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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

#111

Post by icelancer »

mcny wrote: post #76
tptacek wrote: post #41

Earlier quoted context omitted.

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.

How do stock buybacks work (especially in a private company)? Do I as a shareholder access to all the information that the company does? Not trying to sound smart but wouldn't a market with only one buyer mean they will pay the least possible amount? I'm not trying to trash talk buffer. Just wanted to see if there's another angle to this.

One way it can be done:

We issue equity internally, not options. We hold right of first refusal and have independent appraisals of value of the business done, so when you leave, we have the right to purchase the equity back at the last appraised value of the company. Additionally, we also pay dividends (impacted by equity) and profit sharing (not impacted by equity but rather a percentage of salary) to our employees.

These things are what "lifestyle businesses" do, or what basically everyone outside of SV and indoctrinated MBA programs call... businesses.

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

#112

Post by icelancer »

zminjie wrote: post #37
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…

>> For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust.

Only very myopic VCs would think this way globally. If every business did this, it would be terrible. But each business is its own opportunity/set of circumstances, and forcing everyone to 10X+ is as equally stupid as cashing out $1MM on a four year term sheet on $2.5MM invested.

You must evaluate each opportunity individually to maximize profit and growth. The intentions can always be to shoot for hypergrowth, but if the probability drops below the profitability point, you shouldn't be forcing the issue. Terrible investors do this, and it happens fairly regularly, though it's slowing down as founders become a bit more intelligent with their options.

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

#113

Post by icelancer »

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.

Only in this specific timeline. On average over a longer timeframe that is more representative of the market, they definitely would not have.

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

#114

Post by icelancer »

goseeastarwar wrote: post #8

This is the oft-cited dream of founders that think they’ll just pay back the VC’s if the relationship isn’t working out. The reality is that no investor in their right mind would take that deal if they had any confidence in a more successful outcome down the line.

It's reality if you structure the leverage like the CEO did heading into investment rounds. Not everyone can do this and not everyone will prioritize it either.

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

#115

Post by icelancer »

mrhappyunhappy wrote: post #106

Does anyone even use buffer? I remember it gaining traction several years back but that's about it.

The data is open here:

https://buffer.baremetrics.com/

As an anecdote, we are happy paying customers and have been for some time.

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

#116

Post by anemitz »

jVinc wrote: post #51
dyeje wrote: post #40

So the same company that gave paycuts to their entire staff (except the CEO and Director of People) 8 months ago, has enough money to buy out their investors? Interesting. Paycut Discussion https://news.ycombinator.com/item?id=15861043

Sounds a lot like the CEO gauging the company growth and employee pay in order to build up enough cash to push out investors, get a majority so he could "provide liquidity" for himself. I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.

1) I believe most employees were paid more in that discussion from 8 months ago.

2) If any employees own equity it's also in their best interests to buyback shares since they'll own more of the company. It also means the founder(s) see a bigger potential pay out in the future and will continue putting all of their energy into the business.

The Buffer team's idea of success became different from the VC's who initially invested -- it's smart to capitalize on this and buy back your cap table if the price is right, you can afford it, and you think the company will succeed.

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

#117

Post by scarface74 »

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.

From looking at the salary spreadsheet, it looks like they are paid about average. To think that anyone should accept a much lower salary than thier market value on the tiny hope of striking it rich is crazy. Every employee of a non public company should always consider only the cash compensation.

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

#118

Post by scarface74 »

mprev wrote: post #50
dsl wrote: post #43

Earlier quoted context omitted.

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.

There are way too many commenting as if a profitable business is actually a negative thing.

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

#119

Post by scarface74 »

icelancer wrote: post #110
tptacek wrote: post #41

Earlier quoted context omitted.

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.

>> Close-held profitable companies make their shares liquid by buying them back or by distributing dividends (as "profit sharing"). Yes, this is exactly what we do with our equity and our employees. It is ridiculous around Hacker News that this idea has been completely lost and almost everyone focuses on RSUs and unicorn valuations and longshots, rather than simply... I don't know, making a business that very calmly…

It’s as if the idea of working for a company that’s profitable, pays market rates, and may pay a bonus to it’s employees out of its profits is blasphemous....

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

#120

Post by mythz »

rloomba wrote: post #96
jVinc wrote: post #51

Earlier quoted context omitted.

Sounds a lot like the CEO gauging the company growth and employee pay in order to build up enough cash to push out investors, get a majority so he could "provide liquidity" for himself. I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.

I actually had the same thoughts. I'm surprised he's being so transparent about this. I feel for the employees at this company -- just because a company is profitable, doesn't mean that employees are being paid fairly/market rate. I wouldn't be surprised if the founder tries to sell the company in the new few years a discount of the current valuation. With 45% ownership, that's a very large chunk of change.

Buffer is most transparent and open startup I know, they've posted their salaries here:

- https://open.buffer.com/transparent-salaries/

With a calculator here:

- https://buffer.com/salary/

And are open about their sales, subscribers, revenue, churn, etc

- https://buffer.baremetrics.com/

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