Ask HN: How do founders end up broke? • Hacker News Board

Re: Ask HN: How do founders end up broke?

#31

Post by Sohum » Mon, Nov 08, 2010, 5:20 AM UTC

Sohum wrote: post #26

3pt14159 wrote: post #5

Liquidation preference is the number one way that founders end up with nothing. Works like this: VC invests $1m with a, say, 5x liquidation preference then if they company sells for, say $6m the VC gets the first $5m and the remaining $1m is split according to equity. http://www.gabrielweinberg.com/ has some really, really good articles on this kind of thing.

But if the company sold for less than $5m, the founders would get nothing? Probably ignorance here, but if the company sold for less, say $4m are the founders now in debt for the remainder of the 5x agreement?

So the founders who own majority of the company, can be outnumbered on the board and have little influence over "strategic tactical" decisions etc?

Re: Ask HN: How do founders end up broke?

#32

Post by prodigal_erik » Mon, Nov 08, 2010, 5:25 AM UTC

Sohum wrote: post #29

Stevenup7002 wrote: post #3

>> I've recently read stories of startups that became successful and were bought out for large sums, but the founders received little from the transaction. It depends on what startups you're talking about, there are many reasons as to why this could happen. >> Also, how do cases like Steve Jobs and Harry Osborn occur where they are removed from their own company? Do VC's and Investors really take that much of the com…

Are there a pre-set number of board seats or can new seats be issued as new investors emerge? How did Mark Zuckerberg maintain control of the board, whilst still receiving huge VC investments? So I imagine it something like, he owns majority of the board but not majority of the shares?

Crazy high valuations—investors are paying huge sums for small stakes. If you convince people your startup is worth ten billion dollars, you can raise a billion yet retain 90% ownership.

Re: Ask HN: How do founders end up broke?

#33

Post by growt » Mon, Nov 08, 2010, 5:17 PM UTC

Sohum wrote: post #26

3pt14159 wrote: post #5

Liquidation preference is the number one way that founders end up with nothing. Works like this: VC invests $1m with a, say, 5x liquidation preference then if they company sells for, say $6m the VC gets the first $5m and the remaining $1m is split according to equity. http://www.gabrielweinberg.com/ has some really, really good articles on this kind of thing.

But if the company sold for less than $5m, the founders would get nothing? Probably ignorance here, but if the company sold for less, say $4m are the founders now in debt for the remainder of the 5x agreement?

yes at $5m they will get nothing, but at $4m they won't be in debt. 5x is really a rip-off, but 2x (double-dip) is quiet common.

Liquidation preference at its core is an instrument to protect the investor. Imagine the following scenario:

An Investor gives you $1m for 50% of your company. A year later it sells for $1m (because it wasn't a hit). The investor just lost $500k you made +$500k.