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We Spent $3.3M Buying Out Investors: Why and How We Did It

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Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#31

Post by sergiotapia »

dsl wrote: post #12
kayoone wrote: post #9

Seems like Joel is quite stubborn regarding his values and vision for Buffer, which i believe is a good thing but i can see how it can lead to differences with co-founders and investors once the vision does not align anymore. Felt like it was all over for him when they asked him to eventually step down and from that point he planned to remove them. In the end it also means that their investors most likely lost their…

Came to the comments to say the exact same thing: this is basically just a vote of no confidence in management. I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.

Always ask for cash compensation. Stock options vest super slow, you can get fired before they vest, and if you're super lucky and stay there for years and years, you have to be DOUBLE lucky for them to be worth anything.

Buy this lottery ticket and you'll know if it's a winner in 6 years.

???

Just ask for cash!

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#32

Post by tptacek »

dsl wrote: post #12
kayoone wrote: post #9

Seems like Joel is quite stubborn regarding his values and vision for Buffer, which i believe is a good thing but i can see how it can lead to differences with co-founders and investors once the vision does not align anymore. Felt like it was all over for him when they asked him to eventually step down and from that point he planned to remove them. In the end it also means that their investors most likely lost their…

Came to the comments to say the exact same thing: this is basically just a vote of no confidence in management. I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.

How did you get there from here? This appears to be an A-round startup that just paid $3MM to gain the flexibility to award liquid equity to (among other people) it's employees. Doesn't that make it better than the average equity-issuing startup?

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#33

Post by syntaxing »

tomasien wrote: post #28
syntaxing wrote: post #24

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

It's fine for the VCs if they can recycle and re-invest that. Otherwise it's a 0.

Can you please elaborate what you mean? The money is only useful to the VC if they can re-invest it elsewhere?

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#34

Post by devcpp »

syntaxing wrote: post #24

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

Yes, you are slightly crazy. The whole idea of VCs is that while most startups are indeed crapshoot investments, some will make returns in the 100x.

1.5x is sometimes "good enough" but it won't keep a VC afloat if all of its investments go like that. Even 2x means that you only get to invest twice and fail once. And forget about profits or a living wage.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#35

Post by glangdale »

syntaxing wrote: post #24

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

Yes, you are crazy to think this. :-)

Buffer seems like a fairly successful startup relative to the average. A roughly 8% return per annum is not a good return for a VC given that many of their investments in a given round will go to zero.

There may be reasons for this going the way it did, but I doubt VCs would be all that happy with this.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#36

Post by noelwelsh »

TAForObvReasons wrote: post #23
eldavido wrote: post #17

There's a lot of negativity here. I give Buffer a lot of credit. They seem to deeply internalize the idea of "realistic expectations" and it sounds like the buy-out was a win-win solution where everyone got (mostly) what they wanted. As he says, the investors might not have been happy about it, but at least he has the backbone to resist trying to squeeze growth out of a market where there's none to be had (in the sho…

The interesting question, if the intention was to stick it out in the long term, is whether raising VC money in the first place was a good idea. Bootstrapping the business would have probably been closer in line with the vision and allowed him to retain control without eventually souring relationships

It's easy to have 20/20 hindsight. The situation was different when Buffer was formed. There weren't as many examples of successful bootstrapped companies and Joel (the founder) was much less experienced.

I don't want to say getting VC was a mistake for Buffer because I can see it might have had an upside of connections and advice for what was an inexperienced team, and I think at that time the management team was more bought into the VC model. Buffer has definitely transitioned away from the VC model, though, and buying out the investors now is the right decision IMO.

A lot of comments in this thread are quite harsh. I applaud Joel for having the courage to honestly share his experiences so others can learn from them.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#37

Post by zminjie »

syntaxing wrote: post #24

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

You are thinking from the perspective of an individual investor. For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust. In order to VCs to take high risks on early stage companies, they need the winners to return 100x so the fund even makes financial sense. It's one of the main reasons why VCs constantly push startups for hyper growth.

This is certainly better than losing the investment completely but I can't imagine the investors being too thrilled about this outcome.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#38

Post by sushid »

tptacek wrote: post #32
dsl wrote: post #12

Earlier quoted context omitted.

Came to the comments to say the exact same thing: this is basically just a vote of no confidence in management. I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.

How did you get there from here? This appears to be an A-round startup that just paid $3MM to gain the flexibility to award liquid equity to (among other people) it's employees. Doesn't that make it better than the average equity-issuing startup?

How are you going to cash that out? Do you want to hold onto a lifestyle company shares when there's no potential liquidity event in discussion?

I'm not going to exercise my options in that situation and you'd be crazy to pay taxes on this year after year.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#39

Post by cycrutchfield »

syntaxing wrote: post #24

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

If those investors had put their money into the S&P500 instead, they would have had a better return on their investment.
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