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One thing I don't understand about VC money, and i'm not even sure how to phrase this, are the founders of startups able to pay themselves enough that they're s

One thing I don't understand about VC money, and i'm not even sure how to phrase this, are the founders of startups able to pay themselves enough that they're set even if the business fails? What's to stop intelligent people from getting funded, paying themselves large salaries, and then not really caring if it fails or not because you're a couple hundred thousand dollars richer?

hsk0823 8y ago
Of course. That's part of raising capital, is funding employee salary. Of course it's not a "they're set", it's a market rate salary given the size of the company and the role you do for the company. What's to stop VC fraud? Generally when you accept VC money, you're giving a board seat to said VC, who is there to yes guide with experience, but is also there to protect their investment.
mschuster91 8y ago
> What's to stop intelligent people from getting funded, paying themselves large salaries, and then not really caring if it fails or not because you're a couple hundred thousand dollars richer? The same thing that many VC-backed companies like to ignore (Airbnb, Uber as the most egregious): laws and courts. This kind of behavior can be classified as fraud, intentional bankruptcy or securities law violations.
- zby 8y ago
  I am not a lawyer but beside some really crazy cases it seems very hard to prove at court.
zby 8y ago
VC try to filter out such founders - but it happens and it is the reason of why VCs want quick outcomes and avoid the middle ground of slow growth profitable companies. They want their companies either go down quickly or grow up enormously also quickly, because the more time it takes the easier it is for the founders to make good life out of it without giving back anything to the investors. This is the principal-agent problem and VCs have a particular way of working around it, traditional private equity has another way and banks have yet different one (and crowdfunding does not https://medium.com/@zby/the-problem-with-crowdfunding-81b53f963387 https://medium.com/@zby/the-problem-with-crowdfunding-81b53f...).
- ngngngng 8y ago
  Thanks for this, now I know exactly what I was trying to ask and the answer. I wonder if more companies moving away from VC opens the door for more founders to take advantage of the principal-agent issue.

hsk0823 8y ago

Of course. That's part of raising capital, is funding employee salary. Of course it's not a "they're set", it's a market rate salary given the size of the company and the role you do for the company. What's to stop VC fraud? Generally when you accept VC money, you're giving a board seat to said VC, who is there to yes guide with experience, but is also there to protect their investment.

mschuster91 8y ago

> What's to stop intelligent people from getting funded, paying themselves large salaries, and then not really caring if it fails or not because you're a couple hundred thousand dollars richer? The same thing that many VC-backed companies like to ignore (Airbnb, Uber as the most egregious): laws and courts. This kind of behavior can be classified as fraud, intentional bankruptcy or securities law violations.

zby 8y ago
I am not a lawyer but beside some really crazy cases it seems very hard to prove at court.

zby 8y ago

VC try to filter out such founders - but it happens and it is the reason of why VCs want quick outcomes and avoid the middle ground of slow growth profitable companies. They want their companies either go down quickly or grow up enormously also quickly, because the more time it takes the easier it is for the founders to make good life out of it without giving back anything to the investors. This is the principal-agent problem and VCs have a particular way of working around it, traditional private equity has another way and banks have yet different one (and crowdfunding does not https://medium.com/@zby/the-problem-with-crowdfunding-81b53f963387 https://medium.com/@zby/the-problem-with-crowdfunding-81b53f...).

ngngngng 8y ago
Thanks for this, now I know exactly what I was trying to ask and the answer. I wonder if more companies moving away from VC opens the door for more founders to take advantage of the principal-agent issue.