I think all this is OK. The problem is when it's not transparent. Then you have early employees (even some naive founders) with a lot of stock/options who assume they are going to be compensated with the exit. Then it's quite a shock when they aren't. As a veteran of such things (both successful and unsuccessful exits), I make sure to educate my fellow engineers on how these things work and what their realistic expectations should be.
Sell for half a billion and get nothing (2021)
251–260 of 334 posts
Re: Sell for half a billion and get nothing (2021)
#252I'll throw out a VC's perspective on liquidation prefs: 1) I think 1x is very fair and meant to protect investors from bad company behavior. If you didn't have 1x preference, this would be an easy way for an unscrupulous founder to cash out: raise $X for 20% of the company, no liquidation preference. The next day, sell the company and its assets ($X in cash) for, say, 0.9x. If there's no liquidation preference, the V…
Great write up, thanks for sharing this.
As a founder, I'd always though that >1x was predatory with no excuses, but your #2 really clarified that an appropriate situation.
Re: Sell for half a billion and get nothing (2021)
#253I'll throw out a VC's perspective on liquidation prefs: 1) I think 1x is very fair and meant to protect investors from bad company behavior. If you didn't have 1x preference, this would be an easy way for an unscrupulous founder to cash out: raise $X for 20% of the company, no liquidation preference. The next day, sell the company and its assets ($X in cash) for, say, 0.9x. If there's no liquidation preference, the V…
Very enlightening thanks! I wonder if there is or could be some notion of "vesting" over time of the investment such that (1) could not happen. So if the founder tried to sell tomorrow, the investor would get back 1x, but that 1x decays to 0.2x over 5 years or something.
But I guess VCs generally have the leverage and wouldn't want such terms.
Re: Sell for half a billion and get nothing (2021)
#254I think all this is OK. The problem is when it's not transparent. Then you have early employees (even some naive founders) with a lot of stock/options who assume they are going to be compensated with the exit. Then it's quite a shock when they aren't. As a veteran of such things (both successful and unsuccessful exits), I make sure to educate my fellow engineers on how these things work and what their realistic expec…
When founders get hit by this, well, it is their job to understand what they're getting into. They're the ones who can hire lawyers to tell them what it means, who cana ccept or turn down investment, and pivot the company where it should go.
For the employees who get stock options though, it's a despicable move that should get you blacklisted. If you fuck over early employees like that, I will avoid you for life, and tell everyone else to do so too.
Re: Sell for half a billion and get nothing (2021)
#255I think all this is OK. The problem is when it's not transparent. Then you have early employees (even some naive founders) with a lot of stock/options who assume they are going to be compensated with the exit. Then it's quite a shock when they aren't. As a veteran of such things (both successful and unsuccessful exits), I make sure to educate my fellow engineers on how these things work and what their realistic expec…
Right, I suspect many people (including me) wouldn't even know what terms look up to research such things. I get a lot of my knowledge by osmosis from the hn comment section, for better or worse :P
Re: Sell for half a billion and get nothing (2021)
#256Earlier quoted context omitted.
What if you raised 500B and still got nothing? That can happen with 2x or 3x liquidation preference. IDK FanDuel structure (not in article), but they only raised ~ 400M. Yet the investors got every dime up to 550+M.
From an investor standpoint, if I were risking that much momey on a high risk venture, I would want that kind of return to make it worth while and cover the others that don't make it.
From a founder/early employee perspective, if I were risking that much _literal lifespan_ on a high-rish venture, I'd want some kind of return to make it worthwhile.
Re: Sell for half a billion and get nothing (2021)
#257I'll throw out a VC's perspective on liquidation prefs: 1) I think 1x is very fair and meant to protect investors from bad company behavior. If you didn't have 1x preference, this would be an easy way for an unscrupulous founder to cash out: raise $X for 20% of the company, no liquidation preference. The next day, sell the company and its assets ($X in cash) for, say, 0.9x. If there's no liquidation preference, the V…
This helped my understanding of VC/founder relation much better. Thanks for putting a broader perspective to the situation described in the original post.
Re: Sell for half a billion and get nothing (2021)
#258I have a friend that has given up on options. Even if he were to be #10 somewhere he would take any extra pay over any options. Stories like this show the wisdom of that. Are there really that many success stories for people other than for VCs and (maybe) founders out there anymore? Even if your options (eventually) get you 200k, how much did they cost you in years of lower pay. Even with a payout, considering intere…
I think it's worth it still. Depending a lot on the company: * Ask questions to founders if they raise on participating preferred (the worst). Don't take a job if they do or if they won't answer * Find a place with early exercise of options * Find a place with a healthy company culture. (I believe this correlates) I made a lot off of options, while having a good salary. I know others that did the same.
But is there any recourse to the founders telling you one thing and then raising differently later because "circumstances have changed?"
Re: Sell for half a billion and get nothing (2021)
#259I'll throw out a VC's perspective on liquidation prefs: 1) I think 1x is very fair and meant to protect investors from bad company behavior. If you didn't have 1x preference, this would be an easy way for an unscrupulous founder to cash out: raise $X for 20% of the company, no liquidation preference. The next day, sell the company and its assets ($X in cash) for, say, 0.9x. If there's no liquidation preference, the V…
Something I've seen recently is the founder thats willing to let a company die.
I suspect these founders find some way to extract as much as possible from their company after raising funds.
Without naming names, I've seen a startup go boom (raise huge money and be valued at 3x that huge money), then all the senior leadership disappear: moved out of state, only show up for pre-recorded town halls (that used to be live), no longer a part of engineering meetings, cancelling department meetings, etc.
That went on for a couple years until the founder minimized their position in the company.
I don't understand how that could happen unless that founder extracted what they wanted and were just riding the ride rather than marching towards IPO.
Re: Sell for half a billion and get nothing (2021)
#260Earlier quoted context omitted.
Your timing is wrong here, which breaks your calculations. I read some other articles that said FanDuel got $75 million in 2014 and $275 million in 2015, and then they sold in 2018, so not sure where you're getting your "9 years" from.
Still not great ROI.
A moving goalpost isn't a great argument either.