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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)

#281

Post by ComputerGuru »

ta1243 wrote: post #194
elif wrote: post #181

Earlier quoted context omitted.

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.

That "plucky founder becoming billionaire" thing reminds me a little of Whatsapp, which sold for $19b (although I believe did have Venture Capital) https://www.flyertalk.com/forum/travel-technology/952359-tho... Especially this post from Jan Koum: i'll tell you all a funny story which has to do with flyertalk: i am actually flying to Barcelona for MWC right now using the M&M miles award ticket (i am posting this from…

Hilarious because they probably had much more than the cost of a first class business ticket in the not-even-under-lock-and-key petty cash drawer in the next room. But good for him!

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

#282

Post by tomp »

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…

Genuine question:

For liquidation preference >= 1x, why even call it equity instead of debt?

The point of equity is that you own a part of it, and you get a proportional share. The point of debt is that the money owed to you is preferred over other owners (i.e. equity owners). It seems to me that liquidation preferences allow investors to take the best of both worlds.

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

#283

Post by babyshake »

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…

In my experience, startup employers will never volunteer information like whether there are liquidation preferences.

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

#284

Post by ComputerGuru »

vitus wrote: post #177
navane wrote: post #160

Earlier quoted context omitted.

He bought gambling stock with his retirement fund, struck gold, and now has 5bn untaxed in a US account?

He bought 1.7 million founders' shares of Paypal (then Confinity, which he cofounded and was CEO of at the time) for under $2000. These are terms you would never offer to an investor, that you'd never offer to an employee. For comparison, the SEC filing for Paypal's IPO has Thiel Capital investing a bridge loan of $100k in 1998 which was then converted into 500 thousand shares (100x higher valuation than his individu…

So which loophole let him get away with it?

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

#285

Post by slavetologic »

fusslo wrote: post #259
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…

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…

Sometimes they get sidelined by vcs, but you can't see it from lower levels. Other times they started something else, and have insider information that the company will not work

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

#286

Post by giantg2 »

dukeyukey wrote: post #256
giantg2 wrote: post #169

Earlier quoted context omitted.

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.

You mean like a salary and benefits?

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

#287

Post by exreddit »

It's not great from the employee side, either. I got 150,000 options for Reddit very early after it was spun out. With the current target price, that's $4.6M, but I didn't get all 4 years of vesting, the pay was below-average, and my money is tied up. During the same decade, the faangs were up 12x on average, but the pay, even at Amazon, was better, and my money would be liquid. Reddit might not hold up for 6 months, either. The IPO feels like a cash-out because the company's profitability metrics have never been great, and the LLM hype is the best shot at getting something.

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

#288

Post by matthewmcg »

tomp wrote: post #282
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…

Genuine question: For liquidation preference >= 1x, why even call it equity instead of debt ? The point of equity is that you own a part of it, and you get a proportional share. The point of debt is that the money owed to you is preferred over other owners (i.e. equity owners). It seems to me that liquidation preferences allow investors to take the best of both worlds.

The liquidation (or dividend) preference is the differentiating feature of preferred stock. In corporate finance, preferred stock is, for the reasons you give, treated as a hybrid of equity and debt.

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

#289

Post by takinola »

vidarh wrote: post #222
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…

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…

Stories like this often have a lot of missing details that would provide more context and explain why things played out the way it did. I have no doubt the founders knew the risks they were taking and signed up for it. However, the big question is whether the employees knew the risk they had been signed up for. The lack of transparency for employees is where the big problem lies. If you are a non-exec level employee at a startup where most of your compensation is in private securities, you should apply a significant discount to your valuation to account for this opacity.

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

#290

Post by jonfw »

lukeschlather wrote: post #240
vidarh wrote: post #225

Earlier quoted context omitted.

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 s…

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.

Let this be a lesson to employees that they shouldn't value their stock based on VC valuations. Those VCs pay a premium to get those terms.
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