Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

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

open.buffer.com

Post reply on HN
Print view View original

41–50 of 177 posts

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

#41

Post by tptacek »

sushid wrote: post #38
tptacek wrote: post #32

Earlier quoted context omitted.

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.

Close-held profitable companies make their shares liquid by buying them back or by distributing dividends (as "profit sharing").

Remember: to a first approximation virtually all startup equity from all startups is illiquid.

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

#42

Post by jjeaff »

dweekly wrote: post #21
imbusy111 wrote: post #16

Earlier quoted context omitted.

Personally, I think you should treat all stock options/common stock as a lottery ticket with near zero value anyway when joining a startup. In 99% of situations, cash is all you're going to get.

This is practically reasonable but at most companies everyone's in the same boat (including founders / management) that the big upside is going to be a potential future large liquidity event. In this case, the company seems to have transitioned to being content to operate with low growth and high margins. The right thing for an employee to ask for would actually be profit-sharing. I've heard, for instance, this is ho…

While founders and investors may seem to be in the same boat, they rarely are.

Investors are coming from a position of boom or bust to maximize that liquidity event because their success does not hinge solely on your company. If you are a founder, you are all in on it, and unless you are already independently wealthy, or come from money, you would/should most likely optimize for less risk with a healthy upside.

For most founders, making 5-10 million on a liquidity event is a life changing event. For most series a and beyond VCs, that's chump change and they will push to put it all on black and let it ride.

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

#43

Post by dsl »

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?

When VCs (companies that make their money by betting on long shots) and two cofounders walk away, that is a really bad sign for a company. As I mentioned in another comment, if he hadn't had 45% of voting shares, the CEO would be gone.

It sounds like he just wants to turn it into a lifestyle business. Which is cool, they just need to be upfront about bonuses or profit sharing, and ditch equity.

Quick edit: I just re-read my previous comment and realized "cash only" wasn't the correct phrase to use. I meant it to include the other stuff I mentioned here (give employee some amount of cash) not just base salary.

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

#44

Post by jjeaff »

TAForObvReasons wrote: post #20
echan00 wrote: post #19

Earlier quoted context omitted.

Why is he stubborn? Isn't he just running his company his way?

You are permitted to run the company your way when you are wildly successful and can raise money at obscene valuations (see Facebook). Otherwise it is a delicate dance with the investors.

You can run your company however you please until you no longer have 51% voting control.

And don't think for a second that your investors won't do whatever the heck they please once they have controlling interest, up to and including kicking you out of your own company if it serves them better.

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

#45

Post by jjeaff »

nichochar wrote: post #22
sebleon wrote: post #13

> $2.5m of $3.5m was for founders and early team [of Series A money] Terms: > Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders > a return of 9 percent annual interest on their investment at any point So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their…

Who feels bad for VCs though? 1. they didn't have to sign the sheet 2. It's really refreshing to see founders and people with vision be in control for once, instead of the opposite

Stories are legion of VCs throwing their founders under the bus the moment it suits them.

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

#46

Post by odonnellryan »

cycrutchfield wrote: post #39
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.

True, and the risk here would probably make this a "bad investment" in reality.

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

#47

Post by Kpourdeilami »

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!

I think when they invested, they expected more less like a triple-triple-double-double growth from 2014 to 2018.

In 2014 their ARR was $4.6M so investors probably expected their revenue to follow the $4.6M -> $13.8M -> $41.4M -> $82.8M -> $165.6M trajectory. Buffer's current ARR is $15M, which although is pretty good, is not enough for it to work well with the VC model.

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

#48

Post by robhunter »

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

Wasn't a significant amount of the VC money for Buffer allocated to founder liquidity?

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

#49

Post by tptacek »

dsl wrote: post #43
tptacek wrote: post #32

Earlier quoted context omitted.

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?

When VCs (companies that make their money by betting on long shots) and two cofounders walk away, that is a really bad sign for a company. As I mentioned in another comment, if he hadn't had 45% of voting shares, the CEO would be gone. It sounds like he just wants to turn it into a lifestyle business. Which is cool, they just need to be upfront about bonuses or profit sharing, and ditch equity. Quick edit: I just re-…

No. All things being equal, the VC and cofounders leaving is a bad sign. But all things aren't equal: Buffer is so profitable that it can buy out its investors without impacting operations. That's an extraordinarily good sign, one few startups ever find themselves in a position to do.

The Buffer post is extraordinarily clear (almost numbingly so) about the mechanics of their Series A and why they needed to buy their way out of it. They had two structural problems:

(1) the terms of their A round included a strong incentive to liquidate the whole company early, in the form of a perpetual 9% annual interest payment due to the A round investors after 5 years.

(2) the terms of their A round forbade them from extending liquidity to other shareholders, including employee equity holders, without the approval of the A-round lead investor.

Unsurprisingly, Buffer's A-round investors needed to be talked into accepting the buyout, which they took at a substantial premium to their investment in the company.

I do not think the logic you're employing to value these shares is sound. Early exits are usually bad for employees (the lower the exit valuation, the less money is likely to trickle down to employees). Profitability gives Buffer lots of options to maximize returns to long-term shareholders, which is what employees are. To my eyes, Buffer's employee equity is more valuable given this information, not less.

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

#50

Post by mprev »

dsl wrote: post #43
tptacek wrote: post #32

Earlier quoted context omitted.

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?

When VCs (companies that make their money by betting on long shots) and two cofounders walk away, that is a really bad sign for a company. As I mentioned in another comment, if he hadn't had 45% of voting shares, the CEO would be gone. It sounds like he just wants to turn it into a lifestyle business. Which is cool, they just need to be upfront about bonuses or profit sharing, and ditch equity. Quick edit: I just re-…

Can we please stop using “lifestyle business” as a pejorative for everything but hyper-growth companies? Outside our bubble that’s pretty much just what everyone else calls a business.
Post reply on HN