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> In their haste to get financing, start-up founders often fail to read the fine print and later discover that they have signed away huge shares of the profits.

> In their haste to get financing, start-up founders often fail to read the fine print and later discover that they have signed away huge shares of the profits. Does this actually happen?

MOARDONGZPLZ 10y ago
Isn't Facebook the typical example of this? Many people aren't very good with legalese and really should consult an attorney for review of contracts, but when you're new to this and excited to get funding, you're dealing with a much more experienced party and are excited to get funding. I would think this not only happens, but is common.
- grahamburger 10y ago
  I thought Facebook was kind of an example of the opposite of this? Isn't Facebook somewhat unique in that Zuck still has so much control?
  - MOARDONGZPLZ 10y ago
    Oh sorry for the confusion, I was talking about that other guy who had a lot of his equity diluted.
    - kirubakaran 10y ago
      Eduardo Saverin
- nickpsecurity 10y ago
  I believe you're talking about Saverin: http://mashable.com/2011/04/13/facebooks-complicated-ownership-history-explained/ http://mashable.com/2011/04/13/facebooks-complicated-ownersh...
TeMPOraL 10y ago
Yes, and AFAIK it's a known business advice - if you want to build a sustainable company and get rich off it, the most valuable thing for you is ownership. Taking VC money is signing off some degree of ownership - you get some cash now, but seriously limit your potential value later. But most startups are not built with sustainability in mind. They're a get-rich-quick scheme.
- notadoc 10y ago
  > But most startups are not built with sustainability in mind. They're a get-rich-quick scheme. That is the truth.
- cortesoft 10y ago
  Yeah... the ones that aren't a get-rich-quick schemes are called 'small businesses'
  - ascendantlogic 10y ago
    Or if you're not taking a moonshot you will hear the derisive term "lifestyle business" from people who turn up their nose at things like "profitability" and "life/work balance" and other things that don't make VC's 3 to 5 to 10x returns because that's all that matters in life, right?
ccvannorman 10y ago
I've heard many horror stories, VC seems to be a two-faced industry. And their #1 stated legal goal is to maximize shareholder value, whether or not that is in line with the founder's initial vision / whether or not that means firing the founder to maximize profits. Of course there are success stories as well, YMMV.
- jacquesm 10y ago
  VCs will use their experience and the fact that they have done 10's of deals whereas your average founder will do 1 deal in their whole career as a natural advantage. The only way to counter that is to get yourself some competent legal advice in the run-up to getting funding and to make sure that your walk-away option (to go without funding) is a solid one. If funding is all that stands between you and being able to continue to run your business then you are playing for very high stakes in a game where others can dictate the rules. Better make sure you really understand the rules. So, every year a fair number of companies 'exit', that is, their founders and their investors tend to make a substantial multiple of the value that they put in. The latest investors usually have the best terms, earlier investors have lesser terms and the founders will have the worst terms. The multiples for the latest investors will be the lowest, for the earlier investors higher and for the founders the multiples will be the highest. But that does not say much about the absolute 'take home' amounts. It is rare - but not unheard of - for liquidation preferences to eat up all of the result, but it is not at all rare to see founders make substantially less than they thought they would make. And those are the good cases, in a bad case (for instance, a bankruptcy) all of the proceeds could go to an investor + all of the IP if you are not very careful. So make sure you understand the terms and internalize 100% that a large valuation during a funding round can work for you as well as against you quite easily depending on the final price your company will fetch at an exit and the exact parameters of the deal. VC money is not free. This is not simple stuff and plenty of founders are hopelessly naive when it comes to understanding their position.
- spacelizard 10y ago
  A lot of people forget that VCs are salesmen trying to sell a financing product. These come with the usual risks.
notadoc 10y ago
Of course it does, there are always vultures out there.
mbesto 10y ago
Yes. The amount of founders who neither have any sophistication in finance or get poor (usually free) advice is probably more abundant than one would think. Funny enough, many people rely on advice from VCs (the same people who are trying to maximize their returns).

> In their haste to get financing, start-up founders often fail to read the fine print and later discover that they have signed away huge shares of the profits. Does this actually happen?

MOARDONGZPLZ 10y ago

Isn't Facebook the typical example of this? Many people aren't very good with legalese and really should consult an attorney for review of contracts, but when you're new to this and excited to get funding, you're dealing with a much more experienced party and are excited to get funding. I would think this not only happens, but is common.

grahamburger 10y ago
I thought Facebook was kind of an example of the opposite of this? Isn't Facebook somewhat unique in that Zuck still has so much control?
- MOARDONGZPLZ 10y ago
  Oh sorry for the confusion, I was talking about that other guy who had a lot of his equity diluted.
  - kirubakaran 10y ago
    Eduardo Saverin
nickpsecurity 10y ago
I believe you're talking about Saverin: http://mashable.com/2011/04/13/facebooks-complicated-ownership-history-explained/ http://mashable.com/2011/04/13/facebooks-complicated-ownersh...

TeMPOraL 10y ago

Yes, and AFAIK it's a known business advice - if you want to build a sustainable company and get rich off it, the most valuable thing for you is ownership. Taking VC money is signing off some degree of ownership - you get some cash now, but seriously limit your potential value later. But most startups are not built with sustainability in mind. They're a get-rich-quick scheme.

notadoc 10y ago
> But most startups are not built with sustainability in mind. They're a get-rich-quick scheme. That is the truth.
cortesoft 10y ago
Yeah... the ones that aren't a get-rich-quick schemes are called 'small businesses'
- ascendantlogic 10y ago
  Or if you're not taking a moonshot you will hear the derisive term "lifestyle business" from people who turn up their nose at things like "profitability" and "life/work balance" and other things that don't make VC's 3 to 5 to 10x returns because that's all that matters in life, right?

ccvannorman 10y ago

I've heard many horror stories, VC seems to be a two-faced industry. And their #1 stated legal goal is to maximize shareholder value, whether or not that is in line with the founder's initial vision / whether or not that means firing the founder to maximize profits. Of course there are success stories as well, YMMV.

jacquesm 10y ago
VCs will use their experience and the fact that they have done 10's of deals whereas your average founder will do 1 deal in their whole career as a natural advantage. The only way to counter that is to get yourself some competent legal advice in the run-up to getting funding and to make sure that your walk-away option (to go without funding) is a solid one. If funding is all that stands between you and being able to continue to run your business then you are playing for very high stakes in a game where others can dictate the rules. Better make sure you really understand the rules. So, every year a fair number of companies 'exit', that is, their founders and their investors tend to make a substantial multiple of the value that they put in. The latest investors usually have the best terms, earlier investors have lesser terms and the founders will have the worst terms. The multiples for the latest investors will be the lowest, for the earlier investors higher and for the founders the multiples will be the highest. But that does not say much about the absolute 'take home' amounts. It is rare - but not unheard of - for liquidation preferences to eat up all of the result, but it is not at all rare to see founders make substantially less than they thought they would make. And those are the good cases, in a bad case (for instance, a bankruptcy) all of the proceeds could go to an investor + all of the IP if you are not very careful. So make sure you understand the terms and internalize 100% that a large valuation during a funding round can work for you as well as against you quite easily depending on the final price your company will fetch at an exit and the exact parameters of the deal. VC money is not free. This is not simple stuff and plenty of founders are hopelessly naive when it comes to understanding their position.
spacelizard 10y ago
A lot of people forget that VCs are salesmen trying to sell a financing product. These come with the usual risks.

notadoc 10y ago

Of course it does, there are always vultures out there.

mbesto 10y ago

Yes. The amount of founders who neither have any sophistication in finance or get poor (usually free) advice is probably more abundant than one would think. Funny enough, many people rely on advice from VCs (the same people who are trying to maximize their returns).