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VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

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Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#81

Post by garry »

sunnydaynow wrote: post #40
vladd wrote: post #37

Earlier quoted context omitted.

VCs are guys handling money, they need entrepreneurs (guys getting things done) and vice-versa. They sign a contract which mainly defines how each gets to profit from the other one and the boundaries of their interactions afterwards. It's well-known and the web is full of articles about preferred stock, liquidation preference, convertible debt and similar topics. But this article is about something new - a dividend t…

>It's about entrepreneurs screwing early-employees, Yes, that surprised me a lot! Especially from founders that are somewhat "famous" and are connected to YC. I expected they don't play these tricks. Greed? Anyone knows how their employees reacted to this news? If I would have worked 50+ hours for year(s) and then read this... :(

I was early at Palantir (employee #10). Trust me, the founders assumed way more risk than I did when I joined. I didn't even quite understand that fact until I myself started a company. If you know the Airbnb story, you'll know these guys worked their asses off on an idea nobody else believed in. As legend would have it, Joe had a binder of credit cards the way kids would have binders of baseball cards. Think about that sacrifice when you criticize their action today.

Incidentally, this is one of the best reasons to found a company -- equity is distributed in such a way that those who take the biggest risk will be properly rewarded.

Secondly, founders taking money off the table has become common. As mentioned in this very comment thread: "Zuckerberg, Moskovitz, and Parker each got $1m from Accel when they raised their $12.7m Series A according to David Kirkpatrick's The Facebook Effect."

This is both at a far earlier stage, and far more money on percentage basis compared to the overall valuation of the company. I wasn't party to the deal, but I highly doubt any other early Facebookers got liquidity then. But those same people are definitely not complaining today.

I personally don't think anyone got screwed here.

Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#82

Post by staunch »

sek wrote: post #78
staunch wrote: post #76

Earlier quoted context omitted.

I'm giving a example of someone who exemplifies the Silicon Valley mentality that I refer to above.

We were talking about people who do the exact opposite and try to get FU-money before they led companies to success.

Airbnb makes many millions in revenue and has phenomenal growth. They could easily sell the company today for hundreds of millions. That is success.

Instead of selling though, they're raising more money, taking some out themselves, and setting their sights on an even higher level of success.

Makes sense to me.

Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#83

Post by sek »

sek wrote: post #34
Murkin wrote: post #26

Earlier quoted context omitted.

You missed the point, they take the money as dividens. They are not selling their stock for that $20M lump. The only 'foul' thing here, is that their employees (option holders) will probably get nothing.

They sold shares for 20 Million to the investors to pay out this dividend, so the outcome is the same.

Am i wrong?

Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#84

Post by tptacek »

steve8918 wrote: post #23
polymath21 wrote: post #19

Earlier quoted context omitted.

From what I understand, Chamath is okay with cashing out by selling your stock, but what the AirBnB founders are doing is just paying themselves a dividend of $20M (essentially just paying themselves a lump sum out of their funding round and not affecting any of their stock). Please correct me if I'm wrong.

This is my understanding as well. Chamath says that it's fine if all employees have access to this ability to cash out shares, but it sounds like AirBnB is essentially withdrawing money directly from the company, with no opportunity from employees to participate. He says it's basically a cash-grab that only the founders are participating in. I have a hard time disagreeing with him. Did any founders of great companies…

So, I assume you'd agree also that the VCs shouldn't be able to take a dollar out of a deal until employee common stock is liquid? And that they shouldn't be able to take a dollar in management fees until their capital has created a pro-rata amount of liquidity for the employee common stock of one of their investments?

No? That's ridiculous? I agree.

Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#85

Post by gojomo »

vladd wrote: post #47
grellas wrote: post #44

A few thoughts: 1. It is bad form for this sort of thing to be aired publicly. It may give us a voyeuristic fascination on something that is depicted as an internal intrigue within a prominent up-and-coming startup but this is fundamentally company confidential information that is not capable of being aired publicly without significant distortion. Who can answer the implied charges of impropriety? Those most directly…

The 3 points you make forget the little guy: that early employee, whose employee number has 1 digit, who trusted the founders when he accepted the option grant and put 60 hours of work or more each week in the hope of not being screwed when the founders negotiate confidentially with the investors on how the company will move forward. There's no SEC for privately-held companies, there is basically no oversight and the…

You don't know if any 'little guys' were hurt. If the same amount of money had been taken in through sales of additional stock, at the same pre-money valuation, everyone with vested or unvested options would be more diluted. So treating cash-to-early-shares this way (rather than equity sales) can be a slight benefit to all employees and stockholders.

Meanwhile, investors are diversified and have great counsel, so they can look out for themselves.

The only question for me in a situation like this is if there are people who were vested but unexercised, who would have exercised had they known the unique dividend was coming. It'd certainly be nice for a company to give them the info they'd need to participate knowledgeably.

Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#86

Post by vm »

gojomo wrote: post #85
vladd wrote: post #47

Earlier quoted context omitted.

The 3 points you make forget the little guy: that early employee, whose employee number has 1 digit, who trusted the founders when he accepted the option grant and put 60 hours of work or more each week in the hope of not being screwed when the founders negotiate confidentially with the investors on how the company will move forward. There's no SEC for privately-held companies, there is basically no oversight and the…

You don't know if any 'little guys' were hurt. If the same amount of money had been taken in through sales of additional stock, at the same pre-money valuation, everyone with vested or unvested options would be more diluted. So treating cash-to-early-shares this way (rather than equity sales) can be a slight benefit to all employees and stockholders. Meanwhile, investors are diversified and have great counsel, so the…

Secondary transactions don't cause the company to issue more shares. They transfer shares from one party to another, so the total number of shares does not change and existing shareholders take no dilution.

Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#87

Post by [deleted] »

vm wrote: post #86
gojomo wrote: post #85

Earlier quoted context omitted.

You don't know if any 'little guys' were hurt. If the same amount of money had been taken in through sales of additional stock, at the same pre-money valuation, everyone with vested or unvested options would be more diluted. So treating cash-to-early-shares this way (rather than equity sales) can be a slight benefit to all employees and stockholders. Meanwhile, investors are diversified and have great counsel, so the…

Secondary transactions don't cause the company to issue more shares. They transfer shares from one party to another, so the total number of shares does not change and existing shareholders take no dilution.

[deleted]

Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#88

Post by portman »

cletus wrote: post #72

Absolutely 100% agree. Founders cashing out is a big red flag. I said it about Groupon. I've said it before. This really is taking it to the next level: cashing out with a dividend to retain control and ownership. I absolutely agree that for any cash out it should be open way beyond the founders. In fact, this is a good way for larger startups to kick the 500-shareholder limit can just a bit further down the street.…

>> Founders cashing out is a big red flag.

No, it's not. Palihapitiya agreed that there should be a secondary component to the financing.

When a company is "shooting for the moon" and has a chance at a >$1B exit, investors want the entrepreneurs to cash out a portion of their stock, because it gives them the financially flexibility to swing for the fences. It aligns the founders and management team with the late-stage investors.

Fred Wilson does a great job explaining why founders and early investors cashing out in late-stage financings is a Good Thing for everyone.

http://www.avc.com/a_vc/2010/01/the-tug-of-war-between-ma-an...

http://www.avc.com/a_vc/2010/08/angel-liquidity.html

Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#89

Post by user95000 »

steve8918 wrote: post #53
grellas wrote: post #44

A few thoughts: 1. It is bad form for this sort of thing to be aired publicly. It may give us a voyeuristic fascination on something that is depicted as an internal intrigue within a prominent up-and-coming startup but this is fundamentally company confidential information that is not capable of being aired publicly without significant distortion. Who can answer the implied charges of impropriety? Those most directly…

I completely and vehemently disagree with your response. You are acting as if the dot com bust never even happened!! I have no clue how old you are, but if you are over the age of 35, maybe you'll remember that the dotcom "boom" was merely a two-fisted cash grab from investors into the pockets of the founders and VCs. I certainly hope that as in industry, we don't make the same mistake twice in 10 years, lest it will…

Everyone got caught up in the dot com boom. This includes founders, VCs, employee shareholders, public shareholders, and acquiring companies. To blame just founders and VCs as money-grubbers who screwed everyone else makes them sound much smarter than they actually were. Even the best VCs blew hundreds of millions of $ in bad bets, like how Sequoia plowed money into Webvan.

Public investors committed the largest valuation run-ups at the time. Remember how hot day trading was? In the end, they got left with the short end of the stick.

Your general sentiment is right. The people who are rich now are the ones who cashed out when times got frothy. Hard working employees should be given the same opportunity as the people who architect the deal.

Re: VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

#90

Post by sek »

staunch wrote: post #82
sek wrote: post #78

Earlier quoted context omitted.

We were talking about people who do the exact opposite and try to get FU-money before they led companies to success.

Airbnb makes many millions in revenue and has phenomenal growth. They could easily sell the company today for hundreds of millions. That is success. Instead of selling though, they're raising more money, taking some out themselves, and setting their sights on an even higher level of success. Makes sense to me.

Well i see a company with strong competitors, high costs, no competitive advantage and insurance risks.

Their product is an inferior version of hotel rooms.

There is a high possibility that they are bankrupt some day.

What the founders are doing makes perfect sense to me, maybe there will never be an IPO or Exit.

Maybe studying economics diseased my brain, but i can't see why competitiveness doesn't matter any more.

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