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FanDuel founders to receive no cash from sale to Paddy Power Betfair
- forkLding 8y agoQuick question to those in the know, what payment is the founding team getting then, the one mentioned at the end? Is that some kind of executive termination pay?
- protomyth 8y agoTHE PRIVATE equity backers of Scottish technology business FanDuel have completed their boardroom coup by ensuring that none of the firm’s founders or employees will be able to share in the proceeds of its impending sale to Paddy Power Betfair. That's slightly more people than just the founders. I'm sure the employees were expecting some compensation.
- barbegal 8y agoIn a company which isn't generating a profit such as FanDuel employee equity is pretty much worthless. If you get offered equity in a startup you should value it at nothing unless the financials are very solid and the employees between them have a sizeable stake such that their interests are well represented at the board level.
- protomyth 8y agoI was commenting on a headline that could of added two extra words and conveyed that this isn't just a founder problem but something that has affected all of the employees also.
- wand3r 8y ago“Answer this survey question to continue reading the article”. 1. This is terrible UX and while I understand the need to make money this roadblock does nothing but increase bounce rate. 2. “Continue” is pretty deceptive unless you count the article headline as part of the article. 3. I assume this survey is trash but I am going to take it as an experiment then report back. 4. I wish HN would develop a policy on articles that rely on subscriptions or other inputs to actually read. I don’t think they should be banned but they should be paywall flagged so they can be turned off. Its better for comments (people actually read article) better for users not downloading data they can’t use and then being disappointed they can’t participate Edit: it was a demographics survey for a giftcard drawing that would probably be sold onwards to a marketing firm if you provide an email. I guess it’s not too much to ask for but I suspect many people will be unwilling to do it because they are skeptical, not interested enough or simply have no idea how long it will take and arent willing to invest the time.
- antonvs 8y agoThe survey didn't come up for me. That kind of thing makes policies against this more difficult.
- JumpCrisscross 8y agoTL; DR FanDuel was sold for less than its liquidation preference, so common stock holders got nothing.
- beager 8y agoJust want to say thanks for jumping all over this comment thread to explain liquidation topics and scenarios. I'm alarmed how much folks who get into startups don't understand these things, and lament how much I still don't know about it all. Then again, so much of startup culture actively conspires to make deal structure/cap tables/liquidation preferences opaque, because nobody wants to say "Hey, come work for this startup for 2σ under market salary and x% equity. Never mind that the equity will get crazy diluted and a liquidation event might get cleaned out before it ever gets to your end of the table. That is, if a liquidation event ever happens!" So I don't feel totally ignorant about not understanding it, just yearning.
- slededit 8y agoIf a deal is complicated it's to screw you over. I think people would be surprised at how much of the economy runs on handshake deals.
- hn_throwaway_99 8y agoI always wonder, though, that (usually) a good percentage of the value in these deals is the institutional knowledge of the company. The purchasing company better know the amount of ill will engendered when connected leaders like the CEO make out like bandits while everyone else gets screwed can have a serious negative effect on the value of the company.
- Eridrus 8y agoDespite equity being worth nothing, that doesn't mean that employees are all fucked. If the company is actually buying the company for the capability they provide, rather than just customers+brand, there are usually generous offers at the new company for those that the acquiring company wants to ensure stay.
- 21 8y agoI'm sympathetic towards regular people people being legally scammed by nasty contracts, but how did that happen here? This was not a clueless Joe being forced to sign a non-negotiable contract with a giant company. Presumably those clauses and investment contracts were negotiated between lawyers of both parties. Why did they accept such clauses?
- JumpCrisscross 8y ago> Why did they accept such clauses? They're super standard and for the most part make sense. Liquidation preferences say if your firm is worth $90 million, and I invest $10 million, I get my $10 million back before you (i.e. the common stock holder) get anything. If the firm sells for $200 million, I get $20 million and doubled my investment. If the firm sells for $20 million, I get $10 million back and the common splits the remaining $10 million. If the firm sells for $9 million, I get it all. This makes sense because management (a) owns lots of common stock and (b) manages the company. As a risk-sharing measure, it makes sense for the people closest to the operations (and extracting a cash salary) to bear more downside risk. Drag-along rights are the corporate equivalent of collective action clauses [1]. They exist to prevent a person who holds two percent of the company from preventing shareholders who own 60% from selling. (Approving mergers requires supermajorities in most jurisdictions.) [1] https://en.wikipedia.org/wiki/Collective_action_clause https://en.wikipedia.org/wiki/Collective_action_clause Disclaimer: I am not a lawyer. This is not legal advice. Consult with a lawyer before negotiating fundraising terms.
- x0x0 8y agoThese clauses generally don't cause any grief if the outcome is a win or a complete failure. It's only when it's a partial failure and people are dividing up what there is -- typically less than was put in -- that these cause major differences in outcomes.
- paulsutter 8y agoYou're describing participating preferred (that is, investors get paid out once as preferred and again after conversion to common). A liquidation preference is more common than participating, where the preferred investors get paid out (for example) at least 2X their investment (can be any multiplier, the highest I ever heard was 5X). Most investments in Silicon Valley are clean deals, with a liquidation preference of 1X and nonparticipating preferred. Companies without a clean deal usually were too thirsty for unicorn status ($1B valuation) or had difficulty raising money.
- joelrunyon 8y agoI met Nigel + Leslie at a conference in 2010 I believe as they were starting to talk about raising funding and shifting to the US Markets. Was always impressed with their growth, but it seems to be a good reminder to be wary of the cost of that growth.
- opportune 8y agoIs there any reason for founders to ever deal with these investors ever again? Unless the investors were trying to retire, this seems incredibly short sighted.
- greglindahl 8y agoYes. Liquidation preferences are a thing, and getting mad about them isn't helpful. Also, from the details in the article about "drag along" and whatnot, the typical terms for a Silicon Valley investment appear to have even more drag along to them.
- opportune 8y agoIt’s not about there liquidation preferences themselves IMO, it’s that they were exercised in this manner. In this case it was the investors pushing for a liquidation under the limit, not the founders
- greglindahl 8y agoThat's not what I saw described in the article. The circumstances and results in the article sound like they would be reasonable for a Silicon Valley situation under typical VC funding terms.
- x0x0 8y agoI'm not sure there's any lesson here. Taking investment from scum private equity like KKR didn't turn out well? Wow, who could have predicted. It's been well known for at least a decade what private equity does to businesses. Either the founders couldn't raise from anywhere else, or they got greedy.
- hluska 8y agoFrom the perspective of a founder, I would be quite nervous about accepting an investment and drawing any kind of salary if the deal didn't include liquidation preferences. They are so standard (at least in North American tech) that if they were missing, I'd worry about their competence. Structuring a deal without LPs would mean that founders could push for extremely early exits, cash out with modest (though life changing) returns and investors could lose most of their investments. Adding that kind of risk would make it even harder for first time founders to raise a round.
- Bahamut 8y agoStories like this seem to validate that people should choose real liquid equity of public companies over the paper equity of startups when considering employment.
- JumpCrisscross 8y ago> people should choose real liquid equity of public companies over the paper equity of startups Or ask for more cash.
- greglindahl 8y agoIf you like lower risk and lower gain, sure. The most important thing is being educated. Every time this topic comes up on HN it appears that many people are unaware that liquidation preferences are a thing and many sales that are down-rounds have no money falling on common.
- xchaotic 8y agoIf it really was lower gain then sure. But as it is, on average, startups give you more chance of ending up with nothing but an entry in a CV.
- 8y ago
- naturalgradient 8y agoCan someone familiar with the current funding climate say if standard deals at all levels involve liquidation preference nowadays? As in, if Im considering a seed-round, will there be any sophisticated investors doing no preference? Have talked to some investors in the scene (UK) but cannot seem to get a clear picture on this. Is declining to accept a liquidation preference at seed level a red flag for any serious investor? What about subsequent rounds?
- woah 8y agoJust raised a seed on convertible notes, was never asked for any kind of preference
- JumpCrisscross 8y ago> Just raised a seed on convertible notes, was never asked for any kind of preference Notes are debt. They're inherently higher than stock on the capital structure. They may convert into shares with no preference. But as long as they're notes, they're higher than even preferences shares.
- Dwolb 8y agoSure but those preferences only really affect equity payouts when the company’s in distress. When selling the a non-distressed company, equity will receive cash.
- JumpCrisscross 8y ago> those preferences only really affect equity payouts when the company’s in distress Liquidation preferences and bankruptcy priority only matter when a company is distressed.
- Dwolb 8y agoIs it not possible to sell a company that is currently profitable, cash flow positive, and is worth less than what investors had put in?
- goatherders 8y agoI suspect the founders took some cash off the table in prior rounds.
- deleted 8y ago[deleted]
- gkoberger 8y agoThere's a lot more here, including responses from the founders: https://twitter.com/Suhail https://twitter.com/Suhail Seems the founding CEO spent 10 years there and got nothing, but a new CEO of 6 months walked away with $11MM.
- TAForObvReasons 8y agoLikely the new CEO was brought on specifically to engineer a sale. The new CEO arguably brought value to investors if the old CEO wasn't willing to sell and there was significant concern that there would be no residual value. Such is life.
- barbegal 8y agoThe new CEO had previously been CFO since 2014. If his actions turned an unsalable company into a company that could be sold for $465 million then I'd say he's probably worth the $11 million. And the founding CEO surely drew a reasonable salary despite the company making a loss.
- gkoberger 8y agoYeah, to be clear, I'm not saying anyone did anything wrong.
- bsder 8y agoPossibly, but how many more of these deals will it take until the employee pool goes away permanently? If you have the skills to be good at a startup, you can go to one of the big boys for a lot of cash.
- Eridrus 8y agoI think this says more about top end compensation, rather than startup compensation. The effect is going to be top end employees not really being early employees at startups, but that's not necessarily bad.
- 8y ago
- startupdiscuss 8y agoQuick math here: “the aggregate value being paid for FanDuel “is approximately $465m”.” “2014 and 2015 respectively led $70 million and $275m” (345 million) “Mr King is expected to receive a payment of up to $11.3m as a result of the Paddy Power Betfair deal. The firm’s current chief technology officer Robin Spira is due to make up to $3.5m, its legal officer Christian Genetski stands to make up to $6.2m, and it chief financial officer Andy Giancamilli is due to receive up to $5m” (Those add up to $26 m) So it looks like the investors got just over 7% return on a venture investment. (Which is not an unusual ask for preferred shares).
- greglindahl 8y agoAlso note that the retention bonus total is known to be at least 5.5%, it's often the case that up to 10% of the purchase price in these "no money falls on common" deals is paid out to make sure that the deal closes.
- startupdiscuss 8y agoYes, and there are often transaction costs. The bankers that introduced the buyer to the seller, the lawyers that have to go over the deal terms, and the accountants and due diligence people.
- deleted 8y ago[deleted]
- icedchai 8y ago7%... that’s a sad return. They could’ve done better with more traditional investing.
- brudgers 8y agoThe difference is that the returns of a venture capital fund come from the performance of a few portfolio companies. The returns of a private equity fund come from the performance of most companies. Private equity investors, like KKR here, are happy with the 7% premium return because they usually get it from each investment. The 7% return from liquidation preference would be a poor performing investment in a venture capital portfolio. Another way of looking at it is that the hit to reputation that a venture capital firm would take on this outcome isn't worth the 7% return at the expense of founders. The money is in the 10x to 100x deals.
- dpeck 8y agoIf you're shocked or surprised by this, you should give Venture Deals, Third Edition: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld & Jason Mendelson a read. https://smile.amazon.com/Venture-Deals-Smarter-Lawyer-Capitalist-ebook/dp/B01M3UIVW3/ref=tmm_kin_swatch_0?_encoding=UTF8&qid=1531078548&sr=8-1 https://smile.amazon.com/Venture-Deals-Smarter-Lawyer-Capita...
- _bxg1 8y agoI literally can't parse the semantics of this headline
- verbify 8y agoFanDuel founders = The founders of FanDuel To receive no cash = will not receive any money From sale to = as a result of the sale of (FanDuel) PaddyPower Betfair = to the company Betfair, which itself is owned by PaddyPower The founders of FanDuel will not receive any money as a result of the sale of FanDuel to the company Betfair, which itself is owned by PaddyPower.
- _bxg1 8y agoI figured it out, I was just making a lighthearted joke
- verbify 8y agoI'm another victim of Poe's law.
- _bxg1 8y agoI think I'm the victim, given how many downvotes I'm getting...
- sparkzilla 8y agoAs the writer of the headline, you get a pity upvote from me.
- _bxg1 8y agoY'all need to chill
- WheelsAtLarge 8y agoJust because you founded a company, it does not mean you get a cut of the final sale. Starting a company is hard. You can struggle to make it profitable, never get there, and end up deeply in debt years later. Fanduel became relevant mainly because of the marketing it was able to purchase without that it would have fallen by the wayside. You need lots of money for that. The founders must have needed cash at a critical time so they must have had a reason to put their shares second to the shares of the equity firm. It makes no sense to feel bad for them. They knew what they were doing and they got more time out of the business than they would have gotten otherwise. Yes, it's not the greatest outcome but it really is,"just business."
- yummybear 8y agoWell yeah, legally - financially. Still, it doesn't seem "fair".
- evgen 8y agoIt may not seem 'fair', but the reality is that the company that the founders had equity in died in the 2015 round of financing. It was replaced with a company which needed to make a big bet (lots of ad spending) to stay strong in this particular market and the bet did not pay off. If you take $200M+ of financing then the people writing the check are expecting you to exit no lower than $1.5B -- ~$500M is, to use the parlance of this particular company, a single when the team needed a home run.
- Drdrdrq 8y agoIf it doesn't seem fair, it usually isn't. Maybe not even if founders knew this could happen and accepted it willingly (which I doubt they did). This is just the more powerful and experienced squeezing out the weaker ones to grab as much profit as possible.
- evgen 8y agoIt was completely fair if you actually look at the probable course of events. In 2014 FanDuel needed money, a lot of money. They had a valuation approaching a billion but were losing ground to DraftKings and as the space was heating up they needed to grow fast. What probably added urgency to this need to grow was that both companies were starting to court various teams and leagues for partnerships, and no one wants to partner with the also-ran. FanDuel picked up the NBA and a handful of NFL teams, but DraftKings got the NHL and NFL (and the NFLPA) so DraftKings was still pulling ahead. Then in late 2015 New York and other states put the brakes on the entire industry by declaring it illegal sports betting. FanDuel has just accepted a big chunk of money and now their ability to continue operating was suddenly called into question. I have no idea what choices they made at this point, but it is pretty clear they made the wrong ones. An attempted merger with DraftKings was called off when the DoJ indicated it had anti-trust worries, and since 2016 when various state laws were changes it seems DraftKings has tacked hard into becoming an online sports book with partnerships with various casinos (including several in New Jersey, which coincidentally is challenging the constitutionality of the national gambling restrictions in the Supreme Court) while since 2016 we see a whole lot of not much from FanDuel. My guess is that when the DraftKings merged died they started spending the war chest trying to buy growth with an eye towards an exit. This is also when new management stepped in, so it is possible that the investment round was a proxy investment in a potential DraftKings buyout and when that died the company had to start looking around for a fast exit. And please spare us all the 'powerful' squeezing out the weaker BS; the FanDuel founders would have had incredibly high-priced legal counsel for an investment round of this size and knew exactly what the upside and downside was for every possible variation of success.
- harveynick 8y agoPossibly worth noting that the actual story being sold here is essentially: Scottish entrepreneurs screwed out of company by non-Scotish investors.
- segmondy 8y agoGee, not even $500k or a mil? My heart breaks for them. This is why VC's are called vultures. They claim they want you to have skin in the game, yet the founders get screwed. I know folks are thinking but the VCs are not making much, so what? Their entire game is to make it all up from another startup 100x which is why they take massive equity for $$$ invested.
- ericb 8y agoArguably, this is why this may be a foolish move for them. If the next 100xer avoids them based on a history of penny pinching on non 100x deals, they've been penny wise and pound foolish.
- brudgers 8y agoKKR is a private equity firm not a venture capital firm. The investment philosophies are different.
- olliej 8y agoI will reiterate my prior statements: if you take a job that pays you (in part) in stock, with no path to sell it pre-IPO, you should never accept anything other than the highest class of preferred stock. If the company is unwilling to give you that, then you should assume that their, or their VC, long term plan is to screw you. At this point there have been enough cases where startups have clawed back the shares the issues, never gone public even when they’ve “made it” so you can’t sell your stock, or in this case outright stolen from their employees by changing the company charter to retroactively devalue all the stock that they used to pay their employees. [edit: charter is not spelled “charta”. I’d swear I used to be able to spell...]
- JumpCrisscross 8y ago> you should never accept anything other than the highest class of preferred stock. If the company is unwilling to give you that, then you should assume that their, or their VC, long term plan is to screw you If this is your mentality, don't work for a start-up. Employees don't get preferred stock. Founders don't get preferred stock. Your downside protection is your cash salary. Asking for preference as a non-capital contributing stakeholder conveys a fundamental mis-understanding of start-up financing's tradeoffs. (I would be highly suspect of a company throwing preferred stock at employees. It smells like something between incompetence and a scam.)
- olliej 8y agoBased on this article alone anything other than preferred stock isn’t viable. Unless executive have skin in the game - say no executive can make money off a sale of the company or a funding round unless all the employees who have been paid in stock have been given first rights to convert their stock before any member of the executive or founder team. This seems reasonable, as it prevents the founders or executive board from doing what happened here: theft.
- JumpCrisscross 8y ago> Based on this article alone anything other than preferred stock isn’t viable Common stock pays when companies do well. It diverges from non-participating preferred when companies sell for less than their most-recent valuation. Investors get preferences, employees get cash salaries. > say no executive can make money off a sale of the company or a funding round unless all the employees who have been paid in stock have been given first rights to convert their stock Everyone could convert their stock. But the stock was worthless. Preferences are obligations, like debt. If a company with $400 million in debt due on acquisition sells for $300 million, should the owners get a pay-out? > what happened here: theft If KKR et al hadn't invested when they did, FanDuel would have closed down. This wasn't a tradeoff between employees making money and not. It was a tradeoff between employees (a) losing their jobs years ago and (b) keeping their salaries and having the chance, if the company did well, of making more off their options. They kept their jobs. But the company didn't do terrifically well. The lotto didn't pay out, but HR did.
- brudgers 8y agoIn some ways, this story sheds light on the philosophical differences between private equity firms like KKR [1] and venture capital. At least when it comes to the fat parts of the Bell curve (and ignoring outliers), private equity investments tend to be premised on gaining control of the companies accepting investment and seek return on each investment. The fat part of the venture capital investment Bell curve (and ignoring outliers) is looking for fantastic returns from a few companies and tends not to seek control of the companies it invests in. To put it another way, founder friendly private equity is not really a thing and venture capital is a philosophy that is rare outside Silicon Valley (though it has become more common in the last decade or so). Venture capital is playing long odds based on possible future value, private equity seeks to buy current assets at a discount. This sort of outcome would be a hit to a venture capital firm's reputation. It's not an unexpected outcome when private equity invests. [1]: https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts https://en.wikipedia.org/wiki/Kohlberg_Kravis_Roberts
- JumpCrisscross 8y ago> private equity investments tend to be premised on gaining control of the companies accepting investment and seek return on each investment Put another way, losing money on a PE deal is terrible. Losing money on fewer than half of one's VC investments is positively great. When FanDuel sold, it didn't have enough upside left to justify pure venture capital. It was a distressed sale whose alternative was closing down shop. In this timeline, employees got a few more years of cash salaries. On the net, they did better with KKR et al than they would have without.
- deleted 8y ago[deleted]
- hn_throwaway_99 8y ago> In this timeline, employees got a few more years of cash salaries. I think most of their employees would have easily been able to get jobs elsewhere.
- 8y ago
- carlsborg 8y ago“Under FanDuel’s management incentive scheme, there has been a sixtyfold increase in total shares and a corresponding dilution in the rights to them. This distribution increases investors’ ownership in the company from 54 to 71 percent of the 4.4 million total shares, The Herald reported.” Why would a merger blocked by the FTC trigger a clause like this? From here : https://www.legalsportsreport.com/14930/fanduel-equity-investors/ https://www.legalsportsreport.com/14930/fanduel-equity-inves...
- deleted 8y ago[deleted]
- smarri 8y agoFeels like the old maxim, learn from the mistakes of others. I wonder what they could have done differently? Seems like raising capital to promote the business was necessary due to competition, but ultimately the amount they raised was their trojan horse.