Wizards of the Coast, Equity Distributions: Part 1
peteradkison.com
Wizards of the Coast, Equity Distributions: Part 1
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Re: Wizards of the Coast, Equity Distributions: Part 1
#2This is one of the reasons why I like HN, because nothing in my lower-to-middle-class upbringing prepared me for the notion of stock as anything other than shares of IBM which you held at the brokerage until you needed to retire. Pretty much everything I learned about the mechanics of tech investing I learned as a direct consequence of this site, in many cases to material effect.
One would hope that investors, on dealing with unsophisticated entrepreneurs, would tell them "Hey, it seems like you don't know the ropes of this yet, let me explain it to you" but the overwhelming number of anecdotes where I hear that have that sentence followed by advice so bad it shocks the conscience.
Re: Wizards of the Coast, Equity Distributions: Part 1
#3Can someone explain to me how this is even possible? I mean, when a corporation is created, before it takes any investment, someone has to own it, right? How is it possible for the founders to not start out owning 100%?
Re: Wizards of the Coast, Equity Distributions: Part 1
#4Can someone explain to me how this is even possible? I mean, when a corporation is created, before it takes any investment, someone has to own it, right? How is it possible for the founders to not start out owning 100%?
It's more clear if you read his follow-up to the post. (http://www.peteradkison.com/blog-entry-3-wizards-of-the-coas... What probably happened is that they (on the basis of really, really, REALLY bad advice) started with something like 1,000 shares of the company, valued at $0.50 apiece. They did genuinely own 100% at that time. Then as they raised the 300k they issued additional shares, at valuations between $0.50 and $4, diluting the founders horribly, because the founders did not award themselves new shares.
The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. For example, if you had hypothetically bought them a drafting table for $100 (an example used later), you ended up with a 0.5% stake in the company (implicitly valuing the company at $2k at that point). A tech company which only exists as a napkin held between two hungry young men with no asset other than a gleam in their eye gets a notional value of $250k+ on day one. If you attempt to invest in them later, after they have e.g. a product with customers for it, the value gets re-pegged SHARPLY north of that, perhaps in the single digit millions or higher if they're doing really well.
He mentions that a lot of the money men involved were annoyed by hordes of small investors making seemingly outsized returns on their initial investments. I don't think he quiiiiite understands that they're not wrong: their outsized returns were essentially large gifts of surplus value from the founders to them. (The money men, of course, seem a little put out that the founders didn't instead make a large gift of surplus value to them.)
Re: Wizards of the Coast, Equity Distributions: Part 1
#5Can someone explain to me how this is even possible? I mean, when a corporation is created, before it takes any investment, someone has to own it, right? How is it possible for the founders to not start out owning 100%?
It's more clear if you read his follow-up to the post. ( http://www.peteradkison.com/blog-entry-3-wizards-of-the-coas... What probably happened is that they (on the basis of really, really, REALLY bad advice) started with something like 1,000 shares of the company, valued at $0.50 apiece. They did genuinely own 100% at that time. Then as they raised the 300k they issued additional shares , at valuations between $0.50…
The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued.
Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices.
Tarsnap Backup Inc. officially has 100 Common shares outstanding, but there's no way I'll issue new shares for $0.50 each. ;-)
Re: Wizards of the Coast, Equity Distributions: Part 1
#6Earlier quoted context omitted.
It's more clear if you read his follow-up to the post. ( http://www.peteradkison.com/blog-entry-3-wizards-of-the-coas... What probably happened is that they (on the basis of really, really, REALLY bad advice) started with something like 1,000 shares of the company, valued at $0.50 apiece. They did genuinely own 100% at that time. Then as they raised the 300k they issued additional shares , at valuations between $0.50…
The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices. Tarsnap Backup Inc. officially has 100 Common shares outstanding, bu…
I would certainly not suggest giving away those 100 common shares for picodollars because that would compromise your business results and make it affirmatively more difficult for sophisticated investors to join you, leaving your company to only receive investment from worse investors.
By the way, I signed up for Tarsnap and am using it "in anger" for Appointment Reminder. My predicted bill for this month is something on the order of 60 cents. It is, literally, the smallest business oriented bill I have ever forced my accountant to look at, and would fall below the noise floor but for the fact that I want paper records of me having paid for a professional backup service in case I ever have to prove this for my insurance agency. (I have professional liability insurance and data loss/data breach insurance for Appointment Reminder, chiefly because I have hospitals as clients and they want to know that if I screw up there will be deep pockets in the neighborhood to sue to settle up with. The insurance company is basically renting their deep pockets out on a "We are willing to bet that you won't screw up" basis, but to protect their interests, they have a 15 point checklist for various things Serious Businesses do regarding data security and if it turns out that I'm not a Serious Business than my Serious Business Insurance Policy will not actually cover me.)
I would, and this is my honest and true opinion as a customer rather than as someone who has nagged you for years to raise your prices, prefer to pay $100 per month for no reason other than to avoid having my insurance company think that I am a stupid kid playing at being a real business by entrusting core parts of my infrastructure to a service which costs me sub-coffee money. In the event of me having an insured loss (which, n.b., I hope to never have and to just set fire to the $10 a day I pay for insurance), I really don't want to have that conversation. Please make me not have to have that conversation. I can pay.
Re: Wizards of the Coast, Equity Distributions: Part 1
#7This is one of the reasons why I like HN, because nothing in my lower-to-middle-class upbringing prepared me for the notion of stock as anything other than shares of IBM which you held at the brokerage until you needed to retire. Pretty much everything I learned about the mechanics of tech investing I learned as a direct consequence of this site, in many cases to material effect. One would hope that investors, on dea…
FWIW, TechStars was great about this. David Cohen and Andy Sack gave fantastic advice to our round (Seattle '12). I've been doing this for awhile, have read the relevant books and heard a lot second-hand from people who've raised a lot of money, but having mentors give great guidance around this from personal and networked experience was leaps and bounds better.
Re: Wizards of the Coast, Equity Distributions: Part 1
#8Earlier quoted context omitted.
The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices. Tarsnap Backup Inc. officially has 100 Common shares outstanding, bu…
I would certainly not suggest giving away those 100 common shares for picodollars because that would compromise your business results and make it affirmatively more difficult for sophisticated investors to join you, leaving your company to only receive investment from worse investors. By the way, I signed up for Tarsnap and am using it "in anger" for Appointment Reminder. My predicted bill for this month is something…
Thank you.
Re: Wizards of the Coast, Equity Distributions: Part 1
#9The story of all the small investors surprised me, because i thought there were more rules about who could invest in a company. Are these rules new, or do i misunderstand something?
Re: Wizards of the Coast, Equity Distributions: Part 1
#10Earlier quoted context omitted.
The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices. Tarsnap Backup Inc. officially has 100 Common shares outstanding, bu…
I would certainly not suggest giving away those 100 common shares for picodollars because that would compromise your business results and make it affirmatively more difficult for sophisticated investors to join you, leaving your company to only receive investment from worse investors. By the way, I signed up for Tarsnap and am using it "in anger" for Appointment Reminder. My predicted bill for this month is something…
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