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.
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.