Sell for half a billion and get nothing (2021) • Hacker News Board

Re: Sell for half a billion and get nothing (2021)

#221

Post by pclmulqdq » Tue, Mar 05, 2024, 2:28 PM UTC

pfooti wrote: post #44

Analemma_ wrote: post #21

Earlier quoted context omitted.

It's not just your friend: a lot of people have given up on options. Obviously they're underrepresented here on HN because this is a startup-focused forum, but I know many, many people who have concluded "options have an EV of zero, startups pay options in lieu of market-rate salary, therefore startups are a raw deal; I will only go to FAANGs". They're sort of a dark matter universe since they are only visible in the…

This is me. I work at a FAANG, about half of my very good compensation is in RSUs. All the startup companies I've talked to (I don't turn down recruiters out of hand) seem to like my skill set, but cannot really meet my comp requirements without valuing options as if they were 100% guaranteed to convert at the current high valuation. It's a bummer - startups do a lot of really cool stuff, but I'm at a point in my car…

This is somewhere the reality distortion field hits hard. I have even heard "we are about to raise at an $X valuation, we'll offer you options at that price." When you sit them down and explain that those investors are getting preferred shares, which have some measure of protection against bankruptcy, and that the common stock is not worth nearly that much without the insurance, it (in my experience) enrages startup people. Many of them won't show their cap table or even discuss their past fundraising terms.

Re: Sell for half a billion and get nothing (2021)

#222

Post by vidarh » Tue, Mar 05, 2024, 2:31 PM UTC

codegeek wrote: post #209

jv22222 wrote: post #62

> Lessons Learned: Build a Very Fundable Startup > Every founder should learn from this disastrous scenario the importance of building a very healthy, fundable startup. A healthy, vibrant startup draws more investors during fundraising. The competition gives founders the leverage to negotiate for more founder-friendly terms. Healthy startups get better valuations, better terms, and raise funds with much less effort.…

The summary is "When the FanDuel founders raised funds, two key investors received a liquidation preference that entitled them to the first $559M in an acquisition. Founders and employees would be paid only if the acquisition exceeded $559M. Because the Paddy Power Betfair was for just $465M, the founders received nothing" Also they raised over 400M in funding. If you exit with 465M with 400 million raised in funding…

Yeah. I've not had an exit that high, but I've had an exit where my 25% initially was whittled down to 10k, and frankly I was surprised I got anything at all - in the end I was diluted to hell and back, but none of the later rounds had any liquidation preference that got triggered. It's easy to see a large exit number and assume it means it's a success, but in the case in question the (significantly more modest than $559M but still significant-sounding) exit was even below the total amount raised, and I'd written it off as a failure and left when we needed to staff down and I didn't feel I was needed any more about 5 years before the company was finally sold.

It sucks to see "your" (at this point it did not at any point feel like it was "mine") company selling for huge amounts and get nothing or near nothing, but it's worth people understanding that a large-sounding exit does not automatically mean it represents a success.

E.g. in this case the last round in 2015 apparently valued them at over a billion. Going from a $1bn valuation to a $465m exit is not great...

It's easy for people to think these terms were onerous, but if they could get $275m (the size of the last round) at those terms they likely could've still have found significant investment at less onerous terms if they wanted less risk. They chose to take those investments.

Taking VC cash is very often a game of deciding whether you want to gamble it all on faster growth or take less risk for less cash, but with the additional caveat that the investors you take on often will cheer for the "gamble it all" option as they have many parallel bets while you as the founder has one.

I've taken VC money several times and been part of early stage VC funded startups several times (including a VC), and I wouldn't rule out doing so again at some point, but it's important to go in understanding that the VC's incentives and yours are different, but if they are too different, then taking VC money might not be right for you, and that's fine.

Re: Sell for half a billion and get nothing (2021)

#223

Post by pc86 » Tue, Mar 05, 2024, 2:33 PM UTC

dr_dshiv wrote: post #134

gnicholas wrote: post #103

Earlier quoted context omitted.

> No, it won’t have a 1 bil payout Does anything have a $1B payout for the founder? I guess there are a few companies that achieve this, but it takes only a modicum of humility to realize you're not likely to be one of the most successful founders this decade.

> modicum of humility = turnoff for investors. They only care for chances at homeruns — singles and doubles are not welcome. You’d better swing for the fences, because that’s the purpose of VC. (This is my understanding, not my endorsement. Please correct as needed)

No this is 100% the point of Venture Capital, and 100% what "startup" actually means. Startup means a moonshot, something that has a 99.9% chance of failure but if it succeeds will have a gigantic impact.

Someone working on their $500 MRR form-builder app isn't building a startup, they're "just" building a regular ole business.

Personally I'd much rather build a business than a startup.

Re: Sell for half a billion and get nothing (2021)

#224

Post by thelastparadise » Tue, Mar 05, 2024, 2:33 PM UTC

pc86 wrote: post #220

codegeek wrote: post #209

Earlier quoted context omitted.

The summary is "When the FanDuel founders raised funds, two key investors received a liquidation preference that entitled them to the first $559M in an acquisition. Founders and employees would be paid only if the acquisition exceeded $559M. Because the Paddy Power Betfair was for just $465M, the founders received nothing" Also they raised over 400M in funding. If you exit with 465M with 400 million raised in funding…

Honestly $400M in funding with only a preference of $559M seems pretty reasonable as far as the VC world goes. That's a 39% return, which yeah is a lot, but we're also talking about half a billion dollars and when your entire business model is built on looking for 10X or 100X returns, a .39X guarantee isn't out of this world crazy. Especially when the actual exit was about half that return.

Yeah basically the investors let them larp as businessmen and they churned the investment capital and produced a bunch of hot air and imposed opportunity cost on the investors.

The bottom line is these guys were not profitable.

But the investors got very lucky to not see -100% return.

Re: Sell for half a billion and get nothing (2021)

#225

Post by vidarh » Tue, Mar 05, 2024, 2:36 PM UTC

pc86 wrote: post #220

codegeek wrote: post #209

Earlier quoted context omitted.

The summary is "When the FanDuel founders raised funds, two key investors received a liquidation preference that entitled them to the first $559M in an acquisition. Founders and employees would be paid only if the acquisition exceeded $559M. Because the Paddy Power Betfair was for just $465M, the founders received nothing" Also they raised over 400M in funding. If you exit with 465M with 400 million raised in funding…

Honestly $400M in funding with only a preference of $559M seems pretty reasonable as far as the VC world goes. That's a 39% return, which yeah is a lot, but we're also talking about half a billion dollars and when your entire business model is built on looking for 10X or 100X returns, a .39X guarantee isn't out of this world crazy. Especially when the actual exit was about half that return.

The last round was also 3 years prior, so the amortised yearly return was definitely not something their investors had any reason to cheer about. From their point of view this was a failed opportunity.

People forget that VC funds also aren't great business for the partners without carry (you get a management fee that keeps the light on, but you make your profit largely from a proportion of returns of the fund above some threshold; on top of that, in many funds you're required to lock up a significant chunk of your own cash as well, so poor returns both means you earn less and means your own investments return less), and a return like that likely would have had a seriously negative impact on their carry.

Re: Sell for half a billion and get nothing (2021)

#226

Post by pc86 » Tue, Mar 05, 2024, 2:38 PM UTC

willcipriano wrote: post #204

choppaface wrote: post #113

Earlier quoted context omitted.

IRS takes less than 50%.

A lot of this confusion is people talking past eachother. For most people the level of governmental entity taxing them isn't the concern, its the amount of tax the government in general demands in particular contrasted with the level of service provided. Add up the IRS cut, state and local, gas tax, sales tax, fees to use services already paid for with taxes and are basically required for life in the US (road tolls,…

You're making a comment about people "talking past each other" and yet you're talking about gas tax and sales tax in relation to business acquisitions and venture capital payouts.

Re: Sell for half a billion and get nothing (2021)

#227

Post by pc86 » Tue, Mar 05, 2024, 2:39 PM UTC

agentgumshoe wrote: post #155

LudwigNagasena wrote: post #132

Earlier quoted context omitted.

So they raised $416M and sold for $465M. That's 12% ROI. The investors could just buy normal stocks and get similar returns in a year. I don't think there is anything remarkable about this case. It's not like they got a $100K grant and received nothing from a $500M sale.

ROI depends on whether the company is profitable going forward too I'd imagine...

Why would that matter? The investors got their cash and walked.

Re: Sell for half a billion and get nothing (2021)

#228

Post by marcosdumay » Tue, Mar 05, 2024, 2:42 PM UTC

tejohnso wrote: post #217

> When the FanDuel founders raised funds, two key investors received a liquidation preference that entitled them to the first $559M in an acquisition. Founders and employees would be paid only if the acquisition exceeded $559M. > The reality was the founders couldn’t stop the deal because they also granted the same two lead investors drag along rights. This drag along right forced the other shareholders to accept the…

It is a story of people getting screwed.

Having layers working for them and using the knowledge asymmetry between them and working people is how institutional money screws people.

Re: Sell for half a billion and get nothing (2021)

#229

Post by pc86 » Tue, Mar 05, 2024, 2:44 PM UTC

justinlloyd wrote: post #45

I am currently working with a start-up where the company is incapable of meeting its capex obligations. The founder raised a good amount of capital from investors a few years ago, and that provided a decent runway, but there's no traction, no KPIs, and whilst we've built some impressive technology, impressive technology does not bring in revenue. One of the problems (amongst many) is that the primary stakeholder has…

"Let's convert this back pay that you are legally owed and we almost certainly violated a couple state and federal laws by not paying you into equity" is a pretty ballsy suggestion, but couple that with not being allowed to see the cap table is the kind of thing you have board room fist fights over.

Sounds like they should fire that primary stakeholder, claw back his equity, hire someone who knows what the hell they're doing, and hope to god the employees don't walk or sue the hell out of them - both of which they probably should do.

Re: Sell for half a billion and get nothing (2021)

#230

Post by pc86 » Tue, Mar 05, 2024, 2:45 PM UTC

KaiserPro wrote: post #191

mousetree wrote: post #185

Earlier quoted context omitted.

What is meant by "cannot meet its capex obligations"?

Yeah this perplexed me. If they are up against it, why they are they doing capital expenditure, if they have shit all captial. I assume its either opex (operating expenses) or they need to buy $big_thing to get to the next stage of growth.

"Obligation" implies they have some sort of requirement.