No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so.
It also forces you to keep pivoting and finding a cash cow rather than assuming your initial plan was any good. We’re on like plan #10 now and in hindsight if we went with any of our original plans we’d still be burning money whereas current plan was profitable after just 1 month once we figured it out.
Does anything have a $1B payout for the founder? I guess there are a few companies that achieve this, but it takes only a modicum of humility to realize you're not likely to be one of the most successful founders this decade.
= turnoff for investors. They only care for chances at homeruns — singles and doubles are not welcome. You’d better swing for the fences, because that’s the purpose of VC.
(This is my understanding, not my endorsement. Please correct as needed)
The question only seems to be whether this strategy still works in a higher interest rate environment. As I understand it this development mostly stems from it being more profitable to invest with a low ROI (or a low probability of a high ROI) than to keep the money in the bank.
Anyone can get S&P 500 returns with little to no risk. That’s not to say they won’t lose money but it’ll be market returns either way, will be very liquid, and readily transparent to the holder.
Given the risk involved in early stage investment the maths just don’t make sense for an investor to shoot for anything short of the moon.
tldr; Seed funding / early stage investing is closer to lottery tickets and Vegas than to your 401k.
Unless it’s buying SP500 index funds, I doubt it. Especially the last 15 years.
I know quite a few people who would have been further ahead (financially) if they had just invested in SP500 and retired.
I mean literal index funds.
Basically, give me my market returns if you’re not going to hit a homer so that I don’t need to keep shoveling cash and can spend my time and money on the remaining at bats.
Given the situation described in TFA, that's just as well.
VC wants to have a portfolio of 100 companies swinging for the fences, knowing most of them are going to zero.
Individual founders do not want to go to zero, and many would be happy hitting singles or doubles.
That is, VC wants their founders to take more risk than is expected value positive for any given founder. A lot of the legal & financial levers VC uses are to force this upon you as a founder.
Someone working on their $500 MRR form-builder app isn't building a startup, they're "just" building a regular ole business.
Personally I'd much rather build a business than a startup.
It's that singles and doubles aren't profitable for the VC fund.
The VC business model is based on promising investors high return in return for high risk. Typically the fund will take a management fee along the line of 0.5%-2% a year, sometimes frontloaded a bit to account for the higher cost of marketing and finding investment opportunities. 0.5%-2% does not get you rich unless you're a huge fund with very tight operations - it costs money to have people following up a large portfolio. For most smaller funds the management fee will tend towards the lower end, and will just keep the lights on.
Then on top of that you get carry. Carry can vary enormously based on your reputation, and your promises. Specifically, the higher the threshold before the carry kicks in (the hurdle), the more you can insist on retaining above that.
A not untypical example would be to retain 20% of any return over an amortized yearly return of ~7%-15%.
Put another way, in this case $400m of investment was made. The last round was 3 year prior, but much of the capital had been in the company much longer. The VC's in question would, with a 7% hurdle rate need a return of $490m before they'd see any money beyond the management fee if this company was typical of their portfolio and the entire $400m investment was "only" three years old (much of it would have been older).
As such, if the VC funds in question were otherwise successful, a $465m exit would have been dragging their profit down. Not as much as if it'd gone bankrupt, but this was a really bad exit for the VC's, and basically represented the VC's having written the company off as a failure and salvaging what they could before they lost more.
The investors in the VC (the limited partners in the VC fund) would have done better, but keep in mind 7% represents roughly the return of an index fund over time, so for them getting "only" $465m back after it had sat in the VC fund for years will also have represented a significant opportunity cost vs. putting the money in a safer vehicle that might have returned more.
https://www.propublica.org/article/lord-of-the-roths-how-tec...
For comparison, the SEC filing for Paypal's IPO has Thiel Capital investing a bridge loan of $100k in 1998 which was then converted into 500 thousand shares (100x higher valuation than his individual "purchase" the following month).
https://www.sec.gov/Archives/edgar/data/1103415/000091205702...
From the ProPublica article, re: why this was problematic:
> Thiel’s unusual stock purchase risked running afoul of rules designed to prevent IRAs from becoming illegal tax shelters. Investors aren’t allowed to buy assets for less than their true value through an IRA. The practice is sometimes known as “stuffing” because it gets around the strict limits imposed by Congress on how much money can be put in a Roth.
Add up the IRS cut, state and local, gas tax, sales tax, fees to use services already paid for with taxes and are basically required for life in the US (road tolls, document fees, vehicle registration fees, public transit fares, etc), costs for compliance with laws like hiring someone to help you file taxes or taking a day off work to renew your driver's license, higher costs for goods and services due to monopolies granted by government (drug patents where the same drug costs a quarter of what it does in the US everywhere else the world, higher than otherwise internet fees paid to entities like Comcast who are granted monopolies, hospitals that are expensive due to monopolies granted by certificates of need, etc), inflation caused by money printing to pay for foreign wars without broad popular support, housing that is more expensive due to policies that benefit homeonwers at the expense of those without assets etc, etc.
Its way more than half of your productivity that is taken, if you are productive and earn wages. Those earning capital gains are hit about half as hard, another happy little accident that benefits primarily the wealthy and powerful to add to my list above.
Oh and the best part, after paying those taxes for decades once you get sick, all of the sudden, the government and the medical industrial complex doesn't have the money to help you. You get to live in a cardboard box under a overpass.
Also, aren't taxes on things like stocks, equity, etc far lesser than personal income taxes anyway?
Instagram perhaps?
Also, an IPO?
WhatsApp likely did.
Minecraft as well.
Actually, it just might. RightNow was a bootstrapped startup back in the dotcom heydays, which managed a 9 digit exit after selling to Oracle. Midjourney is a unicorn without a cent of VC funding. Zapier raised just $2m, and they only got into YC on their second try.
The old maxim of "build something people want" is crap honestly - it's more appropriately worded as "build something people will pay for".
They would still want it though, if they got the drug compound at a heavy discount, or the SaaS for free. And they'll keep telling you they want something that does exactly what those products do.
Formative experience: working at a startup, coming upon a fundamental technical problem that will prevent delivery of any of our revenue generating projects & realising that anyone who has spent a meaningful amount of time working on the software would notice the same problem. Noticing nobody else has brought it up.
Valuation (I’m told) depends on ARR. Company not really set up to generate meaningful ARR from its core business. I keep hearing “it will get better” but as far as I see, the problem is squarely at the top and some specific deputies. So, why do I keep hearing that?
It sounds like very poorly messaged religion some days.
https://www.flyertalk.com/forum/travel-technology/952359-tho...
Especially this post from Jan Koum:
i'll tell you all a funny story which has to do with flyertalk: i am actually flying to Barcelona for MWC right now using the M&M miles award ticket (i am posting this from LH455 flight)... i obviously got these tickets many months ago - i prefer to fly using miles when i can to save company money. as you know, award ticket inventory is limited and last minute changes are nearly impossible... and this is where it gets cute:
we announced the deal with Facebook on wednesday after the market closed. during the process, we realized there was a chance we might not be able to get the deal wrapped up and signed on wednesday and it could delay.
when the risk of the delay became real, i said: "if we don't get it done on wednesday, it probably wont get done. i have tickets on thursday to fly out to Barcelona which i bought with miles and they are not easily refundable or even possible to change. this has to be done by wednesday or else!!!"
...and so one of the biggest deals in tech history had to be scheduled around my M&M award ticket
They seemingly did everything right and still go screwed in the end.
My understanding is that they were badly advised by Goldman Sachs. Still, "doing the right thing" sometimes includes ignoring bad advice.
Without any statistics at all to back this comment, I bet there are a magnitures more software companies out there that have made people 100% of a million, vs 10% of a billon. You're talking such a small pool (which might seem large in HN terms) when in reality there's an incredible number of small software companies globally.
Of course not discouraging anyone from shooting for the moon.
After we signed with a vendor, the owner took us out on his boat one weekend. As we walked through the harbor he pointed out all the other boats owned by competitors and other companies in the same industry. "This is Supercom's boat, this boat is owned by the person that started Megacom, and that's Supercom's old boat and now it's owned by the Digicom guy..."
The lesson would rather be: don't raise so much at the seed stage. Google got started with a $100K grant.
FanDuel raised $400M in four years [1]
And it looks like one of the the FanDuel founders did it again [2]
This is reckless and should be a massive red flag for new joiners.
[1] https://en.wikipedia.org/wiki/FanDuel
[2] https://futurescot.com/fanduel-co-founder-secures-largest-uk...
The other viewpoint is, that typically at funded startups founders get some salary. You can view it also as an another job.
This changes the complection of the whole article! "Sell for half a billion and get nothing" is _exactly_ what you expect if you raised almost half a billion in finding.
I'm sure all the points in there are important and maybe the author's product is still useful. But it's not really an accurate picture to say that these founders got shafted by unfair terms. They just didn't build a very valuable business relative to the amount of money they spent...
I think the problem with the article is that it emphasized the absolute acquisition value and omitted the fact that the company raised $400M. Considering the amount they raised, $559M seems much more reasonable and not quite bad terms?
Their sale was a 16% increase on their investment rounds. They soaked up half a billion in investment, and then got almost no return or "value added."
Almost as dumb as that $500 million tomato farm that couldn't grow tomatoes. (had to check, AppHarvest)
The Series E itself was 2/3 of the total funding and was about 3 years before acquisition. If we assume all of the investments happened 3 years before (rather than ranging from 3 years to almost 11 years, that's a return of under 4% per year. Investors in Fan Duel would have been just about as well off to pay down their mortgage at nearly historic low mortgage rates rather than invest in risky startups.
If I invest $400M in your company and you sell it for $400M, I think we can all agree that you should get your paycheck for the time you worked at the company, but you didn't create any value from the company.
That failure to create value on the part of FanDuel isn't anyone's "fault" per-se, but it's also not something that means that an equity payday has been earned by anyone.
"Early investors filed suit in New York against FanDuel's board for breach of fiduciary duty in allegedly undervaluing FanDuel to enrich themselves." ( FanDuel Wikipedia )
There was some unusual relationships in the deal, and the valuation of the company post-purchase was dramatically larger.
Not sure if suit is public, but article:
"The new lawsuit claims that the board – which allegedly included only one independent director and six directors tied to KKR and Shamrock – priced the value of FanDuel’s stake in the merged company at about $559 million. That number, the suit alleges, was no coincidence. Under FanDuel’s operative bylaws, preferred shareholders were due to receive all of the first $559 million from any merger."[1]
[1] https://www.reuters.com/article/us-otc-fanduel/fanduel-found... ( "juicy tale?" )
Also they raised over 400M in funding. If you exit with 465M with 400 million raised in funding AND liquidation preference entitles investors to first $559M in an aquisition, of course you are going to get nothing.
The question is why they raised 400M in funding and could only exit for 465M. This tells me it was a failed business.
It sucks to see "your" (at this point it did not at any point feel like it was "mine") company selling for huge amounts and get nothing or near nothing, but it's worth people understanding that a large-sounding exit does not automatically mean it represents a success.
E.g. in this case the last round in 2015 apparently valued them at over a billion. Going from a $1bn valuation to a $465m exit is not great...
It's easy for people to think these terms were onerous, but if they could get $275m (the size of the last round) at those terms they likely could've still have found significant investment at less onerous terms if they wanted less risk. They chose to take those investments.
Taking VC cash is very often a game of deciding whether you want to gamble it all on faster growth or take less risk for less cash, but with the additional caveat that the investors you take on often will cheer for the "gamble it all" option as they have many parallel bets while you as the founder has one.
I've taken VC money several times and been part of early stage VC funded startups several times (including a VC), and I wouldn't rule out doing so again at some point, but it's important to go in understanding that the VC's incentives and yours are different, but if they are too different, then taking VC money might not be right for you, and that's fine.
For starters, in any early stage startup I'd discount by 90%+ just because it's a startup, entirely irrespective of whether I like the idea, and what investors think.
It wouldn't suprise me if the estimated value of those is negative. I.e. your wage will be lower due to "wage dumping" by gamblers. I did not find amy stats on the median or average payout.
This shall be printed in block letters in a red frame ahead of most Paul Graham essays about milk, honey and richies in startup land.
He and VCs push theirs agenda because he has hundreds of bets, while founder has one.
They play different game and are quite quiet about it.
But, yes, people ought to go into it understanding which game they're playing, and understanding that your odds are different. Not least because it might make a difference in how you judge advice from your investors.
(There's also only one decision I regret us making due to investors being too willing to take risks; in retrospect I was firmly proven right but whether the board vote going the other way would have made a financial difference in the long run I can't say)
People forget that VC funds also aren't great business for the partners without carry (you get a management fee that keeps the light on, but you make your profit largely from a proportion of returns of the fund above some threshold; on top of that, in many funds you're required to lock up a significant chunk of your own cash as well, so poor returns both means you earn less and means your own investments return less), and a return like that likely would have had a seriously negative impact on their carry.
I know it can happen, and maybe it happened here. If so that's shitty, and people will have learnt a hard-earned lesson they shouldn't have to have had.
[Also in case anyone do face this argument: as a general rule don't unless you feel like a founder and your share holding gives you good reason to; e.g. even in one of the startups I got 7.5% of on joining I was paid above my previous salary - the one case mentioned above where I was "underpaid" for 6 months, I had 25% of the shares when the company was founded]
> But the investor only demands a meager $200 million return on their $400 million investment before they recognize the workers' investments.
"The investor" here are mostly VC funds that almost certainly lost money on the return they did get, as they in turn take investments on terms that leave them with a minority of the profit after clearing certain hurdles. Given the duration from the last round and the amount of the exit, it's highly unlikely that exit cleared the hurdle, and so this likely at best did nothing towards the VC fund managers profitability either. At best it will have offset even worse investments a little bit.
The investors putting money into those VC funds again, got some returns, but lower than they would have if they hadn't taken the risk in the first place and just put the money in an index fund. If you're going to account for lower salary as a loss, then the limited partners and the general partners in the VC fund also suffered a loss by not getting the return they would have if they didn't invest in this company.
That is the risk you take when you choose to make an investment - be it in cash, or labour. Don't take those risks if you're not prepared for them.
I'm all for lots more workers rights than most people on this site would have the stomach for. But this was not a successful company. This exit was a failure. There's no realistic scenario where staff would get much - if any - return from an exit on terms as bad as this one.
You accept greater job insecurity than more established companies, and lower salary than more established companies, but in return you get the opportunity to receive a larger slice of the proceeds from a "good" exit. It's like buying a lottery ticket. You don't sign on with Meta expecting a great exit, but you gamble that you might see a great exit when you sign on with Series-B-R-Us.
I'm not saying I agree with the gp here that the workers were wronged, but the widespread assumption is that startups pay less than more established companies.
And I agree completely that the gamble did not pay off for anybody here. The investors lost money, the workers lost money, the founders lost money. And that's the risk you take on when you make that kind of investment.
I've definitely declined further interviews with companies with something to the effect of "I don't have the stomach to be in an early stage startup right now".
It's a common negotiating tactic. As I said, I've only once (in 30 years) accepted less, and then I owned 25% of the company prior to the investment. Sometimes they do mean it, but far less often than people think.
> You accept greater job insecurity than more established companies
This is true, and a reason to not accept a lower salary because you are more in need of an ability to maintain or expand your cushion.
> and lower salary than more established companies,
There are certainly companies that want you to think this is just the way it is. And it depends on what you compare against. You won't get FAANG salaries at a startup, but most people don't work at FAANG's.
Some startups will not hire at non-FAANG market rates either. If you have the skills to be attractive to them, however, odds are you don't have to settle, and that includes choosing other startups. Unless you're convinced this specific startup is the next Google, odds are it's a bad bet to concentrate your risk by accepting a trade like that.
Most of the time you'd be better off getting a market-rate salary and investing the money in a way that spreads your risk.
> but in return you get the opportunity to receive a larger slice of the proceeds from a "good" exit. It's like buying a lottery ticket.
The problem is that it is exactly like buying a lottery ticket: The odds are extremely heavily against you and most such jobs do not provide enough shares to be worth it when you factor in likely dilution and things like liquidation preferences and the very, very high odds that the company will fold before any exit event.
If the company is pre-seed and you're offered 5-10%+ and a guaranteed (in writing!) salary increase after the A round maybe. If you're coming in as employee 10+ after A and you're being offered sub .1%, sure you could win the lottery, but you could also find another startup and get the lottery ticket and* the salary, and put the extra salary in an index fund and be far more likely to get a high return.
I'm not saying there aren't ever deals that are worth it, but put another way: If you accept a lower salary for shares, you're investing in the company. Have you done the calculations of risk-adjusted potential returns and done the due diligence you would if you were to put money on the table? If not, why not? It's the same thing.
Unless you're really sold on that startup in particular to the point where if you weren't hired you'd like to participate in their investment round with your own cash, it's likely not just a bad deal, but you're concentrating your risk.
> I'm not saying I agree with the gp here that the workers were wronged, but the widespread assumption is that startups pay less than more established companies.
Most tech workers also don't negotiate their salaries. I've hired dozens over several decades, and I've had less than I can count on one hand actually try to negotiate, and in each case, we went back with a higher offer. Conversely, I've never accepted a first offer. I've sometimes walked because we were too far apart, but I've never had a prospective employer decline to up their initial offer.
I've been offered substantially higher pay than the CEO by startups who did want to pay below-market but were more concerned about getting the right person.
My experience is that if you can get offers, you can get offers from startups at market rate, and it's down to whether or not you consider that investment worthwhile if it had been separated from the employment. If you struggle, and a startup offering below market is the only option, sure, don't be too proud, I wouldn't be either if times were tough.
I'm not sure why I would work for less unless I was founder, or it was a charity or other public good.
The bottom line is these guys were not profitable.
But the investors got very lucky to not see -100% return.
What's the point of accepting 400M to build a business if you essentially don't own any of that business (because of the 559M buyout ceiling).
Were they gambling on a buyout more than 559? I don't understand why someone building a business would accept these terms.
> Every founder should learn from this disastrous scenario the importance of building a very healthy, fundable startup. A healthy, vibrant startup draws more investors during fundraising. The competition gives founders the leverage to negotiate for more founder-friendly terms. Healthy startups get better valuations, better terms, and raise funds with much less effort.
Hmm. The lesson I learn from that is to bootstrap/self-fund, rather than get investment in the first place.