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A lot of Sillicon Valley startup fundraising ends up resembling an iterated prisoner's dilemma. Most startups fail and it's likely that you might have to work w

A lot of Sillicon Valley startup fundraising ends up resembling an iterated prisoner's dilemma. Most startups fail and it's likely that you might have to work with people a few times before you get it right. The [generally] dominant strategy for Iterated Prisoner's dilemma is tit for tat[0], and consequently you see a lot of people cooperating when when it might be more lucrative to defect is because they know that they might want to work together again. Basically, neither side wants to burn the bridge. This guy seems to have reasoned that for him, it was more optimal to defect, and it seems to have worked out. TopTal succeeded and he didn't raise any more money. His reputation with VCs is torched, but he doesn't need to raise any more money. If TopTal had failed, it really wouldn't have mattered because he wouldn't have needed to raise any more either. You have to wonder if VC will eventually become a market for lemons[1] as founders who know they have a big opportunity only offer investors unfavorable terms. Obviously no startup is a 'sure thing' but it does seem like founders increasingly have a lot more information than their investors. [0]https://en.wikipedia.org/wiki/Tit_for_tat https://en.wikipedia.org/wiki/Tit_for_tat [1] https://en.wikipedia.org/wiki/The_Market_for_Lemons https://en.wikipedia.org/wiki/The_Market_for_Lemons

StriverGuy 7y ago
Certain business models require high amounts of capital in order to create leverage/growth. Think of Uber, WeWork etc. All the founders made out fabulously rich due to the ability to leverage growth on the back of VC money. Organically growing, profitable business may never need to take outside money. It really comes down to the market and growth strategy.
- goatinaboat 7y ago
  Certain business models require high amounts of capital in order to create leverage/growth. Think of Uber, WeWork etc The business model of selling $1 for 50c and hoping that later you’ll be able to sell it for $2 because... reasons.
  - jfim 7y ago
    That model works if there are economies of scale. Say that your one dollar cost at one million users is $0.80 fixed costs and $0.20 incremental cost. Adding more users will eventually make the model profitable, and this is how Facebook works, for example.
novok 7y ago
But now the strategy is known, it would be harder for everyone to get investors and employees to even agree to work with him for any conditional future promise of equity on something like investment.
- tschwimmer 7y ago
  That's true. But it's not this guy's problem. He's super rich and therefore isn't interested in raising more money. I guess it's sort of like a tragedy of the commons type situation.
  - deleted 7y ago
    [deleted]
- TuringNYC 7y ago
  >>But now the strategy is known, it would be harder for everyone to get investors and employees to even agree to work with him for any conditional future promise of equity on something like investment. Seemed to work fine Anthony Levandowski ttps://www.wired.com/story/god-is-a-bot-and-anthony-levandowski-is-his-messenger/?verso=true From the article, note how Levandowski pulled the stunt below and managed onwards to Otto: In early 2011, that plan was to bring 510 Systems into the Googleplex. The startup’s engineers had long complained that they did not have equity in the growing company. When matters came to a head, Levandowski drew up a plan that would reserve the first $20 million of any acquisition for 510’s founders and split the remainder among the staff, according to two former 510 employees. “They said we were going to sell for hundreds of millions,” remembers one engineer. “I was pretty thrilled with the numbers.” Indeed, that summer, Levandowski sold 510 Systems and Anthony’s Robots to Google -- for $20 million, the exact cutoff before the wealth would be shared. Rank and file engineers did not see a penny, and some were even let go before the acquisition was completed. “I regret how it was handled…Some people did get the short end of the stick,” admitted Levandowski in 2016. The buyout also caused resentment among engineers at Google, who wondered how Levandowski could have made such a profit from his employer.
jiveturkey 7y ago
> founders who know they have a big opportunity Firstly, that kind of founder/opportunity is exceedingly rare. It may as well not exist for purpose of discussion. Ideas are literally worthless. You become successful via execution and execution at scale (unicorn scale) requires many moving parts with many people. That means there's no sure bets at the early rounds. There's not a specific formula that "works" so it's all subjective and VC groupthink. VC "works" only because they take high risk with limited downside via all the things Toptal is complaining about. Without those onerous terms, there would be no VC (as we know it) and it would be an order of magnitude or 2 harder to get funded.
klipt 7y ago
Also this behavior might work in the US, but if you screwed over a bunch of rich and powerful people in say, Russia, you'd probably end up having an "accident", changing the leadership of your company to someone more favorable to said rich and powerful.
- PopeDotNinja 7y ago
  > ...if you screwed over a bunch of... That is usually gonna go poorly for you in any culture.
- deleted 7y ago
  [deleted]
- cjlars 7y ago
  If he died, his estate's administrator would essentially be forced to sell some shares in order to pay the hundreds of millions of dollars his estate would owe in taxes. Presumably, this would trigger the SAFE for both the investors AND employees. I wonder if the guy realizes he has a defacto decamillion dollar bounty on his head.
- heavenlyblue 7y ago
  I think there's also a good "death bed" test. If your actions lead to you dying alone and everyone who you knew remember you as "that guy not worth remembering" - then you did bad for yourself. You could say it's a more democratic version of the Russian "methods".
throaway5983 7y ago
You're assuming that this was a rational, conscious decision on his part. I've had some dealings with him that would lead me to conclude that this is just his personal inclination. He threatened me & my company over a wholly imagined transgression (and ceased completely when our attorney asked for documentation). Believe me or not, the main point is that working backwards from behavior to the thought process that led to it is a difficult if not impossible endeavor, and there's no reason to assume rationality in the absence of information to the contrary. I wouldn't draw any great lessons from this particular situation.
- bit_4l 7y ago
  Off topic but what an username!
- kordlessagain 7y ago
  People who defend the "rights" of internal personal imagery over that of reality can get stuffed, in my book. If you didn't do the imagined deed, then it never happened.

StriverGuy 7y ago

Certain business models require high amounts of capital in order to create leverage/growth. Think of Uber, WeWork etc. All the founders made out fabulously rich due to the ability to leverage growth on the back of VC money. Organically growing, profitable business may never need to take outside money. It really comes down to the market and growth strategy.

goatinaboat 7y ago
Certain business models require high amounts of capital in order to create leverage/growth. Think of Uber, WeWork etc The business model of selling $1 for 50c and hoping that later you’ll be able to sell it for $2 because... reasons.
- jfim 7y ago
  That model works if there are economies of scale. Say that your one dollar cost at one million users is $0.80 fixed costs and $0.20 incremental cost. Adding more users will eventually make the model profitable, and this is how Facebook works, for example.

novok 7y ago

But now the strategy is known, it would be harder for everyone to get investors and employees to even agree to work with him for any conditional future promise of equity on something like investment.

tschwimmer 7y ago
That's true. But it's not this guy's problem. He's super rich and therefore isn't interested in raising more money. I guess it's sort of like a tragedy of the commons type situation.
- deleted 7y ago
  [deleted]
TuringNYC 7y ago
>>But now the strategy is known, it would be harder for everyone to get investors and employees to even agree to work with him for any conditional future promise of equity on something like investment. Seemed to work fine Anthony Levandowski ttps://www.wired.com/story/god-is-a-bot-and-anthony-levandowski-is-his-messenger/?verso=true From the article, note how Levandowski pulled the stunt below and managed onwards to Otto: In early 2011, that plan was to bring 510 Systems into the Googleplex. The startup’s engineers had long complained that they did not have equity in the growing company. When matters came to a head, Levandowski drew up a plan that would reserve the first $20 million of any acquisition for 510’s founders and split the remainder among the staff, according to two former 510 employees. “They said we were going to sell for hundreds of millions,” remembers one engineer. “I was pretty thrilled with the numbers.” Indeed, that summer, Levandowski sold 510 Systems and Anthony’s Robots to Google -- for $20 million, the exact cutoff before the wealth would be shared. Rank and file engineers did not see a penny, and some were even let go before the acquisition was completed. “I regret how it was handled…Some people did get the short end of the stick,” admitted Levandowski in 2016. The buyout also caused resentment among engineers at Google, who wondered how Levandowski could have made such a profit from his employer.

jiveturkey 7y ago

> founders who know they have a big opportunity Firstly, that kind of founder/opportunity is exceedingly rare. It may as well not exist for purpose of discussion. Ideas are literally worthless. You become successful via execution and execution at scale (unicorn scale) requires many moving parts with many people. That means there's no sure bets at the early rounds. There's not a specific formula that "works" so it's all subjective and VC groupthink. VC "works" only because they take high risk with limited downside via all the things Toptal is complaining about. Without those onerous terms, there would be no VC (as we know it) and it would be an order of magnitude or 2 harder to get funded.

klipt 7y ago

Also this behavior might work in the US, but if you screwed over a bunch of rich and powerful people in say, Russia, you'd probably end up having an "accident", changing the leadership of your company to someone more favorable to said rich and powerful.

PopeDotNinja 7y ago
> ...if you screwed over a bunch of... That is usually gonna go poorly for you in any culture.
deleted 7y ago
[deleted]
cjlars 7y ago
If he died, his estate's administrator would essentially be forced to sell some shares in order to pay the hundreds of millions of dollars his estate would owe in taxes. Presumably, this would trigger the SAFE for both the investors AND employees. I wonder if the guy realizes he has a defacto decamillion dollar bounty on his head.
heavenlyblue 7y ago
I think there's also a good "death bed" test. If your actions lead to you dying alone and everyone who you knew remember you as "that guy not worth remembering" - then you did bad for yourself. You could say it's a more democratic version of the Russian "methods".

throaway5983 7y ago

You're assuming that this was a rational, conscious decision on his part. I've had some dealings with him that would lead me to conclude that this is just his personal inclination. He threatened me & my company over a wholly imagined transgression (and ceased completely when our attorney asked for documentation). Believe me or not, the main point is that working backwards from behavior to the thought process that led to it is a difficult if not impossible endeavor, and there's no reason to assume rationality in the absence of information to the contrary. I wouldn't draw any great lessons from this particular situation.

bit_4l 7y ago
Off topic but what an username!
kordlessagain 7y ago
People who defend the "rights" of internal personal imagery over that of reality can get stuffed, in my book. If you didn't do the imagined deed, then it never happened.