What surprises me most is the lack of understanding of founder risk. Most negative comments are related to employees not walking away from this exit. It feels to me that many here seem to conflate the inner workings of heavily VC-backed businesses with a slowly and sustainably growing company like Baremetrics. I see a lot of assumptions all over the comments.
I appreciate the discussion, though. It's nice to see people sticking up for employees. But a sub-10-people SaaS that's ALMOST self-funded is not the same as a prospective unicorn.
- General Catalyst: $2.5B+ in Assets Under Management
- Bessemer: $4B in Assets Under Management
DISCLAIMER: If you take venture capital, you should obviously always do it as a responsible fiduciary of both the company and the capital.
With that said, I'm positive both of those firms will be fine. They're looking for 100x returns, a $400k write-down from a seed investment is nothing. If anything, it's worth doing that on the off-chance Josh goes on to create the next Uber or Salesforce and they want to invest again. SV runs on relationships.
However, no matter how much money General Catalyst or Bessemer made last year, I would not want to invest with them going forward. I get that this is only money on the margins, and they get a benefit from a write off. Still, how hard would they have had to fight to get some of their money back? It sends a disturbing signal to me to write the whole thing off.
Someone will reply: "But they made $10b last year! You don't understand the business." And I am sure I don't. But the world is full of people who made a lot of money or were in the process of making a lot of money and then get careless.
Or reply: "It's part of the model! If they don't get 10x-100x they just want to write it off as fast as possible. That's what there investors want." Sure, but if you are careless people will take advantage of you. Also, I just don't buy that all institutional investors that back VCs are that savvy. A lot of them are just following a trend and over funding an asset class.
Tell me I am wrong. I am no expert.
VC funds have a duty to their LP base to maximize returns, but I would argue the good will generated by moves like this are what protect their ability to get into "hot" companies and thus protect those returns. Pursuing your strategy would likely harm the fund's reputation and their ability to return LP capital in the future.
Also - a point of nuance. VCs are not in the habit of writing off everything, that would be a false takeaway from this article. If the amount invested was bigger or the exit was more like 2x or 3x for the VCs, your points of criticism would be more valid.
They are not 'squeezing' remotely.
Otherwise, there would be not such thing as 1x participating in the deal in the first place.
Getting your $800K back while the founder gets $3M is not 'squeezing' it's literally just a transaction.
Also - a founder negotiating a price outside the valuation of the shares is getting very close to illegal (Conrad Black went to jail for this).
I think the founder was actually lucky that the funds simply didn't care.
So their choice was between nothing today or nothing later.
Tax-wise it was probably better to write it off now than carry a zombie investment into the future.
Like you said: their investment was a transaction and they made rational choice.
It's the emotional "we can't loose money" or "how dare the founder sell without us getting a cut" that would be a worse choice.
He should have sold the company, honoured the terms of his agreement.
It's one thing to maximize your returns in a successful exit. But for Baremetrics' investors, the returns on this investment might as well be $0; the model is that the winners pay for the losers by generating outsized returns. The ultimate returns that these funds will generate for their LPs are defined by the 10+x's, not by the Baremetrics'.
Straw man argument. 1x participating are standard terms. I'm not sure why any investor would forego using standard terms, even at the early stage, to their detriment.
re: "squeezing"
You're perfectly free to have that opinion. Clearly both firms with extensive investment experience did not feel that way.
re: "illegality"
I have no idea what parallel you're making here, or what "negotiating a price outside the valuation fo the shares" means. Financing documents typically make it very clear what rights each party has upon a financing event and/or exit event. Whether each party chooses to exercise that right is up to them. There is absolutely no reason to believe Josh did anything illegal here.
There's no 'straw man'.
>>> Asking for the 1x back on a sale is not 'squeezing' - it's literally in the contract, a normative part of these transactions. It happens all the time.
"Clearly both firms with extensive investment experience did not feel that way." - no, that they didn't 'go after the money' doesn't imply they would be 'squeezing' if they did. What it implies is that in all likelihood, it probably just wasn't worth the hassle.
The investors got robbed, but at least they can write it off. Asking for money from someone who is essentially refusing to give it back to you is not 'squeezing' by any definition.
>>> "Illegality" - in the article Josh mentioned that he had some kind of deal with the acquirer whereby 'not matter what, he would get his $3.7M'. If the acquirer is agreeing to terms with one 'insider shareholder' to the detriment of the others, that's fraud, and it's illegal.
Josh has a fiduciary responsibility to represent in good faith on behalf of all of the shareholders. Clearly in this situation, he came out with a nice exit, while his investors got $0. It also seems pretty clear that Josh and the acquirer were going to make sure that Josh was 'taken care of as part of the deal'.
Conrad Black went to jail because he was selling off assets of the company, but also getting a large 'consulting fee' from the acquiring entity to him personally. The shareholders felt that was defrauding them of what would otherwise be valuation/money they should receive.
In this companies transaction, it seems pretty clear that the investors were probably into it for $800K (participating) and then 15% or whatever they owned - but they got nothing.
He benefited while the other shareholders did not - this looks like it might illegal - but it probably would only be considered so if someone took them to court over it, which obviously they wont.
It's a fine line between 'negotiating hard' and simply saying 'I have your money, you're not going to get it, so that's that'.
See Sequoia walking away AFTER giving $21M funding b/c of a conflict of interest with Stripe - https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-...
To any normal person or small business, that's a lot of money to be captured and ignoring it is mind boggling, but again for them it's not worth the time and effort. The relationship or good will is worth a lot more, not to mention whatever write off stuff they get and the opportunity cost of their team. There is nothing careless about this.
If you wouldn't work with a VC because they aren't a penny pincher then man you are really going to be in for a reaaaalll treat!
Top tier VC firms aren't like Vanguard. They are choosy about their LPs --- that's why they're called LPs and not "investors". They have an investing thesis, and they go sell it to university endowments and pension funds.
Those endowments and pension funds, in turn, have their own investment goals, and they are not as simple as a first-principles analysis on HN would suggest; in many cases, VC LPs are putting money into that asset class knowing that it's going to underperform other asset classes.
So it's a little cringey reading comments about how people here would choose not to invest with Bessemer based on how they handled a liquidation preference. They really don't care what you think here; you and the partners at Bessemer aren't even working from the same premises.
(A good, though very dated, source on this is the old Kaufmann report on VC as an asset class).
If they have standard term sheets from GC or Softbank, likely the founder will go with GC
No one is talking about GC's investors....
How many future founders will read that blog?
If you were a founder, would it influence your choice of investor, to know if things don't work out, they will be magnanimous, rather than squeeze?
It isn't worth it for either of those funds to play hardball over $400k when hundreds of founders will read that, and will ultimately decide if they want the fund on their cap table for the next Uber/Lyft/Data Dog/Airbnb/etc.
I said it before, but it's worth repeating - SV runs on relationships.
The age-old adage, "There's two kinds of people in the world..." applies to an enormous amount of traits, but here's one where its exceptionally true:
The kind of people who become VCs and have billions of dollars of AUM (assets under management) understand time-value of money calculations, and they understand them almost intuitively. $800,000 sounds like an enormous sum for most people, because for 99% of Americans, $800,000 is life-changing money. It pays off your entire mortgage, or most of it. It sends all your kids to college. It pays for their private schooling.
For the venture capital firm, $800,000 represents a minor clerical error.
Even discounting the goodwill that this displays, engaging the machinery to recoup this $800,000 investment will incur significant financial costs, but more importantly, it incurs opportunity costs. Sometimes its better to just flush the money down the toilet and move on.
How? They write 1x participation into most contracts, and that's the normative expectation. It's not a 'legal battle' is literally a normal transaction between parties.
$1M is not 'nothing' to a firm with $500M under management - that $500M is not their money, it's other people's money.
If they are getting a %10 return for their LPs at $50M a year, and they are keeping 20% of the upside, which is $10M. So the $1M loss comes out of the fund, not their pockets, but still, $10M/year gross revenue doesn't 'feel' like a huge company now does it? A lot of these VC's are just 'rich' not 'rich rich' like mega-exist founders, just for some perspective.
The real choice was likely this deal where we let the 800k go, or future uncertainty.
This isn't "rich people don't care about 800k". This is more like "400k write down makes sense at this time".
And not just "future uncertainty", but "the future of a company that's spent 7 years trying and doesn't look any closer to launching the rocketship, who's founder is onto his second attempt to sell out, and clearly is out of enthusiasm and ideas".
There was no 3x or even 2x future here for them, certainly no 100x - there was just another 2, 5, or 10 years of slow flameout with a 0x - or a quick and tidy 0x with a significant PR goodwill upside.
>>>> If there was 'no future good outcome' for the company then in what way is the founder's 'threat' to 'not sell' credible in any way? <<<<<
Why would he 'march on for 5 more years with little hope of exit' (by your very own projection?)
He's threatening to 'not sell' and therefore probably end up with $0?
That's an empty threat - and it's also acting agains the best interest of shareholders, which is his legal duty.
The situation is obvious:
They have an offer for $4M, it's probably their only way out, it's a nice 'few million' for the founder, the investors get their 1x participating + a tiny bit.
That's it.
It's not uncommon.
What kind of person would even think to sell a company 'on the premise that the other investors get nothing'?
He basically told the investors to bugger off and that's that.
'There is no significant goodwill' for the investors.
There is however some 'bad PR' for the founder unfortunately.
It's plain as day.
No, He asked, they agreed. There’s clearly something they both know that we don’t, and the outcome that happened happened. I guess it’s just as easy and valid for you to interpret it as being a bad thing, as it is for me to interpret it as a good thing. Only the VCs really know, I guess.
Investors have given them $2.5 billion for a reason. One of those, undoubtedly, is that they are not stupid. Suffice it to say that they believe that this decision is worth at least $800k to them in the future, or they wouldn’t have done it.
If you are ever in a position to become a LP with General Catalyst, then perhaps you can ask them for their rationale and decide for yourself if they are trustworthy based on all the facts. Until then, making judgments based upon not even close to all the facts is just useless speculation. Your conclusion - that they are just stupid or terrible fiduciaries - is almost definitely wrong. You are no expert, but they are.
If a single founder decides to accept their money based on this action, and then has a VC-style outcome, they've made a good decision.
Of course, some posters here are talking about employees getting a raw deal, but it was there for all to see that the company had decided long back to prioritize profit more than growth. Any employee that would have expected a unicorn like exit would have known it wouldn't be the case and would have left long ago. Blaming Josh for that doesn't feel right to me.
There is definitely a discussion to be had about property, smarter people than us have had it for at least 150 years (even more, if you include the discussion between Locke and Filmer), don't see anything that cynic about it. I'd go on to say that even Cynicism itself was a really interesting philosophical school [1]. I do agree that that there are some people on this website who still take the IQ thing seriously, but even there, I think that the majority regards it as bogus.
The former tend to think everyone is corrupt and that if people have success or wealth or anything, it’s because those people swindled someone out of it or were connected to the right people.
Those who grew up in the USSR tend to have a more meritocratic worldview, where hard work and intelligence and studying for exams will result in a better life.
Maybe the people I know [strike]are[/strike] aren’t representative of those times and places. No matter, you can find justification for either worldview in nearly any situation, whether it’s 1970s USSR or ‘90s Russia or ‘50s America or Trump’s America. Reality is nuanced and filled with thoughtful insights that oppose each other and yet are equally true. The loudest people on HN are not people trying to square that circle.
I'm actually a really disappointed in Josh's response. I thought that his open stance on what he'd been doing would mean he'd being open to people criticising what he'd done. He doesn't need to agree with that criticism, but dismissing the whole site as toxic based on that disagreement just feels flippant.
From what I've seen and participated in, the discussion mostly centered around whether this was a good deal for everyone involved and whether or not a greater proportion of a company's success should be attributed to it's employees. At least in my eyes very little of it focused on Josh personally.
His goal in publishing this information seems to be to foster a community of transparency. To that end, his actions appear entirely consistent.
Put another way, what additional information do you want him to convey? His goal is to accurately and openly convey information, and he's basically laid it all out on the table.
You're free to have an opinion on whether his actions were right or wrong, but don't expect him to engage with your criticism when that takes a lot of time and effort (and is not part of his goal).
I think his goal was to help people. The goal of many people in HN comments is to ‘be right’. It’s a cultural thing. What we prioritize, how the community started etc.
I think HN has ‘trying to be helpful’ forces in the long run. There are ideas, content, links to new information that are helpful. But it’s not the priority compared to what many people think is decent. If you look at other online communities that’ll be pretty self-evident.
But again I think the key to HN is it has no direct interest in being helpful. Only as secondary effects. There’s nothing wrong with that - just as there’s nothing wrong with an incubator with a certain philosophy or writing essays that you think are insightful. In the long run, they help. But they don’t prioritize human decency or kindness and there are a lot of false negatives (startups missed in YC, entitlement and biases in some essays, dismissal of what isn’t clearly the right comment, etc).
It’s a cruder world that way. Take for example the culture of ‘X, Y, and Z read drafts of this’ that everyone has emulated. I used to admire that. Team building and acknowledgments! But it’s also encourages a culture of not being open and trying out new ideas. Living in fear of new ideas that will be rejected etc.
And that is something Josh had the balls to reject. There’s no hiding behind his Harvard / MIT connections. There’s just honesty and transparency. HN and YC people could learn a lot from that bravery.
I don't expect him to engage at all. I do think he should be able to handle dissenting opinions without merely dismissing the whole site as toxic on twitter.
You are aware that he's not, not by a long shot, the first to have that opinion? There's _way_ more than an element of truth in it.
Obviously some people have made some incorrect assumptions at varying points, but I haven't seen anything that would remotely qualify as toxic.
Apple wants to alert users to genuine / non-genuine batteries (to mention latest downvote blast). That is evidence of how evil apple is (not even considering how many folks were getting screwed by all the trash batteries going into iphones pretending to be real).
Zoom is so evil for X/Y/Z reason - except zoom is actually easy to use which is what most non HN folks care about - so their "evil" is just optimizing for different goals in some cases.
The negativity and the myopic focus on personal need / preferences really highlights sometimes how just out of touch with the rest of the broader world HN can be.
My own personal takeaway is crystal clear: if you want to benefit from the sale of something, you need to be the owner!
Much like a gardener or builder who doesn't get paid out when the house gets sold, unless you have a LOT of equity as an early employee, you will not be getting founder-type payouts (and rightly so as you took little to no risk)
Of course we were a traditional SV startup -- people are different these days.
But I wouldn't start generally inferring that it makes sense to take secretary jobs at startups on the chance the founders decide to pay off my mortgage.. Baremetrics is a more typical case, I would think.
We may also interrogate this arrangement.
Deleted the production database and customer data? You could apologize and move on. There should have been backups to restore from but clearly there weren't.
The gitlab way: Go in great details about how there is no automated backup and the last one that was done manually 3 months ago doesn't work... and how there was no testing/staging environment to try the change before production... and how any intern could delete it the same way by accident on their first day.
There's a reason companies don't publish gory details and internal discussion. At best there's nothing to gain from it and at worst it's highlighting incompetence and wrongdoing.
That's terrifying.
In some ways it's terrifying to be able to see those risks too. But then we need to remind ourselves that those risks are there in companies that don't dare to tell us as well.
1) Works as a club for developers to get the time they need to improve processes and code. "Do you want to be responsible for the HN article about the incident this will cause?" would give most managers pause.
3) Gives customers the confidence that you'll let them know when issues that might affect their experience or data are occurring.
4) Proves to customers that you can fix these issues when they come up.
5) Makes people wonder what's going on in your competitors that they're not hearing.
On the other hand you don't get to pretend the sun shines out your ass, but that's disingenuous and most people will see through it anyway, you only trick the people that also want to go along with you.
Much like TFA I think there are things to be learned from that level of transparency and hope the experiments continue.
$4mm after tax (hopefully Josh is getting the QSBS tax break) for a decade of extremely high risk high effort contribution to our economy is not a good risk-adjusted return, but it's at least a decent exit at the end of the day.
We don't know how much the employees are paid, for all we know they could be paid the prevailing wage for their location.
However, over the years, I've learned that facing critics and doing impactful work goes hand in hand.
Put another way, if you don't have critics, you're likely not doing anything very impactful.
In my experience, the key to maintaining equanimity in the face of harsh criticism is to:
1) Have a strongly held mission and set of core values. Commit to this mission/core values regardless of what anyone says.
2) Recognize that it's sort of funny how pretty much any action can and will be twisted and criticized by critics online. There was an article a few months back about Bezos dedicating $10B to fighting climate change, and the entire comment section was negative. Lol!
Prefer just "good job" comments, or what?
Folks, this is a founder who's openly sharing the kinds of things we usually keep hidden. I doubt there's been a startup exit in the last decade where a healthy skeptical HN'er couldn't find some wrongs being done, if the details had been available. It's extremely hard to get everything right, from every perspective. The only difference here is that the details are actually available.
Please go easy. We want more posts like these, not fewer.