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Gumroad raises $5M from Crowd SAFE in first 24 hours

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Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#51

Post by nrmitchi »

PragmaticPulp wrote: post #24
andygcook wrote: post #15

The investment is being done on a SAFE with a $100M valuation cap, not a $100M valuation with equity grants. That means theoretically Gumroad could never have a qualifying event by selling, going public, or raising a properly priced round by accredited investors. And therefore, investors never get an ROI. Dividends also require actual equity, not promissory notes. I’d imagine even if all investors did convert, paying…

> Using a SEAL or the Indie.VC V3 terms seems more inline with how they want to run the company because it includes an instrument for investors to get an ROI with a payback clause if you choose never to sell. My thoughts as well, though apparently it was unnecessary as they filled the round in 24 hours despite the relatively unfavorable terms for investors. > I’d imagine there will be almost no pressure to sell becau…

> despite the relatively unfavorable terms for investors

This is a concern that I have around equity crowdfunding in general, and I hope this situation doesn't go poorly and ruin it for everyone.

The terms as described here are eerily reminiscent of the Toptal story, where at the time many defending Toptal saying "VCs should have known better". Does that same defense apply to a group of individual investors who were (apparently) limited to a maximum 1k check size?

There was a lot of hype around this investment, which convinced a ton of people to try to get in on it, but I'm legitimately worried that the masses don't understand the actual terms of the round

Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#52

Post by adamhp »

whack wrote: post #43
PragmaticPulp wrote: post #16

Gumroad is an interesting cautionary tale for employee equity compensation. The company was declared to have failed several years ago. Employees were laid off and the investors released the IP (built by the early employees) to the founder as a token of goodwill. Presumably, they thought he might use it to start a new company. Story here: https://www.businessinsider.com/startup-failure-gumroad-why-... However, he cont…

> However, he continued running the company with new part-time employees, minus original investors and minus the early employees who built the company. Apparently the company succeeded enough that it's now worth $100 million. Early employees who built the original site presumably don’t have equity because they were laid off and their options expired worthless as they were told the company had failed. Let me start off…

I've seen similar sentiment being repeated about Sahil, even by other successful founders like Nathan Berry.

It is a bit unfair to look at everything in hindsight and assume Sahil acted maliciously. He did what he could to scrap together the resources to save a failing company. It's not like he ran some sort of shell game to rob the original contributors of their equity. People always view the past in this way and it is incredibly biased. You have to go back and step forward in time with each piece of information as it was available, and at the time it appeared the company was surely going to fail.

In any case, I'd be curious to hear from some of the original contributors as to how they felt they were treated or how Sahil behaved.

Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#53

Post by PragmaticPulp »

vmception wrote: post #44
PragmaticPulp wrote: post #16

Gumroad is an interesting cautionary tale for employee equity compensation. The company was declared to have failed several years ago. Employees were laid off and the investors released the IP (built by the early employees) to the founder as a token of goodwill. Presumably, they thought he might use it to start a new company. Story here: https://www.businessinsider.com/startup-failure-gumroad-why-... However, he cont…

The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to. Yeah I guess cautionary tale is the good word here. > watching the early employees lose out on their equity because they were told the company was a failure is not cool eh, they had the choice, this isn't a sto…

> The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to.

That’s a side effect of the problem, not the cause of the problem.

Why did the employee options expire worthless? Because they were issued at one valuation, then the investors changed the valuation to $0. Yet the company and technology didn’t change. In fact, it kept operating with the same brand, same customers, and website.

The investors and founder both dipped the valuation to zero because it was in their best personal interests, dropping employees with options in the process.

That’s why I framed this as a cautionary tale for employees looking to help startups. This wouldn’t have been a big deal if the company simply went through the normal failure process where the IP was sold on the open market in the normal process. Even if the founder had bought the company IP back for $1 if no one else wanted it, that would have at least persevered some appearance of fairness.

Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#54

Post by jelling »

elnygren wrote: post #30
PragmaticPulp wrote: post #16

Gumroad is an interesting cautionary tale for employee equity compensation. The company was declared to have failed several years ago. Employees were laid off and the investors released the IP (built by the early employees) to the founder as a token of goodwill. Presumably, they thought he might use it to start a new company. Story here: https://www.businessinsider.com/startup-failure-gumroad-why-... However, he cont…

This is why you want stock/equity instead. Everything else is just toilet paper until it becomes stock/equity. Usually countries have lots of laws and regulations protecting small shareholders, but not really anything to protect people who might become shareholders one day. I wish companies had easy ways to give out real stock instead of options... it's up to regulators to make this smoother, easier, cheaper.

The problem is that the employee would have to pay taxes on the value of the stack at the time it was issued. Given how high valuations can be and still never pan out, giving employees stock directly would cost them significant amounts of money in most cases.

Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#55

Post by nrmitchi »

duxup wrote: post #42
luckylion wrote: post #21

Earlier quoted context omitted.

The $1000 maximum investment will probably mean that it won't be professional investors, but individuals who will likely not understand the risk and the potential for misuse. Nicely sized to fit into the stimulus check.

I'm concerned about the risk there as well, but I feel like you can spin that both ways. There's a weird intersection with opening investment to anyone and concerns about folks making ill informed choices.

I think there's a difference between "open investing for equity", and "open investing for a thing that one day may turn in to equity given a certain set of events".

The majority of people will assume that "start up investing" or "equity crowdfunding" (or whatever you want to call it) is like the stock market, but on a smaller scale. You invest money, and you get shares in the company.

I don't think the concern is around folks making ill informed choices (Robinhood has shown us that that can happen in the public markets as well), but more around start-up companies taking advantage of the lack of sophistication by the every-day investor in order to push horrendous terms.

Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#56

Post by vmception »

PragmaticPulp wrote: post #53
vmception wrote: post #44

Earlier quoted context omitted.

The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to. Yeah I guess cautionary tale is the good word here. > watching the early employees lose out on their equity because they were told the company was a failure is not cool eh, they had the choice, this isn't a sto…

> The employees didn't pay for their options because the options were "out of the money" and the employees had various confirmations that the shares would not be worth anything, but they still had the choice to. That’s a side effect of the problem, not the cause of the problem. Why did the employee options expire worthless? Because they were issued at one valuation, then the investors changed the valuation to $0. Yet…

I see, thats strange, do we know who the investors were? I didn't look at Crunchbase or anything yet

Just an odd thing to agree to, if the IP had value and there were no creditors but the prospects were bad then this was improper.

If there were creditors, what happened to them?

Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#57

Post by duxup »

nrmitchi wrote: post #55
duxup wrote: post #42

Earlier quoted context omitted.

I'm concerned about the risk there as well, but I feel like you can spin that both ways. There's a weird intersection with opening investment to anyone and concerns about folks making ill informed choices.

I think there's a difference between "open investing for equity", and "open investing for a thing that one day may turn in to equity given a certain set of events". The majority of people will assume that "start up investing" or "equity crowdfunding" (or whatever you want to call it) is like the stock market, but on a smaller scale. You invest money, and you get shares in the company. I don't think the concern is aro…

I wonder how it would be possible to ... make someone know enough to make an informed choice and still allow more opportunities to invest.

I like the idea of opening things up more like this but worry that actual scams could be a problem.

It's not investing but similar to kickstarter and etc problems.

Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#58

Post by PragmaticPulp »

adamhp wrote: post #52
whack wrote: post #43

Earlier quoted context omitted.

> However, he continued running the company with new part-time employees, minus original investors and minus the early employees who built the company. Apparently the company succeeded enough that it's now worth $100 million. Early employees who built the original site presumably don’t have equity because they were laid off and their options expired worthless as they were told the company had failed. Let me start off…

I've seen similar sentiment being repeated about Sahil, even by other successful founders like Nathan Berry. It is a bit unfair to look at everything in hindsight and assume Sahil acted maliciously. He did what he could to scrap together the resources to save a failing company. It's not like he ran some sort of shell game to rob the original contributors of their equity. People always view the past in this way and it…

Frankly, the investors who set the initial valuation (presumably used to set the strike price of the employee options) and later the $0 valuation (rendering the options worthless) and then giving away the IP that they declared worthless (despite the company not fundamentally changing) deserve a lot of the scrutiny.

If the company had simply been left to make their own choices like laying off the employees and buying out investors, this would have been a different story.

Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#59

Post by joshmanders »

vmception wrote: post #47
joshmanders wrote: post #41

Earlier quoted context omitted.

I'm saying Shl is a shitty person and screwing the original creators of Gumroad out of their equity is just a drop in the bucket for the shitty things he's done, and Nathan creating ConvertKit Commerce in direct competition with Gumroad doesn't negate the things Nathan brings up, and other people have brought up in light of Shl taking peoples money for nothing in return. People are too quick to just ignore things peo…

So neither you or Nathan have posted what you would like to happen and why. What is that? Rebrand Gumroad instead? A lower valuation? Different kind of security issued with more rights? Shi should be shut out from the capital markets and corporate sphere forever? PSA to investors who have already 100% subscribed the max raise? I'm just grasping, what do you guys want to happen?

Why do we have to want something like that to happen? Why can't we just be like "Hey, just so you know, this stuff happened. Make sure you're not being duped into investing in Gumroad without knowing who you're investing in." Especially considering the terms on Republic not favorable at all for investors.

Re: Gumroad raises $5M from Crowd SAFE in first 24 hours

#60

Post by vmception »

ketamine__ wrote: post #37

Is it just me or are most of the crowd funding opportunities horrible? Valuations too high, terms suck, company sucks.

Not just you, I've wasted a lot of time with founding teams that don't have access to venture capital due to lack of network, they so often also have a lack of awareness on what a good deal looks like, opting for completely arbitrary sweeteners that just make them look desparate and further uninvestible.

Hope the deal flow improves.

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