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I am surprised that Dropbox' investors would allow it. It also indicates that Dropbox likely does not have a Redemption Clause in their term sheet. Redemption

I am surprised that Dropbox' investors would allow it. It also indicates that Dropbox likely does not have a Redemption Clause in their term sheet. Redemption Clause basically says "if the company does not IPO or get acquired in X years, the company has to pay the investors back their money, plus a hefty interest". It is a relatively unusual term, but not rarely-seen. (Source: I used to work for a VC.)

Brushfire 10y ago
Note to entrepreneurs: this is a really, really bad term if you see it early on in a companies life. It allows nasty investors to put a gun to the head of the company to either bankrupt the company or (in reality) force a crazy negotiation for more equity when an exit isnt found within enough time. Avoid like the plague. So, good for Dropbox.
- bing_dai 10y ago
  I have a relatively less negative feeling towards the Redemption Clause. I somewhat empathise with VCs who put the clause in the term sheet, as VCs themselves have huge and constant time pressure to make money for their investors (LPs), which likely can only happens when their portfolio companies has a big liquidation event (IPO or acquisition). Yes I agree that the Redemption Clause does not align with entrepreneurs' interest, but I understand the reason behind it.
  - frakkingcylons 10y ago
    I think you meant to say empathize as opposed to emphasize.
    - bing_dai 10y ago
      Oops. You are right. Thanks!
  - mbesto 10y ago
    > Yes I agree that the Redemption Clause does not align with entrepreneurs' interest, but I understand the reason behind it. I don't think the parent was questioning the reasoning behind, he/she was just saying it's a bad deal, and entrepreneurs should actively avoid it. It's good advice and a good strategy for a founder. Let's turn your statement around a bit. You can probably see how there really isn't an equally fair way to play this game: I somewhat emphasize with founders who don't understand such clauses in the term sheet, as founders themselves make huge sacrifices and are constantly under pressure to perform for their investors (VCs), which likely can only happen when their company has a big liquidation event (IPO or acquisition).
rmoriz 10y ago
I guess the investors understand the current situation in funding and exits/IPOs. I'm also guessing that neither of the big players is currently willing to buy Dropbox, because they all started/run their own solution (which, in most case, still come not close to sth like Dropbox). Why start a firesale/-IPO, if you can sit the cold winter out?
hkmurakami 10y ago
Dropbox's last round was during the frothiest of the current frothy environment. Terms sheets with such ominous terms (if they exist today) didn't arrive until later.

Brushfire 10y ago

Note to entrepreneurs: this is a really, really bad term if you see it early on in a companies life. It allows nasty investors to put a gun to the head of the company to either bankrupt the company or (in reality) force a crazy negotiation for more equity when an exit isnt found within enough time. Avoid like the plague. So, good for Dropbox.

bing_dai 10y ago
I have a relatively less negative feeling towards the Redemption Clause. I somewhat empathise with VCs who put the clause in the term sheet, as VCs themselves have huge and constant time pressure to make money for their investors (LPs), which likely can only happens when their portfolio companies has a big liquidation event (IPO or acquisition). Yes I agree that the Redemption Clause does not align with entrepreneurs' interest, but I understand the reason behind it.
- frakkingcylons 10y ago
  I think you meant to say empathize as opposed to emphasize.
  - bing_dai 10y ago
    Oops. You are right. Thanks!
- mbesto 10y ago
  > Yes I agree that the Redemption Clause does not align with entrepreneurs' interest, but I understand the reason behind it. I don't think the parent was questioning the reasoning behind, he/she was just saying it's a bad deal, and entrepreneurs should actively avoid it. It's good advice and a good strategy for a founder. Let's turn your statement around a bit. You can probably see how there really isn't an equally fair way to play this game: I somewhat emphasize with founders who don't understand such clauses in the term sheet, as founders themselves make huge sacrifices and are constantly under pressure to perform for their investors (VCs), which likely can only happen when their company has a big liquidation event (IPO or acquisition).

rmoriz 10y ago

I guess the investors understand the current situation in funding and exits/IPOs. I'm also guessing that neither of the big players is currently willing to buy Dropbox, because they all started/run their own solution (which, in most case, still come not close to sth like Dropbox). Why start a firesale/-IPO, if you can sit the cold winter out?

hkmurakami 10y ago

Dropbox's last round was during the frothiest of the current frothy environment. Terms sheets with such ominous terms (if they exist today) didn't arrive until later.