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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)

#41

Post by AndrewKemendo »

lumost wrote: post #34
AndrewKemendo wrote: post #30

Earlier quoted context omitted.

I stepped out of investing about two years ago because i couldn’t stomach the persistent narcissistic greed dressed up as virtue once I saw it for what it was. The last I saw it was just as bad and frankly getting worse for founders, as investors pulled back when the Fed moved on interest rates. Basically everyone just stopped taking risk except for the giant institutional funds and even then, as of last year were mo…

Out of curiousity - how does a VC fund hold onto "powder"? Do they have terms to invest in a liquid fund, or some other arrangement? Seems like they'd face tough returns if they held powder for long.

I don’t have enough experience at the institutional level to tell you precisely.

At the smaller scale, though it just means that returns that were above and beyond distribution expectations so, for example, what the fund returns separate from the LP distribution, and then separate from distributions to partners is you know basically that net margin for the fund overall so that they would use as seeds for another fund or something like that. So effectively they are just not opening other fund lines, because none of the investments or markets that are coming up, match a risk profile for the amount of interest you can get back in other methods now.

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

#42

Post by lmm »

AndrewKemendo wrote: post #12

I wrote this in 2015 in response to Mark Suster suggesting that founders "Run" from liquidation preference and preference overhang in early deals: "Run where? When I talk to my fellow early stage east coast founders, the majority aren’t beating away founder friendly term sheets. Even seed stage companies with revenue and traction raising relatively small amounts are giving away board seats and agreeing to multiple pr…

> Run where? When I talk to my fellow early stage east coast founders, the majority aren’t beating away founder friendly term sheets. Even seed stage companies with revenue and traction raising relatively small amounts are giving away board seats and agreeing to multiple preferences because they have nowhere else to go.

Away from the east coast? If funding on good terms is important to your business, go somewhere you can get funding on good terms.

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

#43

Post by AndrewKemendo »

lumost wrote: post #32
frfl wrote: post #22

Earlier quoted context omitted.

You wrote that back in 2015. What, in your experience, has changed since then? 2021 would've probably, I'm guessing, been a lot more favorable for founders, but 2022/23/24 is likely a lot less favorable.

Anecdotally, not much changed for East coast startups. What did change is that West coast firms came to the east coast. Whereas 10 years ago it would be noteworthy to work for an SV company - it is now typical. I think the local market was outcompeted and absorbed outside of a few niches.

Interestingly, the East Coast is way more primed for large deals than the West Coast is just from a population volume and infrastructure perspective.

However, because there is just no high risk in the area, it just doesn’t happen. It’s literally just a physical access to rich people location thing which is crazy to me that it’s still the case but it seems to actually just be as simple as that.

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

#44

Post by pfooti »

Analemma_ wrote: post #21
jmward01 wrote: post #14

I have a friend that has given up on options. Even if he were to be #10 somewhere he would take any extra pay over any options. Stories like this show the wisdom of that. Are there really that many success stories for people other than for VCs and (maybe) founders out there anymore? Even if your options (eventually) get you 200k, how much did they cost you in years of lower pay. Even with a payout, considering intere…

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 career where I can no longer really gamble that the options will pay out. I need the stability and mortgage paying power of actual comp.

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

#45

Post by justinlloyd »

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 a perfectionist attitude to the user experience. Which in a start-up is deadly.

Now, as I said, the start-up cannot meet its capex obligations and the current funding round is looking grim. It is definitely going to be a down round and it ain't going to be pretty should a term sheet get thrust under our collective noses. To get the developers motivated to stick around a little longer, "generous" equity packages are on offer, with a request to convert over-due back pay and future payments too, into equity .

When I sought transparency - "Can I see the cap table?" - "Can I see the terms of the investors?" - "Can I see anything?" - the answer was invariably "no." Essentially, they're asking me to make a nominal investment of over $200K in the company, accepting common stock in lieu of pay without any insight into the financials or the terms provided to other investors.

It's worth noting that I had previously given the start-up a sweetheart deal, significantly discounting my usual rate and offering generous payment terms, in the spirit of support and belief in the project. This makes the current scenario even more disheartening. Compound that with what has become an overall toxic environment that I have euphemistically called "challenging" when asked to sum it up, and the future isn't bright enough to wear shades.

Now this isn't exactly my first rodeo. I've seen the beautiful side of start-ups and liquidity events. And I've seen the dreadfully ugly side too. Hard lessons learned. And the ugly side shows up way more than the pretty one.

I swear, some entrepreneurs must think I stepped off the boat yesterday.

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

#46

Post by hamburglar »

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.

Indeed. I consider my last startup option windfall a once in a lifetime success story, but the BigTech I’ve been at since I left the startup world has paid me roughly the same amount in RSUs when you consider all the time spent at both. And the BigTech is going to keep paying me pretty consistently.

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

#47

Post by pclmulqdq »

yieldcrv wrote: post #27
gumby wrote: post #6

Liq prefs vanished during the ZIRP and I haven’t seen them return…yet. But the founders do have some leverage. If there is no incentive to do the deal they can just… not cause the deal to happen (different from blocking it, just not working on it). This is the same reasons you see big pay packets for the execs when a company is doing poorly or is bankrupt: otherwise they could just go do something else (get a differe…

maybe in Silicon Valley, but in New England and other less mature markets nothing has ever changed feel free to change my view, for anyone passing by

New England tends to have startup companies that are either biotechs or hard techs. It's not surprising to have to take bad terms for those companies.

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

#48

Post by [deleted] »

hamburglar wrote: post #46
scarface_74 wrote: post #40

Earlier quoted context omitted.

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.

Indeed. I consider my last startup option windfall a once in a lifetime success story, but the BigTech I’ve been at since I left the startup world has paid me roughly the same amount in RSUs when you consider all the time spent at both. And the BigTech is going to keep paying me pretty consistently.

[deleted]

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

#49

Post by pclmulqdq »

Finbarr wrote: post #33
gumby wrote: post #6

Liq prefs vanished during the ZIRP and I haven’t seen them return…yet. But the founders do have some leverage. If there is no incentive to do the deal they can just… not cause the deal to happen (different from blocking it, just not working on it). This is the same reasons you see big pay packets for the execs when a company is doing poorly or is bankrupt: otherwise they could just go do something else (get a differe…

1x non participating is still the standard in most venture deals for companies doing reasonably well. But every dollar spent by startups essentially builds the preference against them. If you raise and don't spend the money, the balance sheet can be used to "offset" the liquidation preference in a sale.

I mean, every dollar you spend is a dollar off your balance sheet, so a company with $1 million more in cash is theoretically worth $1 million more. That is what "offsets" the liquidation preference.

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

#50

Post by gumby »

pclmulqdq wrote: post #47
yieldcrv wrote: post #27

Earlier quoted context omitted.

maybe in Silicon Valley, but in New England and other less mature markets nothing has ever changed feel free to change my view, for anyone passing by

New England tends to have startup companies that are either biotechs or hard techs. It's not surprising to have to take bad terms for those companies.

FWIW I have started both in Silicon Valley and never had to take unfavorable terms like that.
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