It seems to me that the nature of venture funding is such that it would be unusual for the investor and the CEO to be aligned with respect to the company's financial performance. This is true in public companies where activist investors push management to extract more value out of the business even when the CEO feels this will compromise employee morale and customer value.

I have seen companies in the same position described by Joel in this post where they fired the CEO, installed a "seasoned team" to get the numbers up, and then sold the carcass to BigCorp as an acquihire bailout.

So with that experience of one of the other ways this story could play out, I found Joel's story one of "success" in terms of sticking with the plan as opposed to selling out. I certainly respect that and wish him continued success.

Came to the comments to say the exact same thing: this is basically just a vote of no confidence in management.

I can't imagine any employee joining this company from this point forward without demanding all-cash compensation. Management and the investors have effectively set the value of restricted shares at zero.

Personally, I think you should treat all stock options/common stock as a lottery ticket with near zero value anyway when joining a startup. In 99% of situations, cash is all you're going to get.

This is practically reasonable but at most companies everyone's in the same boat (including founders / management) that the big upside is going to be a potential future large liquidity event. In this case, the company seems to have transitioned to being content to operate with low growth and high margins. The right thing for an employee to ask for would actually be profit-sharing. I've heard, for instance, this is how The Mathworks (which makes MATLAB) works; employees get no equity but they don't care because the company is quite profitable and the employee profit sharing is generous.

While founders and investors may seem to be in the same boat, they rarely are.

Investors are coming from a position of boom or bust to maximize that liquidity event because their success does not hinge solely on your company. If you are a founder, you are all in on it, and unless you are already independently wealthy, or come from money, you would/should most likely optimize for less risk with a healthy upside.

For most founders, making 5-10 million on a liquidity event is a life changing event. For most series a and beyond VCs, that's chump change and they will push to put it all on black and let it ride.

Buffer is apparently generating $300k in profit monthly (and growing), they can likely offer future stock buybacks using their yearly profits.

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?

How are you going to cash that out? Do you want to hold onto a lifestyle company shares when there's no potential liquidity event in discussion?

I'm not going to exercise my options in that situation and you'd be crazy to pay taxes on this year after year.

Close-held profitable companies make their shares liquid by buying them back or by distributing dividends (as "profit sharing").

Remember: to a first approximation virtually all startup equity from all startups is illiquid.

>> Close-held profitable companies make their shares liquid by buying them back or by distributing dividends (as "profit sharing").

Yes, this is exactly what we do with our equity and our employees.

It is ridiculous around Hacker News that this idea has been completely lost and almost everyone focuses on RSUs and unicorn valuations and longshots, rather than simply... I don't know, making a business that very calmly makes a few million dollars per year with double digit growth rather than insanity.

It’s as if the idea of working for a company that’s profitable, pays market rates, and may pay a bonus to it’s employees out of its profits is blasphemous....

How do stock buybacks work (especially in a private company)? Do I as a shareholder access to all the information that the company does?

Not trying to sound smart but wouldn't a market with only one buyer mean they will pay the least possible amount?

I'm not trying to trash talk buffer. Just wanted to see if there's another angle to this.

One way it can be done:

We issue equity internally, not options. We hold right of first refusal and have independent appraisals of value of the business done, so when you leave, we have the right to purchase the equity back at the last appraised value of the company. Additionally, we also pay dividends (impacted by equity) and profit sharing (not impacted by equity but rather a percentage of salary) to our employees.

These things are what "lifestyle businesses" do, or what basically everyone outside of SV and indoctrinated MBA programs call... businesses.

You should talk to someone who works at Bloomberg. Bloomberg is a gigantic private tech company with an internal exchange where vested equity can be bought and sold among employees and the company.

Buffer's current salaries:

https://docs.google.com/spreadsheets/d/1l3bXAv8JE5RB9siMq36-...

Personally, I think the salaries are more than reasonable. A senior engineer with a $175k compensation seems fair enough.

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-read my previous comment and realized "cash only" wasn't the correct phrase to use. I meant it to include the other stuff I mentioned here (give employee some amount of cash) not just base salary.

No. All things being equal, the VC and cofounders leaving is a bad sign. But all things aren't equal: Buffer is so profitable that it can buy out its investors without impacting operations. That's an extraordinarily good sign, one few startups ever find themselves in a position to do.

The Buffer post is extraordinarily clear (almost numbingly so) about the mechanics of their Series A and why they needed to buy their way out of it. They had two structural problems:

(1) the terms of their A round included a strong incentive to liquidate the whole company early, in the form of a perpetual 9% annual interest payment due to the A round investors after 5 years.

(2) the terms of their A round forbade them from extending liquidity to other shareholders, including employee equity holders, without the approval of the A-round lead investor.

Unsurprisingly, Buffer's A-round investors needed to be talked into accepting the buyout, which they took at a substantial premium to their investment in the company.

I do not think the logic you're employing to value these shares is sound. Early exits are usually bad for employees (the lower the exit valuation, the less money is likely to trickle down to employees). Profitability gives Buffer lots of options to maximize returns to long-term shareholders, which is what employees are. To my eyes, Buffer's employee equity is more valuable given this information, not less.

It's also tax efficient. Taking out $2.5m would first incur corporate tax, then dividend tax.

They initially sold equity of the business, only incurring capital gains tax in their personal name. Now they buy back shares and destroy those shares, so their stake increases again. They bought back shares with taxed capital within the company, but without incurring dividend taxes.

Thanks for taking the time to explain to this guy the big obvious perspective he is missing here. So frustrating reading one-sided comments like that.

Can we please stop using “lifestyle business” as a pejorative for everything but hyper-growth companies? Outside our bubble that’s pretty much just what everyone else calls a business.

There are way too many commenting as if a profitable business is actually a negative thing.

It's because we are growing up with VCs teaching us that you have to burn money for 10 years before you can be profitable.

Honestly, I'd sign with my blood if I could get my business to make £5M a year in profit and own nothing to VCs or banks.

Out of curiosity, can you lay out yearly (or monthly) revenue and profit ranges for what you consider a "lifestyle business"?

To me it sounds like he's trying to establish Buffer as a business, and not a startup. Let's make that distinction, and drop the "lifestyle" part.

> 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.

Always ask for cash compensation. Stock options vest super slow, you can get fired before they vest, and if you're super lucky and stay there for years and years, you have to be DOUBLE lucky for them to be worth anything.

Buy this lottery ticket and you'll know if it's a winner in 6 years.

???

Just ask for cash!

What? This is a vote of no-confidence in chasing unicorn-type results. That's fine. Lots of people want to work for a company that produces slow and steady gains.

I honestly can't understand why an employee would insist on anything other than straight cash. Stock options are a joke. I'll take the cash.

From looking at the salary spreadsheet, it looks like they are paid about average. To think that anyone should accept a much lower salary than thier market value on the tiny hope of striking it rich is crazy. Every employee of a non public company should always consider only the cash compensation.

Well, if they actually start paying dividends, that could be interesting, I guess.

Why is he stubborn? Isn't he just running his company his way?

You are permitted to run the company your way when you are wildly successful and can raise money at obscene valuations (see Facebook). Otherwise it is a delicate dance with the investors.

You can run your company however you please until you no longer have 51% voting control.

And don't think for a second that your investors won't do whatever the heck they please once they have controlling interest, up to and including kicking you out of your own company if it serves them better.

> including kicking you out of your own company

kicking you out of their company

After the share buyback, has he undiluted his ownership from 45% to above 50%?

Not by my calculation.

Here is how I figured that. He had 45% of a company that was valued at $80 million in the buyback. That's $36 million. He paid back $3.3 million. That reduces the value of the company by $3.3 million and leaves his value untouched. So he now has 36/(80-3.3) = 0.46936... of the company, for around 47% < 50%.