By contrast, the 3 GitHub founders each took home about $1.25B from their $7.5B acquisition. Mark Zuckerburg's Facebook stake was worth about $20B in 2011, out of the roughly $85B market cap. Larry & Sergey own 11% of Google today, 15 years after it became a public company. Kevin Systrom netted about $400M from Instagram's $1B sale. The three YouTube founders took home around $700M of YouTube's $1.65B sale. Jan Koum and Brian Acton together took in about $11B of WhatsApp's $19B sale, including continued stock incentives (they may've forfeited some by departing FB early). AFAIK Markus Frind took home nearly all of the $575M that PlentyOfFish sold for.
I was also surprised at how low the founder ownership stakes were for Box (3% IIRC) and PayPal (Elon Musk was the largest founder shareholder at about $85M of the $1.5B purchase price). It really does pay to keep capital requirements low, profits high, and get on the hyper-growth curve before taking lots of capital rather than taking lots of capital so you can get on the hyper-growth curve.
The companies I mentioned are all alike in that they have nearly zero marginal cost of production; zero cost of distribution (they grew virally); early markets that could be reached with a product built only by the founders; and a lack of competition. Together, that means low costs and high profits, which means they didn't need to take much investment (Facebook is an exception, but they took it all on very advantageous terms), which means they had investors begging them to invest rather than them begging investors.
The ones that got diluted did so for different reasons. My understanding of PayPal is that it's because of the number of pivots and corporate restructurings they needed to do before finding product/market fit; they started as 2 separate companies (X.com and Confinity) in 1996, and didn't really take off until 1999. My understanding of Box is that they need a very expensive enterprise sales process to generate revenue - they don't get the viral growth of say Hotmail or even DropBox. Lyft got in a price war with Uber, and spent billions on ride subsidies to generate consumer demand and ensure they were price competitive.
Warren Buffett had over 25% of Berkshire Hathaway after roughly 43 years, until he began liquidating to give it away.
Michael Dell now owns 52% of the publicly traded Dell. That had been reduced to about 14% during the company's last term as a public entity (circa 2013), prior to the move to take it private. Through very clever maneuvering he now majority controls the public conglomerate of Dell + EMC + VMWare.
Another one is Larry Ellison, who still holds 30% of Oracle after 41 years.
How much of the capital raise decision due you feel falls into founder choice vs market or industry dynamics?
I know that I've decided not to fundraise until I have a pretty good idea who my market is and some proof points that they actually want my product, and I've chosen product ideas and target markets to make it feasible (if difficult, sigh) to test those assumptions without funding. Part of this is that I see my personal competitive advantages as technology & strategy, though, and I kinda suck at skills like hype and fundraising. Someone good at hoodwinking people like Elizabeth Holmes or Lucas Duplan might rationally choose to raise as much capital as possible first and then hire people to figure out the details ... but then again, it didn't exactly work out for either of them. (Actually, Steve Jobs and Jeff Bezos are good examples of people for whom this strategy did work out - but they actually were not diluted all that much, because the data they took to investors was such that they were able to raise that capital on advantageous terms.)
Brian Chesky talks in some interviews about how they initially planned to grow AirBnB organically and take only as much capital as needed to stay alive, but foreign competition that copied their idea and raised hundreds of millions forced their hand. At that point it didn't matter much, though, because they already had a profitable business. Joel Spolsky has also written about the decision process:
https://www.joelonsoftware.com/2010/02/14/raising-money-for-...
But many startups run out of cash while still growing. It's more like dying from exhaustion while running faster and faster, not a frequent outcome.
Is it that or is it because a lot of start ups always want to "grow" at all cost? It is be possible to have a small-medium scale business and organically growing it out, but obviously if you take investor money, they want max return in shortest amount of time possible.
$700 x 3 = $2.1B. I guess one of these numbers is wrong.
If it had said "each took home" then your interpretation would have been correct.
And considering Lyft was/is a hugely capital intensive business that is still losing billions, I'm not surprised the capital investors came out with more equity in this one.
https://www.businessinsider.com/lyft-ipo-paying-off-big-time...
"Consists of (i) 4,663,809 shares of Class B common stock held by El Trust dated August 3, 2015, for which Mr. Green serves as trustee, (ii) 675,564 shares of Class B common stock held by The Green 2014 Irrevocable Trust dated June 12, 2014, for which Mr. Zimmer serves as trustee, (iii) 360,979 shares of Class B common stock held by The Logan Green 2016 Annuity Trust, for which Mr. Green serves as trustee, (iv) 360,979 shares of Class B common stock held by The Eva Green 2016 Annuity Trust, for which Mr. Green’s spouse serves as trustee, (v) shares of Class B common stock issued pursuant to the Founder Option Net Exercises and (vi) 1,180,329 shares of Class A common stock underlying RSUs for which the time-based vesting condition would be satisfied within 60 days of December 31, 2018 and assuming the satisfaction of the performance-based vesting condition. Subsequent to December 31, 2018, a portion of the shares described in this footnote were transferred between the trusts described in this footnote for estate planning purposes."
Employee #20, who joined maybe a few months in, and then put in seven years, is gonna be at order of magnitude down, $1M. Employee #50, who put in six years, is the hundred thousands, and we keep going down.
Yeah, fantastic money, but pales compared to founders.
Lesson: don't not be a founder.
They did all the work, or they hired employees to do lots of it with the capital?
Equity investors exist because most people would rather work for cash than for stock. Typically, the way the money flows is that college endowments & pension funds put cash into VC funds in exchange for equity; VC funds put cash into startups in exchange for equity; startups use that cash to pay salaries; and employees who receive those salaries spend a portion on college tuition, gifts to their alma mater, retirement savings, etc. that then gets recycled back into institutional finance. If the startup ends up being worth more than the money put in (either because they turn a profit or because they can convince some greater sucker to take that equity off their hands), the excess is returned to the VC fund in proportion to their ownership stake & liquidation preferences, who take 20% for their GPs and distribute the rest of it back to their LPs, who use it to fund scholarships or buy a new building or pay for your parents' retirement.
If you can convince employees to work for you for equity, you don't need VCs at all: you give them shares, and when the company has a liquidity event, everybody benefits. Most people don't take that bargain, though, because they don't have confidence that the equity will be worth anything and need to eat in the meantime. The premium VCs get is precisely because people are risk averse. If all companies were public and everyone were willing to work for equity, that premium would be arbitraged down to nearly nothing, but then we'd probably be complaining about how certain unscrupulous actors managed to convince people to accept equity of their worthless company and now those people can't eat because they were bilked out of just compensation for their labor. (The crypto economy basically functions like this, with various tokens acting as pseudo-equity in the "economy" that grows in value as the surrounding ecosystem grows and these tokens being freely tradeable on exchanges - and it suffers from precisely this failure mode, where it turns out that unforgeable tokens != unbreakable promises.)
No, I think the reason is different, and it's quite rational. Diversification. VCs invest in 10(0)s of startups, but an employee is only employed by one, and his/her job depends on the success of that one startup. It makes sense to take whatever money you can, and invest it in other start-ups (or equity markets).
It would be much more fair of course if "normal" people were able to invest in start-ups, or at least in VCs. (AFAIK currently only "sophisticated investors" can.)
The founders chose to get diluted at each round. And you're ignoring that at each "dilution", the value went up. The company didn't start at $24bn and at each round the founders got their value diluted, down to around a mere $500mm. The founders started at 100% of $0 and got "diluted" up to $500mm each.
I'd call it a fun lesson in meteoric wealth growth for 2 guys starting with just an idea. $500mm/7yrs = $70mm/year. That's remarkable.
top pay : $1.7b for 1 year for #1 spot to $100m for spot #20.
For the hedge fund managers note that this is not just "pay", it includes as well the returns on their own invested fortunes. The #1 in the list is not even working (he's 80 and he retired 10 years ago). They may make billions, but they also may lose billions: since 2011, John Paulson's estimated wealth is down from $15bn to $5bn.
Versus two.
The capital is arguably more valuable in this case. Lyft is just a copycat of Uber, what did the founders bring to the table?
I'm playing devil's advocate [more than] a bit. I'm happy for Green and Zimmer, and they are both making FU money from this so I'm not sure what the complaint is.
Not to downplay Lyft, though... Lyft started in 2007, two years before Uber — and so was doing ridesharing beforehand. Uber snuck in with a taxi model that was legally gray which opened the doors.
At what point of seeing this same story over and over again and realising that funding growth is a viable strategy do the cynics just let go?
[0] heaven forbid you ever take investment advice from dhh https://signalvnoise.com/posts/2585-facebook-is-not-worth-33...
So if I'm critical about the "grow while burning money" strategy, it's because I've seen the damage the eventual successful business model does to civil society. It's a bait and switch that we don't have to continue falling for.
But I'm just making a commentary on the relative value of the capital vs. the work.
Speaking as a Founder myself.... Honestly their stake is too damn high. They didn’t do 0.001% of the work required to build the company. Could you make the case they even had some unique skill or insight that meant they were providing even 1% of the business value? They were just first.
And they weren’t even the first with the idea of how to build a “Lyft”. They were just the first on this particular cap table.
Think it this way, the work of founders which got them their share of capital will be used as investment in some other company.
Or are you trying to claim the capital invested in this company by investors was acquired for free without putting in any work or risk?
How much did those founders get for their time compared to the average person selling their time?
I for one hope for market forces that will rebalance these discrepancies. Talented 1st employee shouldering most of the technical brunt taking <1% plus dilution is selling oneself to the dogs.
Being a founder is a hugely stressful job, and everyone I've seen spend 5 years as a founder has aged more like 10 years in that time.
"We" value taking risks more than working. An investor in Lyft carries much more risk than the founders - who would quickly find new jobs. But if the company goes bust the investor's money is gone.
We lionize the “risk” of VC investors far too much.
Who is "we"? The founders are who agreed to those terms. It's how they valued the capital.
I would say this is more related to cultural understanding and values, than how to just do something profitable.
The cognitive dissonance comes from valuing work, and getting affirmation from others that your work was worth more because of your efforts.
But this has nothing to do with math and accounting.
Logan Green and John Zimmer, the co-founders of Lyft, will each have about $500M in stock at $72.
(Edit: I miscalculated the holdings of the cofounders at $85M because I didn't account for their class B shares. However, I think my point still stands for the most part).
Google holds $900M in Lyft stock. A16Z holds $1B in Lyft stock. GM and Fidelity have $1.3B. Rakuten Europe has $2.2B.
$500M is certainly a life-changing outcome, but it's interesting how we value the capital that those companies put in far more than we value the years of work those two put in.
Edit 2: To be clear, this isn't a complaint in any way. What A16Z and Google and the rest did for Lyft is highly valuable and worthy of compensation.
This is simply a commentary on the relative value of capital vs labor.