VC Decries Airbnb’s Recent Funding for Founder Control and Cashout • Hacker News Board

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

#121

Post by 0x12 » Sun, Oct 02, 2011, 8:07 AM UTC

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.…

Probably the founders of AirBnB would agree that theirs is a risky business, which is one excellent reason to take some money off the table.

Think of it as hedging your bets, on the one hand you keep a large chunk of stock because the company may weather all the storms ahead successfully, on the other hand it may not. The insecurity can be translated in to a strategy where you remove some money now in case the 'worst case scenario' becomes a fact.

Nobody is forcing any of these guys to do business under these terms. If the VC doesn't want to be part of the round then they should just pass on it, it's not like there is a guy with a gun behind them making them ink the contract. If they don't like the terms, don't do the deal.

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

#122

Post by 0x12 » Sun, Oct 02, 2011, 8:10 AM UTC

If you don't like the terms of the deal, don't do the deal (he doesn't want to do the deal, see third and next to last paragraphs of the email).

A VC complaining about the terms under the pretense that 'the little guy is treated unfairly' is a bit like royalty complaining about the price of cake.

Nobody forces him to do this deal on these terms. He's just scared to miss out on a big hit, he'd like the ring side seats to be cheaper by keeping all the money in the company or by buying out some of the founder stock.

Too bad, you can't have it both ways.

He may have a point about early employees (a 'special dividend' that excludes certain shareholders is not very elegant) but it is not his to make, and the dividend in this case was to 'common stock' which seems to imply that anybody with vested shares participates in that dividend.

His 'concern' is about the unvested employees, but that's a nonsense argument, as long as your stock is unvested, you don't have any stock.

Options do not participate in dividends until you exercise them, they never do because they are not stock and that's a pretty clear-cut thing.

Pretty low-class to dump this email in the public domain, I think that people will remember this when dealing with this particular investor in the future.

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

#123

Post by [deleted] » Sun, Oct 02, 2011, 8:18 AM UTC

wisty wrote: post #118

garry wrote: post #81

Earlier quoted context omitted.

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 t…

So, he was risking other people's money, hoping he would be able to reward himself for taking those risks? Sounds like great CEO material. Using multiple credit cards to fund a risky investment is irresponsible.

[deleted]

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

#124

Post by ssx » Sun, Oct 02, 2011, 8:22 AM UTC

gojomo wrote: post #73

ssx wrote: post #25

Earlier quoted context omitted.

It is a huge percentage of their funding, around 1/6th. If a company where to raise 6m and the founders got 1m not by equity, but by dividends! That just doesn't happen. If the founder's want to sell some of their equity, I'm fine with that, but that is NOT what happened here. This is purely a pay-day. If I knew my company was going to be the next eBay for realestate, why would you hamper your company by taking 21m o…

If the founders retain a majority, this is less than 4% of their stake — that percentage is more relevant in analyzing the confidence signalling and motivations than a superficially large "$21 million" figure.

Clearly you still don't understand. They didn't sell 4% of their stake. If they did that, it would be somewhat reasonable. What they got was a dividend. In other words a bonus.

And yes the figure is still "large" because it is 1/6th of their funding that goes to their pockets, rather than the company.

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

#125

Post by georgespencer » Sun, Oct 02, 2011, 12:04 PM UTC

garry wrote: post #79

sbov wrote: post #75

Earlier quoted context omitted.

Not sure how normal it is, but I've never worked for a startup where I made more than the founder.

At YC startups especially, it is quite common. Founders often take the minimum amount of money necessary to survive. But they will often pay market (especially after Series A) or near-market to their hires, plus equity.

Most intelligently run startup should do the same thing. You should be hiring people who will add more value to the business. Often you should be hiring people who are smarter than you.

It's the same principle which means if Steve Jobs came to me and said he wanted to be involved in my startup, I'd happily hand over 60% of my equity to him. The 40% I'd be left with, whilst proportionally lower than what I had previously, would be worth far more than what it was before.

At the moment I earn my rent + expenses from my business. As and when we close our next round of funding, I'll likely formalise this arrangement (at the moment we're boxing clever with the tax man by paying me in various ways), but I'll definitely pay market + equity for early hires.

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

#126

Post by georgespencer » Sun, Oct 02, 2011, 12:06 PM UTC

portman wrote: post #88

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-stag…

> Palihapitiya agreed that there should be a secondary component to the financing.

Agreed. I think what OP meant was "founders cashing out [using this method rather than a secondary sale]" is a big red flag.

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

#127

Post by 0x12 » Sun, Oct 02, 2011, 12:53 PM UTC

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…

> The point that Chamath made is that the money is ONLY going to the founders and maybe some initial investors. Employees are being locked out of this.

You seem to have missed an important detail: the dividend was to 'common stock', without a full list of stockholders you can not make the claim that employees are being locked out of this.

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

#128

Post by iamelgringo » Sun, Oct 02, 2011, 1:21 PM UTC

patio11 wrote: post #28

I must have missed the post where a VC said "Guys, sorry, love your company but I couldn't in good conscience participate in a round where the rich people get paid and the poor people are told to wait for an exit." I must have missed that post quite frequently, because that describes every VC round ever . A $120 million investment round means that about $2.4 million in cash money just moved from the limited partners…

$120 million fund. 2% management fee = $2.4 Million a year.

$2.4 Million a year sounds like a lot initially, but when you consider local salaries and costs associated with this. You might think that VC's make tons of money, but when you consider that the $2.4 Million has to fund their entire business, and when you look at how the costs break down, it starts to look a bit more reasonable.

Here's how those costs break down:

Office space on Sand Hill Road: 5000 sq ft @ $60sq ft / year = $300,000 3 exec admins @ $ $80k / year = $240,000 2 Associates @ $150k / year = $300,000 2 Analysts @ $100k / year = $200k 4 partners @ $300k / year = $1.2M Marketing / sponsoring events @ $100k / year Legal fees @ $300k / year

Now, when you exclaim that a $300k salary is exorbitant, consider that most engineering managers in Silicon Valley make about that much. $300k will allow you to purchase a house in San Jose ($500k for an average house in the burbs), but it won't let you purchase anything in Palo Alto (over $1M, easy. Monthly payments are around $7k).

Nurses working the night shift in Silicon Valley make around $150k a year without working tons of overtime. Firemen and policemen make about the same. An ER tech at a hospital makes about $70k.

Add to that, that most partners and associates at VC firms will end up working 80 to 100 hours a week. So, partners will end up having an hourly wage of about $75 an hour, which is what PHP contractor will make in the area. A decent Rails contractor will bill about $150.

So, when you break it down, the greedy blood sucking vampire VC's... really don't make as much as it's made out to be. A number of them are actually pretty nice, and great people to have a beer with. And, it's actually a pretty hard job.

Full Disclosure: I haven't made a penny from VC's. I've had a couple sponsor events for Hackers & Founders, and a number of them have been really helpful in teaching me the ropes of Silicon Valley.

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

#129

Post by lutorm » Sun, Oct 02, 2011, 2:42 PM UTC

jack7890 wrote: post #36

patio11 wrote: post #28

I must have missed the post where a VC said "Guys, sorry, love your company but I couldn't in good conscience participate in a round where the rich people get paid and the poor people are told to wait for an exit." I must have missed that post quite frequently, because that describes every VC round ever . A $120 million investment round means that about $2.4 million in cash money just moved from the limited partners…

No, that money doesn't go directly into the partners' pockets. It also goes to pay the VC firm's rent, travel cost, salaries of associates and support staff, legal/accounting costs associated with the deal, and a bunch of other things. It is generally accepted that a vast majority of a VC partner's income comes from their share of the fund's return, not from the management fee. It is not unheard of for a VC firm's co…

It is not unheard of ... that the partners loose money unless the fund has a positive return

Doesn't that seem reasonable? With the huge potential upside, shouldn't there be an associated risk?

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

#130

Post by keeptrying » Sun, Oct 02, 2011, 2:53 PM UTC

steve8918 wrote: post #68

keeptrying wrote: post #61

Earlier quoted context omitted.

Your "little guy" has been earning a salary for the last 3 years in the startup - in fact he makes more money than the founders. I still think its okay to compensate the founder for getting the app to this point.

You should probably read this prescient thread a few weeks back. If you go through the comments, the majority of early employees got screwed by the founders. The ones that benefited are the best-of-breed companies like AMZN, GOOG, etc. They took care of their employees. http://news.ycombinator.com/item?id=2958766

I'm not talking about the final exit. I'm talking about an award to the founders if they can get the company to a billion dollar valuation. That's all I'm talking about. And not Fu money but something of the order of 1million which would give the entrepreneur a small nest egg for having gotten this far but doesn't really make him financially secure.

And I agree that shafting employees is reprehensible and downright despicable.