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

#151

Post by rdl » Mon, Oct 03, 2011, 1:11 AM UTC

gavanwoolery wrote: post #91

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…

Founder's can cash out without screwing employees. I had almost no stock as an employee in my first startup, but the founders took care of me post-acquisition.

That kind of thing happens a lot, but you shouldn't count on anything not in writing (and probably not even then, unless it's on a cashier's check).

Google's founders famously helped an early employee (Scott Hassan) who had done a lot of work and didn't have much on-paper equity. He's now running an awesome robotics startup, Willow Garage.

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

#152

Post by rdl » Mon, Oct 03, 2011, 1:52 AM UTC

jroseattle wrote: post #149

philwelch wrote: post #146

Earlier quoted context omitted.

Pre-funding, yes, is a leap of faith. Post-funding, if you offer a market salary, standard benefits, and a startup working environment (which seems to be the norm for YC startups), why wouldn't top talent choose that over, say, working for Google?

> Post-funding, if you offer a market salary, standard benefits, and a startup working environment (which seems to be the norm for YC startups), why wouldn't top talent choose that over, say, working for Google? 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)…

They're just being honest.

If a company sells for $150mm, and you have 1%, and there has been $20-40mm in financing (i.e. certainly not a great outcome for later investors, but ok for early), it's possible your equity will be worth $0 (due to preference), or maybe $200-300k. The odds of the company going from early to this are maybe 20%. Getting 1% isn't all that common either; 0.1% is a lot more likely unless you're pre-A.

$200-300k is nice, but if you figure there's a 20% or less chance of it happening, and you have to wait 4 plus maybe 1-4 more years for it. So, the net present value is about $10k/yr in extra salary.

Now, if you're Google, Facebook, or Microsoft, it's totally different; or if you are early at a company which takes very little financing and has a good ($50-150mm+) early exit.

As an employee, what I'd want from a prospective employer is full visibility into the financials/cap table, and help running through various assumptions about the future. Misleading people about the value of compensation, up or down, isn't reasonable.

As an employer I wouldn't want to be hiring someone who was too stupid to understand the accounting when given the numbers, or too meek to ask for the numbers, either. But an employee would be a lot better if he were motivated by wanting to solve this problem, use this tech, expand skills, be in this industry, or learn to do his own startup, vs. banking on the options lottery.

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

#153

Post by VladRussian » Mon, Oct 03, 2011, 2:10 AM UTC

gojomo wrote: post #143

VladRussian wrote: post #141

Earlier quoted context omitted.

>Dividends are legal, tax-favored, and exist to reward actual shareholders-of-record 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.

When you say "...are supposed to be paid using earnings...", are you referring to a legal requirement? If so, this could be stopped by someone with a legal challenge. 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 e…

>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.

Even if they had other sources able to completely cover the "dividends", there seems to be the causality link between the investment and the "dividends". In Tom DeLay's case the causality between "donors to RNC" and "RNC to candidates" allowed the jury to recognize shortcut-ed "donors to candidates". It seems to me that it was an obvious bonus (i.e. ordinary income) to founders which for the purposes of lower tax rates (i.e. basically for the reason of greed) was shaped as dividend, and as result they seems to step into the Madoff territory.

>Everybody who's a party to the transaction is happy, in a tax/legally-efficient manner, and no one's rights are trampled.

people were fighting to get a piece of Madoff action.

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

#154

Post by VladRussian » Mon, Oct 03, 2011, 2:22 AM UTC

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…

>It is bad form for this sort of thing to be aired publicly.

the financial dealings start to stink in Silicon Valley and in hi-tech in general and some people seem to care enough and are in position to at least voice their concerns.

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

#155

Post by philwelch » Mon, Oct 03, 2011, 11:37 AM UTC

trevelyan wrote: post #148

philwelch wrote: post #140

Earlier quoted context omitted.

At 20 million dollars, that would be a rather significant premium above market rates.

Early-stage investors aim for a 10x return on capital, yet AirBNB has consistently delivered 15-20x compound annual growth. That makes ten million per founder significantly less than their first few months of foregone salary if you compound the investment at the same rates investors are getting. This guy is getting skittish that 1/100th of the valuation of the company is going in a payout to the founders? That's only…

Yes, it does look a lot better based solely on made-up numbers. Back in the real world, there's a 120 million dollar "investment" of which 1/6 is actually a no-strings-attached gift of cash money. That's an atrociously bad deal for the investor, and it's totally sensible to balk.

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

#156

Post by philwelch » Mon, Oct 03, 2011, 1:18 PM UTC

jroseattle wrote: post #149

philwelch wrote: post #146

Earlier quoted context omitted.

Pre-funding, yes, is a leap of faith. Post-funding, if you offer a market salary, standard benefits, and a startup working environment (which seems to be the norm for YC startups), why wouldn't top talent choose that over, say, working for Google?

> Post-funding, if you offer a market salary, standard benefits, and a startup working environment (which seems to be the norm for YC startups), why wouldn't top talent choose that over, say, working for Google? 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)…

Yes, which is making the market rate go up. I'm not talking about accepting below-market rates, I'm just asking what's so much better about accepting a given rate at Google as opposed to a startup.

Options aren't it. They're somewhere between a bonus and a lottery ticket, and if you're smart enough to be "top talent" you're smart enough to figure that out anyway.

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

#157

Post by jroseattle » Mon, Oct 03, 2011, 2:27 PM UTC

philwelch wrote: post #156

jroseattle wrote: post #149

Earlier quoted context omitted.

> Post-funding, if you offer a market salary, standard benefits, and a startup working environment (which seems to be the norm for YC startups), why wouldn't top talent choose that over, say, working for Google? 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)…

Yes, which is making the market rate go up. I'm not talking about accepting below-market rates, I'm just asking what's so much better about accepting a given rate at Google as opposed to a startup. Options aren't it. They're somewhere between a bonus and a lottery ticket, and if you're smart enough to be "top talent" you're smart enough to figure that out anyway.

> I'm just asking what's so much better about accepting a given rate at Google as opposed to a startup.

Below-market rates? Not sure if that was implied, but that's certainly not the case I'm talking about.

I'm not suggesting that's the case, but you need to ask the candidates who we've identified that are doing so. We've been losing people to AMZN/GOOG (MS less so) who will often have salary offers matched + bonus structures that exceed ours, plus benefits that jump way over anything we can provide. What's so much better about that? You'd have to ask the candidates.

Not sure where the discussion went off, but I'm not suggesting that options are the end-all-be-all for early stage employees. I agree that the chances of them holding any value are low. But this I would say: if they really are this gigantic crap-shoot, why on earth do startups continue to offer them to candidates?

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

#158

Post by jroseattle » Mon, Oct 03, 2011, 2:49 PM UTC

rdl wrote: post #152

jroseattle wrote: post #149

Earlier quoted context omitted.

> Post-funding, if you offer a market salary, standard benefits, and a startup working environment (which seems to be the norm for YC startups), why wouldn't top talent choose that over, say, working for Google? 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)…

They're just being honest. If a company sells for $150mm, and you have 1%, and there has been $20-40mm in financing (i.e. certainly not a great outcome for later investors, but ok for early), it's possible your equity will be worth $0 (due to preference), or maybe $200-300k. The odds of the company going from early to this are maybe 20%. Getting 1% isn't all that common either; 0.1% is a lot more likely unless you're…

I'm afraid we're getting off on a tangent on this thread, but your math is correct, and I agree with your probabilities.

> As an employee, what I'd want from a prospective employer is full visibility into the financials/cap table, and help running through various assumptions about the future. Misleading people about the value of compensation, up or down, isn't reasonable.

I think that's the crux of it. Most startups are not this transparent and upfront with potential candidates.

> As an employer I wouldn't want to be hiring someone who was too stupid to understand the accounting when given the numbers, or too meek to ask for the numbers, either.

Very true.

> But an employee would be a lot better if he were motivated by wanting to solve this problem, use this tech, expand skills, be in this industry, or learn to do his own startup, vs. banking on the options lottery.

For the company, absolutely. For the employee? Yes, if certain circumstances hold true. But expecting this to be of equivalent benefit to everyone is uninformed.

> As an employer I wouldn't want to be hiring someone who was too stupid to understand the accounting when given the numbers, or too meek to ask for the numbers, either. But an employee would be a lot better if he were motivated by wanting to solve this problem, use this tech, expand skills, be in this industry, or learn to do his own startup, vs. banking on the options lottery.

Again, great sentiment, but when you fold in everything that's been discussed and you target premium talent, more often than not I'm finding that talent is often going elsewhere.

As a summary, I think the tension around financials between founders and VCs is slowly being pushed off to early-stage employees, and premium talent recognizes it and is expecting more than invaluable startup experience as compensation for making someone else wealthy.

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

#159

Post by lurker19 » Mon, Oct 03, 2011, 7:13 PM UTC

VladRussian wrote: post #153

gojomo wrote: post #143

Earlier quoted context omitted.

When you say "...are supposed to be paid using earnings...", are you referring to a legal requirement? If so, this could be stopped by someone with a legal challenge. 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 e…

>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…

Did Madoff have the earnings?

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

#160

Post by rdl » Mon, Oct 03, 2011, 9:39 PM UTC

jroseattle wrote: post #158

rdl wrote: post #152

Earlier quoted context omitted.

They're just being honest. If a company sells for $150mm, and you have 1%, and there has been $20-40mm in financing (i.e. certainly not a great outcome for later investors, but ok for early), it's possible your equity will be worth $0 (due to preference), or maybe $200-300k. The odds of the company going from early to this are maybe 20%. Getting 1% isn't all that common either; 0.1% is a lot more likely unless you're…

I'm afraid we're getting off on a tangent on this thread, but your math is correct, and I agree with your probabilities. > As an employee, what I'd want from a prospective employer is full visibility into the financials/cap table, and help running through various assumptions about the future. Misleading people about the value of compensation, up or down, isn't reasonable. I think that's the crux of it. Most startups…

I generally agree with you, but I think most engineers, even really good ones, would rather have extra cash at the current investor valuation, vs. more stock. Assuming your startup can raise 5mm on a 20mm pre, raise 7mm on a 20mm pre with a smaller options pool, and pay people slightly above market vs. slightly below market.

If your startup is a rocket with no problems, either approach works, but if it gets bumpy, having cash extends your runway, and helps you retain key people better than increasing amounts of declining stock.

Plus, having investors put more cash in keeps them motivated to help you longer, sort of like an author's book advance.

There is definitely under appreciated value to being "rich" in your 20s; driving a nice car, living in a nice place that you like, being able to go out to eat... and it really only takes making a marginal extra 10-20k to make a big difference.