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

there is a special well known definition for a schema when "dividends" are paid using new incoming capital. The dividends you're talking about are supposed to be paid using earnings from the actual business.

If you just mean traditionally, well, if this is a more efficient way to meet the various goals of all parties to the transaction, I'm with founders/investors/innovation, moreso than tradition.

Also, money is fungible. What if AirBnb has earnings from elsewhere that could pay the dividend, meeting the early shareholders' desire for a interim diversifying return? But, that would then leave less capital for expansion. However, new investors are happy investing money that replaces (and then some) the cost of the dividend to support expansion costs.

There'd then be no essential violation of the way you think things are 'supposed to be': just think of earnings paying dividends, and then new investment adding all required expansion capital. Everybody who's a party to the transaction is happy, in a tax/legally-efficient manner, and no one's rights are trampled.

(As I've mentioned elsewhere, I think the main fairness issue would be if anyone who had the legal right to become dividend-eligible, for example by vested option-exercise, wasn't given that chance. But that's an internal fine detail we don't know about this still-in-progress private company financing.)

http://www.quora.com/Airbnb/Why-are-Airbnbs-founders-excludi...

I have no knowledge of specifics outside of the ATD article mentioned, but my read says that the dividend will go to all common shareholders. So employees who have both vested and exercised shares will receive their pro-rated portion of the proceeds as well. It just seems that the founders must hold 93% of the vested shares (21/22.5), which is reasonable given that they started vesting years ago, when they were still in their cereal-selling phase.

Addressing the founders' decision to dividend-to-common instead of secondary selling some of their common shares:

In a typical venture financing, only preferred shares are sold, and there is a price per share that is set by the round's valuation. After closing, the price per share of the common shares/options is determined by external auditors in what is called a 409A valuation process. This process is a little bit of a game, whereby the company tries to come up with reasons (financial models, market comps, etc.) to depress the price of the common shares relative to preferred. This has the benefit of giving subsequent hires a lower exercise price on their options (and eventual higher profit upon exit.)

The price delta between the classes can be as high as 10:1, though it's usually closer to 3:1 and narrows as a company approaches IPO. However, were anyone (founders or employees) to sell common stock in the round, the common price per share would jump to exactly this new clearing price. Since Airbnb is a hot company, it's reasonable to think that buyers would be willing to pay a market price for common that's not far below preferred. And that would mean less upside for all future employees. A dividend-to-common avoids this.

Because Airbnb is so young and fast growing, they still need the allure of the upside of stock options to recruit and retain talent. Any sophisticated investor should understand this dynamic. And yet this dividend annoys them because it means there's a wealth transfer occurring that doesn't increase their ownership.

Let's assume for a second that I'm right and that all vested/exercised common shareholders will see some of the dividend. As food for thought, what if Airbnb had instead said they were going to spend $21M of their newly raised capital for cash bonuses for anyone who had worked for them more than a year -- distributed per employee via this equation: total hours worked * total value created... would the Valley's response have been less uproarious?

Also, a $1M house is affordable if you earn 300k a year. Why would you think it's not? You could probably pay that off in 10 years, far short of the 30 year time span on most mortgages.

If someone was making this statement to me, as a prospective employee at Startup X, a giant red flag would go up. This is a signal that (a) this company isn't aware of what's being offered elsewhere, and (b) this company is projecting what's valuable to me as an employee (no financial gain, but "better working conditions".)

I wish it was that trivial, but this is a quaint notion that simply doesn't work if your goal is to pull in premium talent. It may work once in a while, but long-term -- no way. Maybe that simplicity has worked for you in hiring situations, but in my geography -- you'll end up with mediocre talent.

The bigco environment you mention -- the Amazons, the Googles, the Microsofts -- top flight candidates are using the pool of bigco and startups against each other to gain greater financial rewards. It's leverage, and the top candidates have it and are using it to their advantage.

Play the reindeer games or not, the market is what it is.