7 ms·

Here's the biggest offenders I see when talking to founders: revenue vs GMV (if you give GMV, give me your cut/margin) contract vs LOI burn vs expenses

• duaneb 11y ago
  IANAL, and Sam mentioned a felony charge. Are there any legal protections for investors (or.... whoever this is protecting) for e.g. misrepresenting "signups vs users vs active users"? Surely that falls under subjective fraud rather than a straight up objective lie, especially for sites e.g. reddit where the line between "active user" and "lurker" is extremely murky. EDIT: Clearly I have no understanding of fraud.
  • dudurocha 11y ago
    Usually and investor makes a Due Diligence in the company. Depending on the stage of the company, investor profile, this due diligence can be a formal one, where you hire external auditors to make the process or in a more early-stage phase you can do VC firm (or angel) makes the due diligence themselves. Either way, at least in Brazilian Law (I work with VC in Brazil, but I imagine there is something similiar in USA), we have a "Hidden Liabilities" clause in our termsheet. It says that anything prior to the investors investiment is liable to the founders only.
    • jbverschoor 11y ago
      If an investor does not include such a clause and doesn't do proper due diligence but everything was handed over... It works the other way around with all the ways people get screwed over by the other side.
    • deleted 11y ago
      [deleted]
  • unreal37 11y ago
    RE: "Subjective fraud". Regardless of whether the fraud is intentional or accidental, misstating something to investors (i.e. "our revenue was $1 million last month" when you're talking about GMV) will still subject you to a lawsuit and/or arrest.
    • taylorwc 11y ago
      Your point stands, and this is a nit, but... Fraud, by legal definition, must be intentional. It is a deliberate attempt to mislead.
      • unreal37 11y ago
        Is there a concept in law as "you should have known"? Like, its one thing to not know that the thing you are saying isn't true (i.e. "my co-founder went to Yale" when he actually believes that he did). But another to not know the definitions of words you are using when you should know that? Can you say "I have a million dollars in the bank" when you honestly believe "a million" = 1000?
        • ams6110 11y ago
          Yes it's probably the line between just being liable for damages vs. going to jail.
        • duaneb 11y ago
          Ignorance of the law is no defense to criminal charges. But law might also specifically entail intent. For instance, this is the difference between first and second degree murder. IANAL and I have no knowledge of the business/financial/contract end of things. I do know I've signed quite a few "due diligence" and "reasonable effort" clauses. I don't know how legally defensible they are in situations like user reporting when it's not specified.
        • taylorwc 11y ago
          The concept of mens rea[0] touches on this. One of its applications is that ignorance is not an excuse for being culpable. All of this is not to say that lack of intent makes someone blameless, only that it is not fraud without intent. [0] https://en.wikipedia.org/wiki/Mens_rea https://en.wikipedia.org/wiki/Mens_rea
  • MichaelGG 11y ago
    Really? Seems like that line is easily defined with a sentence or two.
    • duaneb 11y ago
      Sorry, I more meant it in terms of: 1. What to the investors think the terms mean. 2. What does the service provider think the terms mean. 3. Can the difference between 1 and 2 be construed as a violation of a contract. 4. If 3, is it possible to discern unintentional vs fraud. I used reddit because it so easily demonstrates the different tiers of the 1% rule[1], except with reddit there are un signed in users, signed in users who don't do anything, only voters, voters and commenters, people who submit, and "power users". I don't know the details now (and reddit has changed a lot), but last I checked they seemed to descend in numbers by about ~10%. This would be a place where you could easily portray a very different ecosystem than reality, intentionally or not, simply by categorizing the users as "active" or not, and how you're characterizing the value you're getting from them. [1] https://en.wikipedia.org/wiki/1%25_rule_(Internet_culture) https://en.wikipedia.org/wiki/1%25_rule_(Internet_culture)
  • jsprogrammer 11y ago
    There are substantial remedies. Civil courts allow actions for restitution and punitive awards. If the fraud rises to a sufficient level, you can attempt to have the state lock the person up and/or prevent the person from interacting with you.
• dsugarman 11y ago
  I've probably been guilty of this but I think revenue & GMV can be confusing terms based on how a lot of commerce works via the internet. For reference, our company used to do dropship e-commerce. Amazon, for example, uses revenue for first party sales and GMV for third party marketplace, Amazon never owns the product in third party marketplace. If you are a dropship retailer though, you have flash ownership because you buy from the dropship wholesaler and then you sell to the customer using a marketplace or website. You could say Amazon is different here because they physically have the products, but with net payment terms up to and past 180 days, it really isn't much different. Also, if you just consider revenue to be your cut of GMV and you have net payment terms that gives your company high free cash flow, that seems important to distinguish as well. [Update] The main point of my post is to show how confusing these terms are in one instance, and every business is different so it is really important to clearly define how you use the terms you are using
  • npalli 11y ago
    Two quick points 1. You have switched the terms in your amazon example. Amazon uses GMV for 1st party and revenue (its cut of GMV) for 3rd party marketplace. 2. Why would you have flash ownership in a dropship model? Seems to me that would be a regular wholesale/retail model not dropship.
• antaviana 11y ago
  billings vs revenue markup vs margin payout vs dividend
• randall 11y ago
  What's voluntary vs involuntary churn? (googling but if anyone wants to save me the time) :) A: Voluntary churn occurs due to a decision by the customer to switch to another company or service provider, involuntary churn occurs due to circumstances such as a customer's relocation to a long-term care facility, death, or the relocation to a distant location. from: https://en.wikipedia.org/wiki/Customer_attrition https://en.wikipedia.org/wiki/Customer_attrition
  • foolfoolz 11y ago
    involuntary can also occur when you cannot renew for technical reasons, such as credit card rejected. these aren't always fraud related, you can have someone who wants to pay you but cant anymore.
  • deleted 11y ago
    [deleted]
  • jleader 11y ago
    I've also heard of "happy churn", where the customer no longer needs your services (e.g. when a dating site's customers get married).
• ISL 11y ago
  For those who didn't realize the difference between expenses and burn (I'd always equated them): "Your burn rate is the speed at which your cash balance is going down." http://avc.com/2011/12/burn-rate/ http://avc.com/2011/12/burn-rate/
  • timv 11y ago
    Part of the problem is that most startups run with zero revenue for the first few months (or longer). Generally speaking, if you have no revenue then burn == expenses. So for the period during which most founders are starting to learn about these terms, "burn" and "expenses" are indistinguishable. That tends to cause them to think of them as essentially the same thing for far longer than they should.
• deleted 11y ago
  [deleted]
• Havoc 11y ago
  >“GMV” (gross merchandise volume) Interesting...been in finance all my life & dealt with pretty much every industry out there...never heard this one before. Must be some type of startup slang so to speak.
  • sumanthvepa 11y ago
    It's a term of the trade in the retailing (and by extension e-commerce) industry. It refers to the value of the goods sold. If a retailer sells a widget for $100 at 50% margin, then the GMV is $100 and revenue to the retailer is $50.
    • martinflack 11y ago
      I'm pretty sure if a retailer sells a widget for $100 then the revenue is $100. COGS is $50. GMV is probably a term more useful in situations where the entity is not a retailer per se, like eBay, who still wants a number to represent the value of the goods they are facilitating transactions upon. They don't own the items on auction so the purchase price is not revenue to them, but the fees are revenue.
    • gnufrra 11y ago
      I always thought GMV is more like gross revenue. So if you sell 5 of these widget at $100 your GMV is $500. Which is different from your Net Sales. Because let say if one of these widgets got returned. And one of them was sold at 20% discount. Your GMV will still be $500 but your net sales will be: Net Sales = GMV - (discount $20) - (returns $100) = $500 - $20 - $100 = $380
    • rz2k 11y ago
      What is the value of this number? I can see how some research into operations would identify the cost incurred by holding a certain value of inventory, but decreasing inventory costs by selling at a discount without recognizing that decrease in value really seems like it is using the number for the wrong purpose entirely. Sure, if you're looking into decreasing insurance costs or something, but I how is it defensible when trying to explain your value to investors?
    • 11y ago
• liyanchang 11y ago
  I am not an accountant - I was looking most of these up so do let me know if I got something wrong and I'll edit as needed. Just trying to compile things in one place. Gross Merchandise Value is how much money flows through your system while Revenue is how much lands in your bank account. For instance, a payments processor like Stripe might have a GMV of $100 million while their revenue would only be the 3% commission (in this case $3 million). A contract is a legally binding and enforceable document. A letter of intent is when one party outlines what they are likely or would like to do - with some bits of it being enforceable like non-disclosure agreements. A memorandum of understanding is a letter of intent signed by all parties involved - it is still non-binding. A term sheet from a VC is like an LOI - however, it doesn't actually happen until after due diligence, negotiation, etc and only official when signed. Burn rate is the delta in your bank account. Expenses is how much money left your bank account and revenue is how much entered. Thus burn rate is expenses - revenue and is -1 * profit. Users are people on your site. Customers are paying users. Signups are how many people created an account. Active users are how many people logged in over a certain period of time. Cash flow positive means you have more in your bank account than you did before. However, a kickstarter which raised 1 million would be cash flow positive but not be profitable as it has many outstanding obligations. Churn rate is the percentage of your users/customers who left over a certain duration. Retention is 1-churn. Involuntary churn is when the customer leaves because they go out of business or in the case of dating apps, no longer need your services. Voluntary churn is all other churn. Gross refers revenue - expenses of the product. Net is revenue - expense of the product - administrative costs - depreciation - payroll taxes etc. Top line is referring to gross while bottom line refers to net. Top line growth means more revenue and bottom line growth means cost cutting.
  • matthewrudy 11y ago
    I think stripe is the perfect example of GMV. A clear distinction between the transaction volume they handle and the revenue they take from that volume. There are more confusing examples though. If Uber accepted cash payments, and the driver post paid just the commission, would the whole trip cost be GMV or just the commission? eg Regular Uber: Ride Cost: $20.00 GMV (goes through ubers payment system) Commission: $4.00 revenue Credit card fees: $0.60 expense Cash Uber Ride Cost: $20.00 (Uber never handles this) Commission: $4.00 revenue Credit card fees: n/a Edit: formatting
• far33d 11y ago
  I would add bookings vs. revenue. If you sign up a $120k yearly contract, you have $120k in bookings, but can only recognize $10k of revenue each month.