5 ms·

"...they could presumably just say "no"." I wouldn't imagine that's the case. Especially if the investor came up with the number and agreed to it in a legally

"...they could presumably just say "no"." I wouldn't imagine that's the case. Especially if the investor came up with the number and agreed to it in a legally binding contract. It'd be an uphill battle in court to get around that. (yeah, you still need the funds to defend your company...) Also, my anecdata says that most corporations have in their corporate bylaws (or whatever the right document is) the provision that they can forcibly recall shares at any time (presumably for current fair market value/409A valuation.)

tptacek 8y ago
Huh? No, the investor agreed to an annual 9% interest rate, not a lump sump their equity could be purchased for. It would be pretty funny if the legal norm among startups was that they can acquire their own equity back from investors based on their 409A valuation.
- delinka 8y ago
  "...at the number they came up with..." Maybe I've misread you here. Is this not a number the investors came up with? As for the 9% interest rate, that starts sounding more like debt than ownership.
  - tptacek 8y ago
    Yes. That is the idea. As downside protection, Collaborative Fund's investment was to begin behaving as if it were debt (issuing interest, that is) after 5 years. I assume the expectation was that if Buffer maintained hypergrowth and reached the inevitable Series B, part of the series B negotiation would eliminate that downside protection clause. But they didn't; they charted a course that didn't involve an imminent second round, and so that protection clause was problematic. Again: it would be really weird if companies could simply demand their equity back. The whole point of investing in a startup is that their equity will end up wildly more valuable --- not 40% more, but 10x more --- than the money put in.
    - ElFitz 8y ago
      40% is still far more than most of their startups ever did or will get them. Or a conflicted / disaligned relationship with the founders would have.
    - gamblor956 8y ago
      Once the interest (aka "downside protection") kicks in, the shares effectively converted to debt, meaning the company was simply repaying a liability.
      - tptacek 8y ago
        Did I miss the part where they said that? The post suggests their counsel said it was a unique clause. At any rate: they bought out their investors years before interest became due. It was a negotiated sale.

tptacek 8y ago

Huh? No, the investor agreed to an annual 9% interest rate, not a lump sump their equity could be purchased for. It would be pretty funny if the legal norm among startups was that they can acquire their own equity back from investors based on their 409A valuation.

delinka 8y ago
"...at the number they came up with..." Maybe I've misread you here. Is this not a number the investors came up with? As for the 9% interest rate, that starts sounding more like debt than ownership.
- tptacek 8y ago
  Yes. That is the idea. As downside protection, Collaborative Fund's investment was to begin behaving as if it were debt (issuing interest, that is) after 5 years. I assume the expectation was that if Buffer maintained hypergrowth and reached the inevitable Series B, part of the series B negotiation would eliminate that downside protection clause. But they didn't; they charted a course that didn't involve an imminent second round, and so that protection clause was problematic. Again: it would be really weird if companies could simply demand their equity back. The whole point of investing in a startup is that their equity will end up wildly more valuable --- not 40% more, but 10x more --- than the money put in.
  - ElFitz 8y ago
    40% is still far more than most of their startups ever did or will get them. Or a conflicted / disaligned relationship with the founders would have.
  - gamblor956 8y ago
    Once the interest (aka "downside protection") kicks in, the shares effectively converted to debt, meaning the company was simply repaying a liability.
    - tptacek 8y ago
      Did I miss the part where they said that? The post suggests their counsel said it was a unique clause. At any rate: they bought out their investors years before interest became due. It was a negotiated sale.