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FanDuel founders to receive no cash from sale to Paddy Power Betfair

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Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#121

Post by hn_throwaway_99 »

olliej wrote: post #116
JumpCrisscross wrote: post #86

Earlier quoted context omitted.

> you should never accept anything other than the highest class of preferred stock. If the company is unwilling to give you that, then you should assume that their, or their VC, long term plan is to screw you If this is your mentality, don't work for a start-up. Employees don't get preferred stock. Founders don't get preferred stock. Your downside protection is your cash salary. Asking for preference as a non-capital…

All employees who are getting paid below market rates are providing a direct and ongoing capital investment of their own money. At minimum they are investing the difference between their market rate salary and the amount you are paying them. That is a direct investment in the company that is no different from investments from VCs. In fact I would argue the cash investment of employees must be greater than that of any…

But your advice is still basically "Don't work for a startup", because I still do not know of any startup that would incentivize employees with preferred shares.

I think much better advice is to (a) be sure you have a good understanding of the cap table, and what the liquidation preferences are for the preferred investors, and (b) have a general sense of how likely it is for your shares to be diluted over time.

Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#122

Post by hn_throwaway_99 »

JumpCrisscross wrote: post #100
brudgers wrote: post #93

In some ways, this story sheds light on the philosophical differences between private equity firms like KKR [1] and venture capital. At least when it comes to the fat parts of the Bell curve (and ignoring outliers), private equity investments tend to be premised on gaining control of the companies accepting investment and seek return on each investment. The fat part of the venture capital investment Bell curve (and i…

> private equity investments tend to be premised on gaining control of the companies accepting investment and seek return on each investment Put another way, losing money on a PE deal is terrible. Losing money on fewer than half of one's VC investments is positively great. When FanDuel sold, it didn't have enough upside left to justify pure venture capital. It was a distressed sale whose alternative was closing down…

> In this timeline, employees got a few more years of cash salaries.

I think most of their employees would have easily been able to get jobs elsewhere.

Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#123

Post by clips »

greglindahl wrote: post #120
kinkora wrote: post #118

Earlier quoted context omitted.

That might be true but you also have this bit in the article: > “Mr King is expected to receive a payment of up to $11.3m as a result of the Paddy Power Betfair deal. The firm’s current chief technology officer Robin Spira is due to make up to $3.5m, its legal officer Christian Genetski stands to make up to $6.2m, and it chief financial officer Andy Giancamilli is due to receive up to $5m” (Those add up to $26 m)" Al…

It's usual to pay ~ 10% to the people who are needed to make the deal close. The founders, who have common shares and/or options, knew the terms when they started. If you think any of this is unfair, don't take external funding.

This is in no way typical (and 10% seems very high but it obviously depends on deal size). There will be certain cases where management carveouts are part of a deal, but it's far from the norm. Executives who join at a later stage also receive the same type of common stock / options that the founders have, and they typically don't receive much of an equity payout in comparison.

Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#124

Post by paulsutter »

JumpCrisscross wrote: post #88
paulsutter wrote: post #59

Earlier quoted context omitted.

You're describing participating preferred (that is, investors get paid out once as preferred and again after conversion to common). A liquidation preference is more common than participating, where the preferred investors get paid out (for example) at least 2X their investment (can be any multiplier, the highest I ever heard was 5X). Most investments in Silicon Valley are clean deals, with a liquidation preference of…

> You're describing participating preferred I'm describing non-participating preferred, which as you point out is far more common. Here's how it would go with participating preferred. As before, I invest $10 million at a $90 million pre-money valuation. If the firm sells for $200 million, first I get back my $10 million. Then I convert to common and get 10% of the remaining $190 million, or $19 million. Before I got…

I misread your comment, thanks

These terms are by no means confined to distressed finance. Many unicorns got their “billion dollar” number using adverse terms such as these

Which explains this outcome, Fanduel was a “unicorn”:

https://seekingalpha.com/article/4010443-fanduel-unicorn-bac...

Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#125

Post by sonnyblarney »

olliej wrote: post #82

I will reiterate my prior statements: if you take a job that pays you (in part) in stock, with no path to sell it pre-IPO, you should never accept anything other than the highest class of preferred stock. If the company is unwilling to give you that, then you should assume that their, or their VC, long term plan is to screw you. At this point there have been enough cases where startups have clawed back the shares the…

No, you'll never get preferred shares working for a startup, so don't even ask for them; it would also highlight a misunderstanding of what those shares are.

Preferred shares are for investors, and they have 'preference' during liquidity, i.e. if the company is sold, they get their $X back first, then the rest is split among all shareholders etc..

'Clawback' terms are almost always applied to investors, not employees, in which case, by virtue of type distinction, you'll never get those.

Though it's reasonable to ask about certain aspects of share rights, there's no way on earth a regular startup is going to give you all the details and fine-print on their stocks that'll give you all then information you'd be after.

Unfortunately, basically nobody gets this information when joining a startup. Even later stage investors don't necessarily get to see all the terms of earlier investors, depending on the situation.

Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#126

Post by sonnyblarney »

brudgers wrote: post #93

In some ways, this story sheds light on the philosophical differences between private equity firms like KKR [1] and venture capital. At least when it comes to the fat parts of the Bell curve (and ignoring outliers), private equity investments tend to be premised on gaining control of the companies accepting investment and seek return on each investment. The fat part of the venture capital investment Bell curve (and i…

'Private Equity' and 'Founder' are terms that shouldn't really even cross.

PE wants to incentivize leadership, but the concept of 'founder' and all that means, is somewhat beyond.

That said - KKR etc. definitely want to incentivize company leaders to make money, and might likely put in significant bonuses for CEO's in the event of an acquisition.

But yes ... PE entities may care less about this.

But note that it will also be a 'hit' to KKR's reputation in this area. You can be dam sure that future mid-stage entities are going to think twice about the terms of the deal.

Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#127

Post by sonnyblarney »

brudgers wrote: post #99
startupdiscuss wrote: post #30

Quick math here: “the aggregate value being paid for FanDuel “is approximately $465m”.” “2014 and 2015 respectively led $70 million and $275m” (345 million) “Mr King is expected to receive a payment of up to $11.3m as a result of the Paddy Power Betfair deal. The firm’s current chief technology officer Robin Spira is due to make up to $3.5m, its legal officer Christian Genetski stands to make up to $6.2m, and it chie…

The difference is that the returns of a venture capital fund come from the performance of a few portfolio companies. The returns of a private equity fund come from the performance of most companies. Private equity investors, like KKR here, are happy with the 7% premium return because they usually get it from each investment. The 7% return from liquidation preference would be a poor performing investment in a venture…

7% is a bad return when you risk-adjust this kind of deal.

So many ways it could go wrong. There are less risky ways to make . 7%, with a lot less work.

Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#128

Post by jib »

olliej wrote: post #113
JumpCrisscross wrote: post #97

Earlier quoted context omitted.

> Based on this article alone anything other than preferred stock isn’t viable Common stock pays when companies do well. It diverges from non-participating preferred when companies sell for less than their most-recent valuation. Investors get preferences, employees get cash salaries. > say no executive can make money off a sale of the company or a funding round unless all the employees who have been paid in stock hav…

Again as I have said repeatedly - the ceo got 11 million. It seems that they could have taken less and employees could have taken more. As far as the employees losing there jobs years ago: if that had happened they would have got jobs elsewhere, maybe jobs that paid them what they were worth. Other things that make it theft: people who got the biggest pay outs were the ones he rewrote the charter to ensure that the e…

This is sunk cost reasoning.

No one takes on more debt / raises more funds unless they have to. If your company needs to raise more capital your stock options are worth exactly 0 dollars. You already lost that bet, because your company isn’t solvent without external funds.

The new investors may give you a new bet, but don’t think your original bet still stands - you lost that when you had to do another round of founding. You should also expect the new bet to be significantly worse than the old bet, because you have no leg to stand on in the bargaining of the terms of the new bet.

Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#129

Post by greglindahl »

clips wrote: post #123
greglindahl wrote: post #120

Earlier quoted context omitted.

It's usual to pay ~ 10% to the people who are needed to make the deal close. The founders, who have common shares and/or options, knew the terms when they started. If you think any of this is unfair, don't take external funding.

This is in no way typical (and 10% seems very high but it obviously depends on deal size). There will be certain cases where management carveouts are part of a deal, but it's far from the norm. Executives who join at a later stage also receive the same type of common stock / options that the founders have, and they typically don't receive much of an equity payout in comparison.

Just to be clear, I'm speaking about deals where no money falls on common, which includes the common shares and options held by all of the executives and employees needed to make the deal close.

Re: FanDuel founders to receive no cash from sale to Paddy Power Betfair

#130

Post by [deleted] »

everdev wrote: post #101
olliej wrote: post #82

I will reiterate my prior statements: if you take a job that pays you (in part) in stock, with no path to sell it pre-IPO, you should never accept anything other than the highest class of preferred stock. If the company is unwilling to give you that, then you should assume that their, or their VC, long term plan is to screw you. At this point there have been enough cases where startups have clawed back the shares the…

Isn't there a way to earn shares in a company that convert to cash in the event of an acquisition?

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