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Sell for half a billion and get nothing (2021)

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

#271

Post by lpolovets »

ytx wrote: post #253
lpolovets wrote: post #241

I'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.

I've thought about that kind of system before, and it's an interesting approach but it doesn't fully protect against bad actors. E.g. what if the founder raises $5m, puts it into a bank account, moves to Hawaii, and then sells it for $4.9m in 5 years?

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

#272

Post by VirusNewbie »

scarface_74 wrote: post #40
VirusNewbie wrote: post #36

Earlier quoted context omitted.

Plenty of people made millions joining series C/D deca-corns and selling in the IPO pop.

And plenty more made nothing. It’s survivorship bias in a nutshell. You take 10 people who worked for a public BigTech company that gave cash + RSUs and 10 people who got the same in “equity” in 10 different private companies, who do you think will be ahead in 10 years? 10 years is the average amount of time it takes for the few companies that make it to have an exit event.

I didn't say hang on for ten years, I said people joining late stage series D companies like Stripe, Databricks, SpaceX etc.

Those are very likely to have multiple liquidity events before they even go public, and are known to pay more than FAANG. You're trading some liquidity and some security for a higher upside.

Those are the companies that have the best luck luring away FAANG engineers with higher comp (if things go well).

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

#274

Post by araes »

renonce wrote: post #244
whiplash451 wrote: post #108

Earlier quoted context omitted.

That's not super useful advice for founders who (really) need some investment from the get go. The lesson would rather be: don't raise so much at the seed stage. Google got started with a $100K grant. FanDuel raised $400M in four years [1] And it looks like one of the the FanDuel founders did it again [2] This is reckless and should be a massive red flag for new joiners. [1] https://en.wikipedia.org/wiki/FanDuel [2]…

> Founders and employees would be paid only if the acquisition exceeded $559M I think the problem with the article is that it emphasized the absolute acquisition value and omitted the fact that the company raised $400M. Considering the amount they raised, $559M seems much more reasonable and not quite bad terms?

That's actually one of the best points in here. They didn't make any money or valuation over their funding. Really? You couldn't make a gambling site for less than $400M? Maybe 2500 years of human labor at 150k / yr? Really?

Their sale was a 16% increase on their investment rounds. They soaked up half a billion in investment, and then got almost no return or "value added."

Almost as dumb as that $500 million tomato farm that couldn't grow tomatoes. (had to check, AppHarvest)

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

#275

Post by seandougfan »

lpolovets wrote: post #271
ytx wrote: post #253

Earlier quoted context omitted.

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.

I've thought about that kind of system before, and it's an interesting approach but it doesn't fully protect against bad actors. E.g. what if the founder raises $5m, puts it into a bank account, moves to Hawaii, and then sells it for $4.9m in 5 years?

There are some ways to make this work, I think (but I agree that time based vesting wouldn't work for the reasons you suggest). I've most commonly seen structures that contemplate something like this referred to as either a "bleed off" or a "kick out".

Bleed Off: set up a participating preferred with 1x liq pref and bleed off between investors A-Zx MOIC. In practice the preferred investors would participate by taking their 1x off the top, then sharing pro rata in proceeds. As the investors implied MOIC reaches the bleed off MOIC range, their participating preference would bleed off or be reduced ratably in the bleed off range until the participating portion approaches 0 (and eventually investor converts to common).

Kick Out: set up as a participating preferred with a 1x liq pref and a Ax kick out. In practice, investors would take their 1x then participate pro rata up until they Ax their capital. After Ax, the investor would collect no additional proceeds unless they convert to common.

I've seen both used, but the latter probably more appropriately works for instances in which there is a bid ask spread and founders want to solve for valuation (with the belief that they'll blow through the preference anyway and it won't matter) and investors want to shift the returns curves to higher probability (lower) equity values.

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

#276

Post by santoshalper »

elif wrote: post #181
aetherspawn wrote: post #66

Earlier quoted context omitted.

Yeah I have a small business and I sway strongly towards being contempt with letting the business grow at its own rate. No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so. It also forces you to keep pivoting and finding a cash cow rather than assuming your initial plan was any good. We’re on like plan #10 now and in hindsight if w…

Never say never. I worked for MailChimp who never touched investor money, never gave out any stock to any employees (not even key engineering staff), each founder retained 50%, and they turned down multiple $1b+ offers until finally accepting $12b from Intuit.

It definitely happens, it will generally mature more slowly. Not that there is anything wrong with that. I find the pace of bootstrapped companies healthier and more sane.

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

#277

Post by santoshalper »

highwaylights wrote: post #148
dr_dshiv wrote: post #134

Earlier quoted context omitted.

> 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)

That’s the model essentially. Makes a lot of sense too. Anyone can get S&P 500 returns with little to no risk. That’s not to say they won’t lose money but it’ll be market returns either way, will be very liquid, and readily transparent to the holder. Given the risk involved in early stage investment the maths just don’t make sense for an investor to shoot for anything short of the moon. tldr; Seed funding / early sta…

There are plenty of outcomes for an investment that sit between "S&P 500 Index" and "Unicorn Startup", and in fact most PE feeds in that range. But VCs are running the casino model where the law of large numbers works in their favor.

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

#278

Post by [deleted] »

lpolovets wrote: post #241

I'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…

[deleted]

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

#279

Post by petsfed »

vidarh wrote: post #250
lukeschlather wrote: post #240

Earlier quoted context omitted.

The employees were sold a lie that their stock options were worth taking a lower salary. Every single developer effectively invested something resembling 10-30k and was totally wiped out, and if they worked there 3 years that's probably a quarter of their life savings. But the investor only demands a meager $200 million return on their $400 million investment before they recognize the workers' investments.

Were they? Do you have inside info? I have done many startups, and in none apart from one did I accept a lower salary whether as regular staff or as a founder [EDIT: to be clear: after a funding round, as a full time employee; as a founder/co-founder I've of course done work for free on the side, but with according amount of stock]. In the one where I did, I forced in a clause in the investment agreement guaranteeing…

Isn't that the broadly accepted value proposition for working at a startup?

You accept greater job insecurity than more established companies, and lower salary than more established companies, but in return you get the opportunity to receive a larger slice of the proceeds from a "good" exit. It's like buying a lottery ticket. You don't sign on with Meta expecting a great exit, but you gamble that you might see a great exit when you sign on with Series-B-R-Us.

I'm not saying I agree with the gp here that the workers were wronged, but the widespread assumption is that startups pay less than more established companies.

And I agree completely that the gamble did not pay off for anybody here. The investors lost money, the workers lost money, the founders lost money. And that's the risk you take on when you make that kind of investment.

I've definitely declined further interviews with companies with something to the effect of "I don't have the stomach to be in an early stage startup right now".

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

#280

Post by babyshake »

lpolovets wrote: post #241

I'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 is a good explanation. However, if you do take on liquidation prefs, you should be open with other parties (employees) who are affected. I have never, ever experienced employers who have volunteered this information. I have also been told, when I asked about liquidiation prefs, that they had no way of determining whether or not that provision existed in their investment terms (!).
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