The founder's personal problems have everything to do with the business. If a founder's life falls apart, then it's the business that will suffer. Keeping founders poor is a great way to make an investment more risky.
What percentage of the founder/investor drama you read about on HN comes from misunderstandings about that basic fact? 90%?
You can imagine a better world in which everyone worked together as a team to the betterment of all involved, but the reality is that you are in business, and there are going to be times when business doesn't give a sh#t about your problems.
I think this gets overlooked because we read a lot about a very specific investor who seems unusually attuned to the well-being of its investments. But they do that because it makes very good business sense, and because they've rigged their model so that the success or failure of any one investment is much less impactful than it would be at Battery Ventures; they have less incentive to be ruthless.
A founder's personal life becomes relevant the moment it affects the successful management of the company.
Well he is pretty replaceable...
Don't forget, most VC funds make 1-4 investments per partner/year, invest huge sums of money, invest at a point where the business has a life beyond the founder, and require a home run return to move the dials.
Graham invests in many tens of companies per year. He invests a small amount of money. He invests at a point where there is nothing but the founder. And he's thrilled with Wufoo.
Should more firms invest the way YC does? Maybe, but remember that many YC companies depend, at the DNA level, on eventually getting an investment from a major VC.
As the article points out, there can be sensible reasons for letting the founders cash out. The conflict between early exit (that sets the founders up for life) and risky home-run (that meets the numbers the VC needs) is classic. I saw it firsthand in the last startup I worked for. It caused a palace coup that replaced the management team. I understand the issue.
But what does that have to do with the question I responded to? Sorry, it's not despicable for investors to focus on their investment and not the personal problems of founders.
(If I'm wrong about what you meant, let me know and I'll delete this comment; I'm not trying to be antagonistic.)
Meanwhile, note two things: first, that you may in reality be a lot more replaceable than you think you are, and second, that you are almost certainly perceived as being a lot more replaceable than you perceive you are.
As soon as you sell board seats, the question of your ruthless replacement stops being a moral issue and starts being a business issue. Venture capitalists aren't investing their own money. It is the case that their absolute most important priority is the protection of their investors money.
I think the fundamental issue here though is that there are massive costs of having an under-performing head founder. Replaceability is a massive risk (bad replacement, moral, public image, learning periods, etc.) compared to what it costs to keep the original CEO happy and driving hard toward the dream - assuming they're good in that position in the first place.
The question being begged is whether these two things are positively, negatively, or un-correlated. That has a whole lot to do with the logic of making the investment in the first place.
So, setting aside the "despicable" question, is it rational to invest in a startup where the founders have tons of credit card and student load debt, or planning a wedding they can't afford right now, without also putting some money into alleviating that pain? Do crushing financial burdens make founders "hungry," "panicked," or somewhere in between?
I think those are more interesting questions.
Now restrict your perspective to the stages of these experiments that A-round investors like Battery or First Round or DFJ concentrate on. In other words, stipulate that we're not talking about firms like YC that invest in 30-50 pairs of individual people they like every year.
What are the assets of these companies?
Yes, the founders are assets.
But so is the total team.
And so, to an even greater extent, are the proprietary results of the customer discovery/validation experiments they've been running.
And so, to an even greater extent than that, are the customers they have managed to close (or more broadly the "market traction" they've achieved) in the course of conducting those experiments.
And so is inventory, so is brand value, so is the core idea, so is the foothold in the market, so is the framework code they've built and the expertise in extended it, and so on.
Against all these assets, what's the real pragmatic cost of replacing the rare founder whose incentives have flipped so totally against the investors that he will drag the company away from the home-run outcome the investors need so he can salvage his personal life?
Now what's the cost of simply not giving a founder bonus money that itself might pose the risk of allowing the founder to disengage, consider a new startup, become obstinate in board meetings, etc?
I don't know, but I can see sane arguments in both directions for not giving VC founders liquidity.
The nice thing about not taking VC this time around: I don't have to give a shit. =)
I think I'm still on the side of letting the founders take some money off the table, but not satiate their hunger. I like Mark Suster's article on this:
http://www.cloudave.com/1616/should-founders-be-allowed-to-t...
(a) Because he is addicted to arguing about things on Hacker News.
(b) Because he takes pleasure in pointing out how ruthless the venture capital funded startup environment actually is.
(c) Because he believes that people who factor their blood, sweat, and tears into how they should be treated by investors have set themselves up for otherwise avoidable heartbreak.
(d) All of the above.
People seem to equate not letting the founders cash out early with not letting them see a dime, which is not the case. They're getting paid (sort of) and in situations in which the company is no longer surviving on ramen they might even be well off in the grand scheme of things.
Think about it this way. Why should you, the founder, be given say 20k to pay for a wedding, while a early employee has to pay for it out of his own pocket. This is not a case of investors not being 'fair' and their decisions being despicable, it's a case of investors making a judgement call on good faith for the benefit of the company (for profit...).
Investors are not going to pay for your wedding as a founder because they're kind hearted or because it's the 'non-despicable' thing to do. They're going to invest in your personal life because it's a benefit for the business - plain and simple. No investor should feel they need to invest on you because it's morally correct (which is probably erroneous anyways), but if said investor feels there's a benefit to paying for your wedding/debt/porsche they will do it as a extra bit of investment on the company as a whole and not because it's a nice thing to do for your money making machine.
My solution: Get married when you do have money to pay for it. Most people save for months if not years to do so, regardless of if you're living on pizza boxes or fancy restaurants.
I do agree that letting founders cash out can be good though if it helps them aim higher.
I get where you're going - there's plenty of 'entrepreneurs' (see earlier trending article) who give up stable jobs/raises/etc with no guarantee of a payoff. But the people who are getting VCs to pay off student loans aren't the ones making sacrifices (imo).
One could turn this around from an investor's point of view too. If this kid can't manage her finances well enough so that they need a $20k 'quick fix' to pay off their credit cards, why should I invest my money in her idea, or even her as a person? How are they going to run a business? If I as an investor have to put up the money and put up the 'experience', perhaps I can find someone else with better financial skills.
Having high cc debt does not mean they've been irresponsible.
Seems to be a double standard here...
Founders are expected to pour every ounce of their life into the business, which means they can't work a 9-5 to pay the bills.
Yet having debt is considered a bad thing.
Second, you can't settle for a crappy exit your VC doesn't believe in. You sold them board seats. They will stop you, and then they will fire you. Are there companies with terms that make this less likely? Yes; they also got dealt pocket aces. Did you?
My point? Why would VC's include cash-out terms for their typical investment? The whole investment is predicated on the idea that you're going to make their numbers.
Lets say an exit is possible after 4 years of more work. For all intents and purposes, your founders have blown through their savings and are watching as their former (regularly employed) friends are buying houses (at least putting down large down-payments) and driving nice cars while he/she is living in some crappy apartment to keep costs down.
In this scenario, the sane thing in my mind is to help out the entrepreneur so that he can focus on making the company huge instead of quitting the startup so he can get a job paying $300K which would let him buy a decent house for his kids.
Everything in life is negotiable. Even the present terms in a termsheet are negotiable and I feel that this could certainly be one of them.
CEOs of VC-funded companies make market wages.
Serious question: at that point what is the qualitative difference with being an employee with lots of stock options? Isn't the point of being an entrepreneur that you get to drive the bus?
My ideal anyway. But I'm pragmatic so if there comes a situation that "fits" and where the positives massively outweigh negatives, so be it. Large enough amounts of money could get me to say, "Where do I sign?"
Am I the only one who finds this despicable, and probably bad business too? The one person in the company making the most sacrifices, taking the biggest risks and working the hardest is the one that can't even pay for his own wedding. Even when there are millions floating around in VC money.