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We Spent $3.3M Buying Out Investors: Why and How We Did It

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Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#51

Post by jVinc »

dyeje wrote: post #40

So the same company that gave paycuts to their entire staff (except the CEO and Director of People) 8 months ago, has enough money to buy out their investors? Interesting. Paycut Discussion https://news.ycombinator.com/item?id=15861043

Sounds a lot like the CEO gauging the company growth and employee pay in order to build up enough cash to push out investors, get a majority so he could "provide liquidity" for himself.

I can't say if this is close to the mark, but if so it makes perfect sense why the other founders left. Being at the head of a ship with a captain trying to slow down so he can line his own pocket is a special kind of hell.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#52

Post by tptacek »

sebleon wrote: post #13

> $2.5m of $3.5m was for founders and early team [of Series A money] Terms: > Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders > a return of 9 percent annual interest on their investment at any point So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their…

How exactly does offering an immediate return to those early investors throw them under the bus? Buffer put together a deal and their investors took it. For them to "buy" their equity, it had to be "for sale", and it turns out it was.

The normal story of what happens when a company takes an investment planning for hypergrowth and that doesn't pan out is that the company "pivots" to some usually-less-promising hypergrowth opportunity and repeats until it dies. The outcome here seems far better for investors, which is presumably why they took advantage of it.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#53

Post by Alex3917 »

dsl wrote: post #43
tptacek wrote: post #32

Earlier quoted context omitted.

How did you get there from here? This appears to be an A-round startup that just paid $3MM to gain the flexibility to award liquid equity to (among other people) it's employees. Doesn't that make it better than the average equity-issuing startup?

When VCs (companies that make their money by betting on long shots) and two cofounders walk away, that is a really bad sign for a company. As I mentioned in another comment, if he hadn't had 45% of voting shares, the CEO would be gone. It sounds like he just wants to turn it into a lifestyle business. Which is cool, they just need to be upfront about bonuses or profit sharing, and ditch equity. Quick edit: I just re-…

> When VCs [...] walk away, that is a really bad sign for a company.

VCs eventually need to post cash-on-cash returns to their LPs if they want to raise their next fund. It doesn't matter if they think the company can do another 10x or another 100x, eventually they just need to exit their positions and mark the book. Now granted maybe it's a sign that they don't think the business will do 10x in the next year, but that doesn't have much to do with the scale on which the business will ultimately succeed.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#54

Post by gnu8 »

odonnellryan wrote: post #46
cycrutchfield wrote: post #39

Earlier quoted context omitted.

If those investors had put their money into the S&P500 instead, they would have had a better return on their investment.

True, and the risk here would probably make this a "bad investment" in reality.

There’s no reason on earth why anyone would consider having their money returned plus a mil a “bad investment,” even if they are a VC looking for 100x unicorn returns.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#55

Post by richardlblair »

When you give someone a pile of money you will always wonder if you get that money back, let alone see a return.

Returning anything to investors should be seen as a positive. If you disagree, go give someone 6+ figures and have them lose it. You're opinion will change rather quick.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#56

Post by erikpukinskis »

zminjie wrote: post #37
syntaxing wrote: post #24

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

You are thinking from the perspective of an individual investor. For VCs, this kind of return is abysmal since it won't cover the 7/10 companies that went completely bust. In order to VCs to take high risks on early stage companies, they need the winners to return 100x so the fund even makes financial sense. It's one of the main reasons why VCs constantly push startups for hyper growth. This is certainly better than…

It means the three that have a liquidity event only need to cover 5/10 instead of 7/10.

Is that not a helpful result?

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#57

Post by mrnobody_67 »

syntaxing wrote: post #24

So investors put $2.3M into the company and got back $3.3M. They essentially have a ROI of 1M over a span of four years. Am I crazy to think that this is a pretty good deal for the investors?! If someone gives me a ~40% return on a crapshoot investments (like how most start ups are), I would be pretty happy!

see - https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

the math is pretty crazy... even $50m and $100m exits would doom a fund.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#58

Post by sebleon »

tptacek wrote: post #52
sebleon wrote: post #13

> $2.5m of $3.5m was for founders and early team [of Series A money] Terms: > Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders > a return of 9 percent annual interest on their investment at any point So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their…

How exactly does offering an immediate return to those early investors throw them under the bus? Buffer put together a deal and their investors took it. For them to "buy" their equity, it had to be "for sale", and it turns out it was. The normal story of what happens when a company takes an investment planning for hypergrowth and that doesn't pan out is that the company "pivots" to some usually-less-promising hypergr…

Ah, to clarify: Buffer threw the seed investors under the bus when they inked a deal with the Series A investors.

However, kudos to the founders for fixing this mistake later on. While their intentions at Series A were questionable (raising to pay themselves), they made things right later on, though they did pay the price of a co-founder and CTO departure. Everyone makes mistakes, but true character can be seen when you deal with them.

> Our seed investors had been supporting the company for almost six years, and several were starting to ask when they may get a return

> The Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders (seed or common) without approval from a majority of the Series A.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#59

Post by hkmurakami »

robhunter wrote: post #48
TAForObvReasons wrote: post #23

Earlier quoted context omitted.

The interesting question, if the intention was to stick it out in the long term, is whether raising VC money in the first place was a good idea. Bootstrapping the business would have probably been closer in line with the vision and allowed him to retain control without eventually souring relationships

Wasn't a significant amount of the VC money for Buffer allocated to founder liquidity?

$2.5M out of $3.5M raised.

Re: We Spent $3.3M Buying Out Investors: Why and How We Did It

#60

Post by sebleon »

echan00 wrote: post #18
sebleon wrote: post #13

> $2.5m of $3.5m was for founders and early team [of Series A money] Terms: > Series A class of shares included a protective provision which meant that Buffer was unable to offer liquidity for other shareholders > a return of 9 percent annual interest on their investment at any point So... the founders raised a series A mostly to give themselves liquidity, at the expense of a high interest loan that also threw their…

Not everybody is perfect. Sometimes goals change and you realize what you wanted before isn't what you want today. Plus, he did mention his cofounders left, so maybe his ex-cofounders wanted the VC route.

Right on, mentality likely shifted along the way.

And yes, everyone makes mistakes, but author shows great character in making things right later on.

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