4 ms·

Tony Hseih wanted to stay independent, Sequoia wanted liquidity event

10 points by marcamillion 16y ago

marcamillion 16y ago
What's even more interesting....Sequoia had a 3X - 3.5X liquidation preference. That's INSANE!!! That means, that if they put in $5M, and the company is sold for $100M, they get $15M - $17.5M before their stock gets converted to common shares. Then, on top of that, they get X% of the rest. X% representing their portion of common stock out of the outstanding.
- hga 16y ago
  Would you say that post-Sarbox VC looks very ugly?
  - marcamillion 16y ago
    I wouldn't say that. I don't think Sarbox affected the basic economics of VC. The VC's interest and the Entrepreneurs interest are not aligned. That's at the heart of VC. So while it can be good to raise VC financing, other times it can be bad (like we have seen in this case - although to be fair it was good when Tony raised the money, it's just when the credit crisis came around that it was kinda bad).
    - hga 16y ago
      Well, the thing I'm wondering about is how this misalignment brings more harsh results with the almost total departure of the IPO exit, about which many or most say Sarbox was the last straw. When no IPOs are combined with the dot.com crash most VCs have little to show for the last ten years, and when you further combine that with the credit crisis as you note, the prospect of mutually satisfactory VC exits may be getting very unlikely. All this is another reason why it may be the case that "the VC game is numbered" as you note elsewhere.
      - marcamillion 16y ago
        Well...that is perhaps true. Sarbox did make IPOs more onerous. So that took away options, leaving just acquisitions. And the truth is, at those levels, there are very few options (especially in the middle of a credit crisis). It kinda sucks though, that Tony had to be relying on $100M lines of credit from banks to purchase inventory. I would have thought that being the largest customer for many of these shoe companies he could have gotten favorable credit terms (up to even 60 - 90 days payable). But maybe there are other reasons he chose not to go that route, or couldn't.
        Todd 16y ago
        It's interesting to note that many of the potential acquiring companies were the IPOs of the dot-com pre-Sarbox era. Where would we be today if some of the great companies of this last decade had been able to IPO? We would at least have a larger number of companies able to acquire more smaller-scale companies. Better for jobs and the economy, at the very least. Sadly, Washington doesn't seem to be in the mood to make any of this easier these days.
        marcamillion 16y ago
        Well...you have to remember that Washington is not only in the business of spurring the economy, but avoiding disasters. While I don't think heavy regulation and onerous filing processes make the system completely fail-safe, it does provide some amount of deterrence to would-be crooks. You can't completely get rid of everything, so we just have to work within the system we have. Fortunately, man is ingenius. If it weren't for a weaker IPO market and an adjusted acquisitions market, I don't think we would have seen the birth of Y-Comb. The main function of Y-Comb is to facilitate much earlier stage exits (i.e. $5M, or even earlier) if needs be. You can't do that with traditional VC. So it's 6 of one, half-dozen of the other.
        anamax 16y ago
        > While I don't think heavy regulation and onerous filing processes make the system completely fail-safe, it does provide some amount of deterrence to would-be crooks. How about some supporting evidence? After all, AIG was regulated by at least two federal authorities and some foreign ones. They got into trouble selling a product that US regulators asked them to sell. Fannie and Freddie were essentially govt run. We keep hearing about how banks and their management need to have more "skin in the game". How about making regulators and politicians do the same?
- jboydyhacker 16y ago
  Are you sure that's not just 3x on their last round? If they had done a lot of prior rounds with cash in that may be covering old money for their LPs. i.e. if they had done 5m in their last round, but 10m in two prior rounds--3x is just getting the money they put in back.
  - marcamillion 16y ago
    I haven't seen the term sheets, but according to the article (and the one in Inc.) it seems that they jumped in fresh in the Series E, because Tony's investment firm basically did all the other rounds. If I am not mistaken, Series E was the first round that outsiders joined. I could be mistaken on that though. However, I am reading his book now so if I find out I will be sure to let you know :)
staunch 16y ago
Now that we know this is true it really puts Mike Moritz in a different light. He's always been considered one of the top VCs. This takes him way down the list as far as I'm concerned.
- marcamillion 16y ago
  Well...I mean...to be fair..you can't really blame him. His fiduciary responsibility is to maximize returns for his shareholders. So, to be quite honest, he is actually doing a great job at that. The issue is that it seems that the VC game is numbered. Entrepreneurs are being more and more turned off of VC - and this definitely won't help the VC's case.

10 points by marcamillion 16y ago

What's even more interesting....Sequoia had a 3X - 3.5X liquidation preference. That's INSANE!!! That means, that if they put in $5M, and the company is sold for $100M, they get $15M - $17.5M before their stock gets converted to common shares. Then, on top of that, they get X% of the rest. X% representing their portion of common stock out of the outstanding.

hga 16y ago
Would you say that post-Sarbox VC looks very ugly?
- marcamillion 16y ago
  I wouldn't say that. I don't think Sarbox affected the basic economics of VC. The VC's interest and the Entrepreneurs interest are not aligned. That's at the heart of VC. So while it can be good to raise VC financing, other times it can be bad (like we have seen in this case - although to be fair it was good when Tony raised the money, it's just when the credit crisis came around that it was kinda bad).
  - hga 16y ago
    Well, the thing I'm wondering about is how this misalignment brings more harsh results with the almost total departure of the IPO exit, about which many or most say Sarbox was the last straw. When no IPOs are combined with the dot.com crash most VCs have little to show for the last ten years, and when you further combine that with the credit crisis as you note, the prospect of mutually satisfactory VC exits may be getting very unlikely. All this is another reason why it may be the case that "the VC game is numbered" as you note elsewhere.
    - marcamillion 16y ago
      Well...that is perhaps true. Sarbox did make IPOs more onerous. So that took away options, leaving just acquisitions. And the truth is, at those levels, there are very few options (especially in the middle of a credit crisis). It kinda sucks though, that Tony had to be relying on $100M lines of credit from banks to purchase inventory. I would have thought that being the largest customer for many of these shoe companies he could have gotten favorable credit terms (up to even 60 - 90 days payable). But maybe there are other reasons he chose not to go that route, or couldn't.
      - Todd 16y ago
        It's interesting to note that many of the potential acquiring companies were the IPOs of the dot-com pre-Sarbox era. Where would we be today if some of the great companies of this last decade had been able to IPO? We would at least have a larger number of companies able to acquire more smaller-scale companies. Better for jobs and the economy, at the very least. Sadly, Washington doesn't seem to be in the mood to make any of this easier these days.
        marcamillion 16y ago
        Well...you have to remember that Washington is not only in the business of spurring the economy, but avoiding disasters. While I don't think heavy regulation and onerous filing processes make the system completely fail-safe, it does provide some amount of deterrence to would-be crooks. You can't completely get rid of everything, so we just have to work within the system we have. Fortunately, man is ingenius. If it weren't for a weaker IPO market and an adjusted acquisitions market, I don't think we would have seen the birth of Y-Comb. The main function of Y-Comb is to facilitate much earlier stage exits (i.e. $5M, or even earlier) if needs be. You can't do that with traditional VC. So it's 6 of one, half-dozen of the other.
        anamax 16y ago
        > While I don't think heavy regulation and onerous filing processes make the system completely fail-safe, it does provide some amount of deterrence to would-be crooks. How about some supporting evidence? After all, AIG was regulated by at least two federal authorities and some foreign ones. They got into trouble selling a product that US regulators asked them to sell. Fannie and Freddie were essentially govt run. We keep hearing about how banks and their management need to have more "skin in the game". How about making regulators and politicians do the same?
jboydyhacker 16y ago
Are you sure that's not just 3x on their last round? If they had done a lot of prior rounds with cash in that may be covering old money for their LPs. i.e. if they had done 5m in their last round, but 10m in two prior rounds--3x is just getting the money they put in back.
- marcamillion 16y ago
  I haven't seen the term sheets, but according to the article (and the one in Inc.) it seems that they jumped in fresh in the Series E, because Tony's investment firm basically did all the other rounds. If I am not mistaken, Series E was the first round that outsiders joined. I could be mistaken on that though. However, I am reading his book now so if I find out I will be sure to let you know :)

staunch 16y ago

Now that we know this is true it really puts Mike Moritz in a different light. He's always been considered one of the top VCs. This takes him way down the list as far as I'm concerned.

marcamillion 16y ago
Well...I mean...to be fair..you can't really blame him. His fiduciary responsibility is to maximize returns for his shareholders. So, to be quite honest, he is actually doing a great job at that. The issue is that it seems that the VC game is numbered. Entrepreneurs are being more and more turned off of VC - and this definitely won't help the VC's case.