $644.7 million with 83.1 million subscribers and 28.1 million Groupons sold. Those subscribers don’t come cheap. Gross profit, one of Groupon’s favorite metrics, was $270 million with a revenue cost of nearly $375 million but Groupon lost $102 million in that same quarter after operating expenses. The accumulated deficit as of March 31: $522.1 million

Mason said at D that Groupon has more than 8,000 employees in 46 countries, largely the result of a relationship-based sales model that requires deep staffing. (The filing says more than 7,000 employees in 43 countries.) That staffing, its marketing model and its international expansion make it Groupon an expensive place to operate. By comparison, Twitter has roughly 500 employees.

Groupon has raised more than $1 billion so far, including $135 million from Digital Sky Technologies and Battery Ventures last year followed by a whopping $950 million round from existing investors and a group including Andreessen Horowitz, Greylock Partners, Kleiner Perkins Caufield & Byers, Maverick Capital, Silver Lake, and Technology Crossover Ventures.

The valuation was reported then to be just under $5 billion. Estimates of Groupon’s potential valuation as a public company go as high as $30 billion.

The most recent tech IPO turned out to be considerably under priced. LinkedIn (NYSE: LNKD) shares more than doubled from its $45 per share price when it debuted May 19 and is still trading at more than $75 a share.

Why are they looking at it? Because that’s what companies eventually do. And why won’t he admit to turning down the reported Google (NSDQ: GOOG) offer of billions? “It’s not respectful to the other people involved.”

After one barrage, Mason insisted on explaining himself before he moved to another topic. He spoke of observing someone years ago and decided, “What a corporate douchebag. I never want to be like that.” What bothered him most about the questions he couldn’t answer was it made him feel like that.

But this was no Mark Zuckerberg meltdown. Mason, wearing a short-sleeved shirt and a Chicago attitude, more than held his own, answering questions alongside Foursquare’s Dennis Crowley and winding up with a wild event idea best described as Tony & Tina’s Wedding meets The Walking Dead.

Those eligible to sell include founder and CEO Andrew Mason, Eric Lekofsky, and board members Ted Leonsis, Brad Keywell, John Walter, Jason Fried, Peter Barris, Harry Weller and Kevin Efrusy. That will give the individual and institutional investors some return despite the decision to reject an offer from Google (NSDQ: GOOG) reported to be in the range of $5 billion to $6 billion.

Put another way, the $950 million Groupon says it could raise in this seventh round of founding is just over the number of dollars the company currently boasts on its site of saving users: $929,684,459 on 21 million-plus transactions. It’s also many times over the $135 million round raised earlier this year from Russian investor DST. It the full round is raised, Groupon will be well past the $1 billion mark. It already has 33 investors; the current round hasn’t been identified yet.

It also has global expansion plans and a growing number of competitors. Groupon didn’t disclose a revenue range in the filing but, citing unidentified sources “close to the situation,” Kara Swisher earlier this month reported that the company was headed for $2 billion in revenue this year. That’s not all Groupon’s to keep; roughly half goes to the merchants.

Update: I should have included this earlier. TechCrunch reports that the round was led by DST with Fidelity and Morgan Stanley at a valuation of $4.75 billion.