6 ms·

What happens when you sell your startup?

141 points by gk1 9y ago

dvt 9y ago
> Unless you’re one of the lucky few who start and take a company public in an IPO Not like I have much to draw on, but to me it seems that a huge acquisition is probably more bang for your buck than going public (which is by definition a gamble). I don't think I'd ever want to be the CEO of a Fortune 500 company. Being at the whims of finicky investors on top of shady market forces 24/7 just seems awful when compared to getting acquired for a pretty penny (WhatsApp or Tumblr come to mind).
- rm_-rf_slash 9y ago
  On the other hand, you can keep working at a publicly listed company and whenever you feel like leaving you can sell your shares on a liquid market at any time. Whereas if your private company is bought out by another private company and a significant chunk of the compensation is in stock, the market is far less liquid.
- matt_wulfeck 9y ago
  I would say for the median engineer, a buyout is better because valuable employees will be put on a retainer, which is where the real money is for the little guys.
  - dvt 9y ago
    True, but I meant as a founder.
hinkley 9y ago
He forgot the part where some of the executive team is offered a big payout for retaining employees for a period of time. At which point they at incentivized to straight up lie about how great it is to be bought and sold like cattle. That sweet, sweet stock vesting will make it worthwhile. And then it never quite seems to work out, but the horror only settles in after they get theirs. Man, do I have some latent resentment...
- edoceo 9y ago
  I feel like there is more to add?
  - jasondrowley 9y ago
    Author of the article here. Yes, there are plenty of different ways to wind up a company. But the primary goal of the series was to go over the most common legal terms in investor agreements, so I took this last piece as an opportunity to mostly cover seniority structures and liquidation preferences.
- Waterluvian 9y ago
  I respect and trust my founders, but I also believe The Machine can corrupt amd manipulate anyone. At a certain point I wrote off all my stock options as a free lottery ticket, and have valued them at $0 in my big picture life ledger. I work for a combination of money today and love for what I do, but not for the promise of ritches one day. There's always a chance I'm being foolish or paranoid, but this approach is the safest.
  - logicallee 9y ago
    You don't really value them at $0. Shoot me an email and I'll send you a binding contract saying you'll transfer them to me for $100 paid now. Hey, that's $100 for free! Only it shows you don't really value them at zero. It's only a slightly smaller lie than founders who insist their startup is worth hundreds of millions. The truth is somewhere betweem the two...
    - comstock 9y ago
      In many (most?) cases shares are not transferable in this way. If they are, there is often some kind of private market and the shares have an actual real value. This makes it much more sensible to value them near zero.
      - 9y ago
saluki 9y ago
@DHH thoughts on selling your startup https://www.youtube.com/watch?v=0CDXJ6bMkMY&feature=youtu.be&t=15m55s https://www.youtube.com/watch?v=0CDXJ6bMkMY&feature=youtu.be...
cardine 9y ago
There is also a third option for making money with a startup: To get your startup profitable without selling or going public.
- Xcelerate 9y ago
  Yeah, I've never understood why this is so frequently forgotten. How rare is this route anyway?
  - majani 9y ago
    It's not rare at all. It's just not celebrated in the big tech news sites. The VC route is way more exciting to cover.
    - hugs 9y ago
      There's a hybrid approach: Indie.vc. It's a VC investment, but the focus is on profitability and sustainability. The terms of an Indie.vc deal let them get paid back via traditional methods (IPO, acquisition), but more importantly, there's also an optional/alternative cash distribution sharing mechanism for paying out via profits over time.
- ekianjo 9y ago
  It's not an option on the table if you ever get VC money. VCs want you to sell down the road, because if you stay in control they can never make any exit. It's an implicit agreement that you enter with VCs from the get go.
- jdavis703 9y ago
  What's the point of that? If you're an employee with stock options you aren't going to see a dime of the profits. You need an IPO or acquisition to make all those extra overtime stock options pay off.
  - adventured 9y ago
    See: the SAS Institute model of profit sharing, which they began shortly after forming the business. It has endured in an extremely successful manner for four decades as SAS has remained private. To put this into context. Facebook will likely hit ~$17 billion in profit for fiscal 2017. They have 20,000 employees. If their only obligation was to employees as owners, they could very safely distribute half a million dollars per year perpetually to every one of their employees (while distributing billions to the early shareholders). This model would have vastly outperformed the IPO model as far as the VC firms are concerned (specifically as far as their institutional capital suppliers are concerned). Most VC investment gets liquidated early on, shortly after the IPO (the same happened with Google, most of the early backers bailed not long after the IPO, or their returns to date would be comically higher; Peter Thiel made the same choice with his Facebook position, selling a lot of it early after the IPO).
rsp1984 9y ago
How likely is it though that the board would have accepted the deal in a real scenario? The VC returns in the example aren't exactly home runs. Wouldn't they be incentivized to block the deal and wait for a better one?
- gedrap 9y ago
  I guess quite likely? In this scenario, it sounds like the goal of Series C was just to get some, any return. And getting back your initial investment sure sounds better than getting nothing back.
  - moxious 9y ago
    I doubt that was the goal of series C as any investor in that round would have been throwing good money after bad. If you're the VC in that case you're probably better off investing in a growth operation that trying to salvage a previous bet
sds111 9y ago
The buyers rarely understand what they are getting. Because of that they will use different marketing approaches and customer service. The good buyers will be lucky to keep 50% of the customers. Other buyers may decide to take the idea and tangibles such as domain names, and rebuild from scratch. In either case it sure is hard watching your baby get sold off and changed.

141 points by gk1 9y ago

dvt 9y ago

> Unless you’re one of the lucky few who start and take a company public in an IPO Not like I have much to draw on, but to me it seems that a huge acquisition is probably more bang for your buck than going public (which is by definition a gamble). I don't think I'd ever want to be the CEO of a Fortune 500 company. Being at the whims of finicky investors on top of shady market forces 24/7 just seems awful when compared to getting acquired for a pretty penny (WhatsApp or Tumblr come to mind).

rm_-rf_slash 9y ago
On the other hand, you can keep working at a publicly listed company and whenever you feel like leaving you can sell your shares on a liquid market at any time. Whereas if your private company is bought out by another private company and a significant chunk of the compensation is in stock, the market is far less liquid.
matt_wulfeck 9y ago
I would say for the median engineer, a buyout is better because valuable employees will be put on a retainer, which is where the real money is for the little guys.
- dvt 9y ago
  True, but I meant as a founder.

hinkley 9y ago

He forgot the part where some of the executive team is offered a big payout for retaining employees for a period of time. At which point they at incentivized to straight up lie about how great it is to be bought and sold like cattle. That sweet, sweet stock vesting will make it worthwhile. And then it never quite seems to work out, but the horror only settles in after they get theirs. Man, do I have some latent resentment...

edoceo 9y ago
I feel like there is more to add?
- jasondrowley 9y ago
  Author of the article here. Yes, there are plenty of different ways to wind up a company. But the primary goal of the series was to go over the most common legal terms in investor agreements, so I took this last piece as an opportunity to mostly cover seniority structures and liquidation preferences.
Waterluvian 9y ago
I respect and trust my founders, but I also believe The Machine can corrupt amd manipulate anyone. At a certain point I wrote off all my stock options as a free lottery ticket, and have valued them at $0 in my big picture life ledger. I work for a combination of money today and love for what I do, but not for the promise of ritches one day. There's always a chance I'm being foolish or paranoid, but this approach is the safest.
- logicallee 9y ago
  You don't really value them at $0. Shoot me an email and I'll send you a binding contract saying you'll transfer them to me for $100 paid now. Hey, that's $100 for free! Only it shows you don't really value them at zero. It's only a slightly smaller lie than founders who insist their startup is worth hundreds of millions. The truth is somewhere betweem the two...
  - comstock 9y ago
    In many (most?) cases shares are not transferable in this way. If they are, there is often some kind of private market and the shares have an actual real value. This makes it much more sensible to value them near zero.
    - 9y ago

saluki 9y ago

@DHH thoughts on selling your startup https://www.youtube.com/watch?v=0CDXJ6bMkMY&feature=youtu.be&t=15m55s https://www.youtube.com/watch?v=0CDXJ6bMkMY&feature=youtu.be...

cardine 9y ago

There is also a third option for making money with a startup: To get your startup profitable without selling or going public.

Xcelerate 9y ago
Yeah, I've never understood why this is so frequently forgotten. How rare is this route anyway?
- majani 9y ago
  It's not rare at all. It's just not celebrated in the big tech news sites. The VC route is way more exciting to cover.
  - hugs 9y ago
    There's a hybrid approach: Indie.vc. It's a VC investment, but the focus is on profitability and sustainability. The terms of an Indie.vc deal let them get paid back via traditional methods (IPO, acquisition), but more importantly, there's also an optional/alternative cash distribution sharing mechanism for paying out via profits over time.
ekianjo 9y ago
It's not an option on the table if you ever get VC money. VCs want you to sell down the road, because if you stay in control they can never make any exit. It's an implicit agreement that you enter with VCs from the get go.
jdavis703 9y ago
What's the point of that? If you're an employee with stock options you aren't going to see a dime of the profits. You need an IPO or acquisition to make all those extra overtime stock options pay off.
- adventured 9y ago
  See: the SAS Institute model of profit sharing, which they began shortly after forming the business. It has endured in an extremely successful manner for four decades as SAS has remained private. To put this into context. Facebook will likely hit ~$17 billion in profit for fiscal 2017. They have 20,000 employees. If their only obligation was to employees as owners, they could very safely distribute half a million dollars per year perpetually to every one of their employees (while distributing billions to the early shareholders). This model would have vastly outperformed the IPO model as far as the VC firms are concerned (specifically as far as their institutional capital suppliers are concerned). Most VC investment gets liquidated early on, shortly after the IPO (the same happened with Google, most of the early backers bailed not long after the IPO, or their returns to date would be comically higher; Peter Thiel made the same choice with his Facebook position, selling a lot of it early after the IPO).

rsp1984 9y ago

How likely is it though that the board would have accepted the deal in a real scenario? The VC returns in the example aren't exactly home runs. Wouldn't they be incentivized to block the deal and wait for a better one?

gedrap 9y ago
I guess quite likely? In this scenario, it sounds like the goal of Series C was just to get some, any return. And getting back your initial investment sure sounds better than getting nothing back.
- moxious 9y ago
  I doubt that was the goal of series C as any investor in that round would have been throwing good money after bad. If you're the VC in that case you're probably better off investing in a growth operation that trying to salvage a previous bet

sds111 9y ago

The buyers rarely understand what they are getting. Because of that they will use different marketing approaches and customer service. The good buyers will be lucky to keep 50% of the customers. Other buyers may decide to take the idea and tangibles such as domain names, and rebuild from scratch. In either case it sure is hard watching your baby get sold off and changed.