7 ms·

I take this as one of the two central themes of this article: "...points to a persistent flaw in Silicon Valley financing: the willingness to give start-up fou

by jmull 8y ago

I take this as one of the two central themes of this article: "...points to a persistent flaw in Silicon Valley financing: the willingness to give start-up founders unassailable control of their companies, to the point that investors have no recourse if things go blooey." That's not a flaw, it's a fundamental part of how it is meant to work. The investors generally don't want to invest in companies run by a committee of investors... or else they would certainly do just that. Not to mention the larger investors could self-fund their own companies, if that's what they wanted to do, and retain all control. They are investing in the ideas, talent, and execution of the founders and other principal executives. It would be pointless to turn around and take control away from them. (I think the other main theme of this article is that Domo is a mess... which is probably true. I only know what I read in the article, but it seems they have real revenue? It would have to more than double to match their rate of spending, but that can happen if they really provide value. It's hard to have confidence, though, in a CEO who is funneling money out of the company to his family and himself. Just the willingness to put that kind of cloud over the company, is a red flag.)

dpark 8y ago
> That's not a flaw, it's a fundamental part of how it is meant to work. Is it? Up until recently this was not the typical result. Google did this and others have followed, but it’s not how it was done before then.
- mkirklions 8y ago
  Typically the founder of a company owns the company. So unless you want to buy the founder out, the founder still has ownership. Sure the moment it goes public, you need to ask the question 'who leads?', but you will have to buy out the owenership.
  - jartelt 8y ago
    Yes, founders always have ownership, but it is not always the case for the founders to own more than 50% of the company after a few financing rounds. Startups that do super well can pull this off, but I think it is safe to assume most normal startups do have super majority voting schemes that give founders total control of the company.
  - dpark 8y ago
    That's not what's being discussed at all. There is no question of ownership, but of voting rights. e.g., Brin and Page own something like 14% of Google stock combined, but control >50% of the votes. That's the exact setup that Domo is attempting, giving its CEO >90% of votes by virtue of getting 40 votes per share.
  - wpietri 8y ago
    This is not typical at all for tech startups. If you take investment, the founder's share declines quickly: https://www.lawtrades.com/blog/answers/usual-share-percentage-seed-round/ https://www.lawtrades.com/blog/answers/usual-share-percentag... Even a single founder can be under 50% by the end of the series A, as you not only have two rounds of investors, but you have to carve out a chunk of equity for employees (10-15%). And if you have multiple founders, which is typical, no one founder may own more than 50% past the seed round.
    - mkirklions 8y ago
      Eh, you were trying really really hard. I think you knew what I meant. Or your head is in the clouds.
- aetherson 8y ago
  It wasn't even that much the case with Google, where remember the board/investors installed "adult supervision" for like a decade. Facebook, on the other hand, was always Mark's. He has had ironclad control of the company from inception to the present day. And when Facebook became the success story of its generation of companies, investors took the lesson that you always had to have the founder(s) have complete control of the company. That led to the modern trend of founder worship, which probably lasted more-or-less until Travis Kalanick, Elizabeth Holmes, and Parker Conrad swung the pendulum in the other direction.
untog 8y ago
> That's not a flaw, it's a fundamental part of how it is meant to work. And, as the article demonstrates, it is not without risk. A CEO spending huge amounts of company money on other ventures he owns for no discernable reason is a pretty great example of why this SV model can be hugely problematic.
- dv_dt 8y ago
  It can be problematic, but so can investors in SV companies demanding that scale-out takes off too early or too quickly. It's difficult to quantify which of many problems are a bigger issue, or even relevant from case to case.
- mistersquid 8y ago
  Vocabulary question here: Is this "embezzlement"? I'm not sure because the use of funds were for legitimate services even if they are owned by James and his family. Is there a different word to describe the siphoning of company funds by directing business to self-affiliated parties? Is this covered by "nepotism"? (Thanks, in advance, for any clarifications.)
throwaway5752 8y ago
Practically speaking Satya Nadella runs MSFT, not the board of directors. Nadella does not have control of MSFT (he isn't the majority holder of shareholder voting rights), though. Investors don't want to run the company. But the question is should they be able to fire the person running the company, even if that person is acting against the interests of the rest of the shareholders. * ps, yes, the BoD can fire a CEO even if the the CEO has majority control of voting rights through various share classes. But the CEO can turn around and fire that board in that case (and the CEO has presumably already used their voting power to install a friendly BoD)
- Bahamut 8y ago
  > Investors don't want to run the company. Sometimes they do - I've certainly seen it happen at one company I've worked at, to the point where the board decimated engineering.
  - throwaway5752 8y ago
    I agree completely, but I ignored that because it's very likely that you're hosed at that point anyway.
- s73v3r_ 8y ago
  Shouldn't the law prevent the CEO from doing just that? I mean, the board is presumably the only check on the CEO's power, so even if the CEO is the majority shareholder, they shouldn't be able to control the board.
  - deleted 8y ago
    [deleted]
  - madamelic 8y ago
    No. What's the worst they could do? It's their company. Worst case the CEO runs it into the ground and everyone loses their money. CEO =/= President of the United States.
rdlecler1 8y ago
Don’t throw the baby out with the bath water.
JumpCrisscross 8y ago
> The investors generally don't want to invest in companies run by a committee of investors There are governance structures between one where the CEO spends "$600,000 for catering services from...[a] sandwich and salad restaurant...owned by Josh James and his brother," and committees of directors. Uber, where a supermajority of the Board (which contains independent directors) can vote off the CEO, is one amongst many examples.
- airspace69 8y ago
  LOL -Cubbies??? :P
fallingfrog 8y ago
Not only that but the whole point of a limited liability corporation is that the stockholders cannot be held responsible for the debts of the corporation- and in return they relinquish control of it. That's the trade off. That's the defining characteristic of the corporate form. It creates a division between capital and labor, up to and including the CEO. That's why we call it "capitalism".
drb91 8y ago
> That's not a flaw, it's a fundamental part of how it is meant to work. Just because it's intended doesn't mean it works.
rossdavidh 8y ago
Yeah, I found that same point quite problematic. There are basically two possibilities: 1) the founder is able to get this plane off the ground 2) the founder is not able to In case (1), running it by committee is going to mess it up. The nature of a startup is that it is not doing ordinary, well-tested things, so no committee is going to approve what they do. Only a founder (or two) can get things off the ground with a coherent vision. In case (2), you are screwed whether the founder has absolute control or not. Just don't invest, whether you get control or not. Now all this may be very different for a Fortune 500, twenty or thirty year old company with an already established business model and good cashflow, etc. But this is talking about new companies, which absolutely should be under control of the founder. Even in the case of older companies, the example of Apple after they kicked out Steve Jobs, before they brought him back, ought to give one pause about not letting the founders have too much control.
- aetherson 8y ago
  You have a false dichotomy between "running by committee" and "giving the founder complete control." Trying to have the board literally run the company is not generally a great idea. Having one or more non-founders in the leadership of the company, including possibly the CEO spot, is a fine idea and was how it used to pretty routinely be done. When the company is very small, it probably doesn't make sense to inject an outside leader. The company isn't worth anything at that point: if it fails, it just fails. But by the time the company has product-market fit, traction, revenue, and is trying to scale up, there may be plenty of reason to have non-founder leaders. Way before 20-30 years old.
  - rossdavidh 8y ago
    Certainly there is a continuum there, but the decisions that a founder makes that are most likely to be critical for a startup's success, are the very ones that are most likely to be opposed by non-founders, because they will be the most unconventional. Typical startups fail. "how it used to pretty routinely be done" was kind of like what was called "adult supervision", as I recall, back in the late 90's. I don't find that the success rate of the late 90's startups (the dot-com bust) to be all that much better than the current boom (which, granted, is not totally bust yet but no doubt will).

by jmull 8y ago

dpark 8y ago

> That's not a flaw, it's a fundamental part of how it is meant to work. Is it? Up until recently this was not the typical result. Google did this and others have followed, but it’s not how it was done before then.

mkirklions 8y ago
Typically the founder of a company owns the company. So unless you want to buy the founder out, the founder still has ownership. Sure the moment it goes public, you need to ask the question 'who leads?', but you will have to buy out the owenership.
- jartelt 8y ago
  Yes, founders always have ownership, but it is not always the case for the founders to own more than 50% of the company after a few financing rounds. Startups that do super well can pull this off, but I think it is safe to assume most normal startups do have super majority voting schemes that give founders total control of the company.
- dpark 8y ago
  That's not what's being discussed at all. There is no question of ownership, but of voting rights. e.g., Brin and Page own something like 14% of Google stock combined, but control >50% of the votes. That's the exact setup that Domo is attempting, giving its CEO >90% of votes by virtue of getting 40 votes per share.
- wpietri 8y ago
  This is not typical at all for tech startups. If you take investment, the founder's share declines quickly: https://www.lawtrades.com/blog/answers/usual-share-percentage-seed-round/ https://www.lawtrades.com/blog/answers/usual-share-percentag... Even a single founder can be under 50% by the end of the series A, as you not only have two rounds of investors, but you have to carve out a chunk of equity for employees (10-15%). And if you have multiple founders, which is typical, no one founder may own more than 50% past the seed round.
  - mkirklions 8y ago
    Eh, you were trying really really hard. I think you knew what I meant. Or your head is in the clouds.
aetherson 8y ago
It wasn't even that much the case with Google, where remember the board/investors installed "adult supervision" for like a decade. Facebook, on the other hand, was always Mark's. He has had ironclad control of the company from inception to the present day. And when Facebook became the success story of its generation of companies, investors took the lesson that you always had to have the founder(s) have complete control of the company. That led to the modern trend of founder worship, which probably lasted more-or-less until Travis Kalanick, Elizabeth Holmes, and Parker Conrad swung the pendulum in the other direction.

untog 8y ago

> That's not a flaw, it's a fundamental part of how it is meant to work. And, as the article demonstrates, it is not without risk. A CEO spending huge amounts of company money on other ventures he owns for no discernable reason is a pretty great example of why this SV model can be hugely problematic.

dv_dt 8y ago
It can be problematic, but so can investors in SV companies demanding that scale-out takes off too early or too quickly. It's difficult to quantify which of many problems are a bigger issue, or even relevant from case to case.
mistersquid 8y ago
Vocabulary question here: Is this "embezzlement"? I'm not sure because the use of funds were for legitimate services even if they are owned by James and his family. Is there a different word to describe the siphoning of company funds by directing business to self-affiliated parties? Is this covered by "nepotism"? (Thanks, in advance, for any clarifications.)

throwaway5752 8y ago

Practically speaking Satya Nadella runs MSFT, not the board of directors. Nadella does not have control of MSFT (he isn't the majority holder of shareholder voting rights), though. Investors don't want to run the company. But the question is should they be able to fire the person running the company, even if that person is acting against the interests of the rest of the shareholders. * ps, yes, the BoD can fire a CEO even if the the CEO has majority control of voting rights through various share classes. But the CEO can turn around and fire that board in that case (and the CEO has presumably already used their voting power to install a friendly BoD)

Bahamut 8y ago
> Investors don't want to run the company. Sometimes they do - I've certainly seen it happen at one company I've worked at, to the point where the board decimated engineering.
- throwaway5752 8y ago
  I agree completely, but I ignored that because it's very likely that you're hosed at that point anyway.
s73v3r_ 8y ago
Shouldn't the law prevent the CEO from doing just that? I mean, the board is presumably the only check on the CEO's power, so even if the CEO is the majority shareholder, they shouldn't be able to control the board.
- deleted 8y ago
  [deleted]
- madamelic 8y ago
  No. What's the worst they could do? It's their company. Worst case the CEO runs it into the ground and everyone loses their money. CEO =/= President of the United States.

rdlecler1 8y ago

Don’t throw the baby out with the bath water.

JumpCrisscross 8y ago

> The investors generally don't want to invest in companies run by a committee of investors There are governance structures between one where the CEO spends "$600,000 for catering services from...[a] sandwich and salad restaurant...owned by Josh James and his brother," and committees of directors. Uber, where a supermajority of the Board (which contains independent directors) can vote off the CEO, is one amongst many examples.

airspace69 8y ago
LOL -Cubbies??? :P

fallingfrog 8y ago

Not only that but the whole point of a limited liability corporation is that the stockholders cannot be held responsible for the debts of the corporation- and in return they relinquish control of it. That's the trade off. That's the defining characteristic of the corporate form. It creates a division between capital and labor, up to and including the CEO. That's why we call it "capitalism".

drb91 8y ago

> That's not a flaw, it's a fundamental part of how it is meant to work. Just because it's intended doesn't mean it works.

rossdavidh 8y ago

Yeah, I found that same point quite problematic. There are basically two possibilities: 1) the founder is able to get this plane off the ground 2) the founder is not able to In case (1), running it by committee is going to mess it up. The nature of a startup is that it is not doing ordinary, well-tested things, so no committee is going to approve what they do. Only a founder (or two) can get things off the ground with a coherent vision. In case (2), you are screwed whether the founder has absolute control or not. Just don't invest, whether you get control or not. Now all this may be very different for a Fortune 500, twenty or thirty year old company with an already established business model and good cashflow, etc. But this is talking about new companies, which absolutely should be under control of the founder. Even in the case of older companies, the example of Apple after they kicked out Steve Jobs, before they brought him back, ought to give one pause about not letting the founders have too much control.

aetherson 8y ago
You have a false dichotomy between "running by committee" and "giving the founder complete control." Trying to have the board literally run the company is not generally a great idea. Having one or more non-founders in the leadership of the company, including possibly the CEO spot, is a fine idea and was how it used to pretty routinely be done. When the company is very small, it probably doesn't make sense to inject an outside leader. The company isn't worth anything at that point: if it fails, it just fails. But by the time the company has product-market fit, traction, revenue, and is trying to scale up, there may be plenty of reason to have non-founder leaders. Way before 20-30 years old.
- rossdavidh 8y ago
  Certainly there is a continuum there, but the decisions that a founder makes that are most likely to be critical for a startup's success, are the very ones that are most likely to be opposed by non-founders, because they will be the most unconventional. Typical startups fail. "how it used to pretty routinely be done" was kind of like what was called "adult supervision", as I recall, back in the late 90's. I don't find that the success rate of the late 90's startups (the dot-com bust) to be all that much better than the current boom (which, granted, is not totally bust yet but no doubt will).