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In my mind this should even be on termsheets. Especially when VC is involved as it increases the incentive for an entrepreneur to go for the biggest possible ex

In my mind this should even be on termsheets. Especially when VC is involved as it increases the incentive for an entrepreneur to go for the biggest possible exit instead of settling for something in the 10's of millions so that he can fill up his bank balance which is tending to $0.

tptacek 16y ago
First, an 8-figure exit is a outlying success for an A-round funded company. It is the king-high straight of startup outcomes. Twitter drew quad jacks; Facebook got a straight flush. You aren't going to draw a straight flush. Don't benchmark outcomes that way. A $900,000 dollar (gasp!) payday would be enormously tempting to most startup founders. Second, you can't settle for a crappy exit your VC doesn't believe in. You sold them board seats. They will stop you, and then they will fire you. Are there companies with terms that make this less likely? Yes; they also got dealt pocket aces. Did you? My point? Why would VC's include cash-out terms for their typical investment? The whole investment is predicated on the idea that you're going to make their numbers.
- jimbokun 16y ago
  "The whole investment is predicated on the idea that you're going to make their numbers." Serious question: at that point what is the qualitative difference with being an employee with lots of stock options? Isn't the point of being an entrepreneur that you get to drive the bus?
  - tptacek 16y ago
    An age-old question. The answer I've gotten is, "if you're making your numbers, you're driving the bus; when you stop making your numbers, your investors take over the bus".
    - mkramlich 16y ago
      My ideal is to not have investors. That way I'm always driving the bus. It may be a short bus. It may be a bus with nobody else in it. But it's my bus, I'm driving, there's no drama and no risk of losing control or getting screwed out of ownership. My ideal anyway. But I'm pragmatic so if there comes a situation that "fits" and where the positives massively outweigh negatives, so be it. Large enough amounts of money could get me to say, "Where do I sign?"
      - tptacek 16y ago
        We started out looking for funding. We backed into consulting/bootstrapping. Consulting has sort of taken over our lives (it's lucrative, and we love the work), but we've never not had a full-time dev team. We joke, constantly, about how badly the company would have done had we been unfortunate enough to actually close a round.
- keeptrying 16y ago
  Imagine that you were making 200K a year before you founded the company. And being a founder you've taken a 40K salary. Suddenly its been 5 years, your startup is doing well with 2M of revenue per month but your still making 40K/y as the founder. Lets say an exit is possible after 4 years of more work. For all intents and purposes, your founders have blown through their savings and are watching as their former (regularly employed) friends are buying houses (at least putting down large down-payments) and driving nice cars while he/she is living in some crappy apartment to keep costs down. In this scenario, the sane thing in my mind is to help out the entrepreneur so that he can focus on making the company huge instead of quitting the startup so he can get a job paying $300K which would let him buy a decent house for his kids. Everything in life is negotiable. Even the present terms in a termsheet are negotiable and I feel that this could certainly be one of them.
  - tptacek 16y ago
    No founder/CEO of a profitable startup who was making $200k/yr before starting the company and then takes a VC A-round is making $40k/yr in her fifth year at the company. No such person is making $40k/yr the day after the first round of funding they take. CEOs of VC-funded companies make market wages.

tptacek 16y ago

First, an 8-figure exit is a outlying success for an A-round funded company. It is the king-high straight of startup outcomes. Twitter drew quad jacks; Facebook got a straight flush. You aren't going to draw a straight flush. Don't benchmark outcomes that way. A $900,000 dollar (gasp!) payday would be enormously tempting to most startup founders. Second, you can't settle for a crappy exit your VC doesn't believe in. You sold them board seats. They will stop you, and then they will fire you. Are there companies with terms that make this less likely? Yes; they also got dealt pocket aces. Did you? My point? Why would VC's include cash-out terms for their typical investment? The whole investment is predicated on the idea that you're going to make their numbers.

jimbokun 16y ago
"The whole investment is predicated on the idea that you're going to make their numbers." Serious question: at that point what is the qualitative difference with being an employee with lots of stock options? Isn't the point of being an entrepreneur that you get to drive the bus?
- tptacek 16y ago
  An age-old question. The answer I've gotten is, "if you're making your numbers, you're driving the bus; when you stop making your numbers, your investors take over the bus".
  - mkramlich 16y ago
    My ideal is to not have investors. That way I'm always driving the bus. It may be a short bus. It may be a bus with nobody else in it. But it's my bus, I'm driving, there's no drama and no risk of losing control or getting screwed out of ownership. My ideal anyway. But I'm pragmatic so if there comes a situation that "fits" and where the positives massively outweigh negatives, so be it. Large enough amounts of money could get me to say, "Where do I sign?"
    - tptacek 16y ago
      We started out looking for funding. We backed into consulting/bootstrapping. Consulting has sort of taken over our lives (it's lucrative, and we love the work), but we've never not had a full-time dev team. We joke, constantly, about how badly the company would have done had we been unfortunate enough to actually close a round.
keeptrying 16y ago
Imagine that you were making 200K a year before you founded the company. And being a founder you've taken a 40K salary. Suddenly its been 5 years, your startup is doing well with 2M of revenue per month but your still making 40K/y as the founder. Lets say an exit is possible after 4 years of more work. For all intents and purposes, your founders have blown through their savings and are watching as their former (regularly employed) friends are buying houses (at least putting down large down-payments) and driving nice cars while he/she is living in some crappy apartment to keep costs down. In this scenario, the sane thing in my mind is to help out the entrepreneur so that he can focus on making the company huge instead of quitting the startup so he can get a job paying $300K which would let him buy a decent house for his kids. Everything in life is negotiable. Even the present terms in a termsheet are negotiable and I feel that this could certainly be one of them.
- tptacek 16y ago
  No founder/CEO of a profitable startup who was making $200k/yr before starting the company and then takes a VC A-round is making $40k/yr in her fifth year at the company. No such person is making $40k/yr the day after the first round of funding they take. CEOs of VC-funded companies make market wages.