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This matters more now that the current crop of tech companies have taken so much money. In the old days, when software companies sold software rather than trad

This matters more now that the current crop of tech companies have taken so much money. In the old days, when software companies sold software rather than traditional services enhanced by software, it was common to get to profitability around the B round and then never take any more investment after that. Google took $25-35M and then nothing until IPO, running the company from 2001-2004 off cashflow. Microsoft took nothing except a small mezzanine round (to align incentives with the I-bankers) right before IPO. Github took a $50M Series A on a valuation of $500M; VCs owned 10% of the company, and the 3 founders + employees split the remaining 90% of its $7.5B acquisition. Indeed took a Series A and is profitable. Atlassian took a $60M Series A 8 years after starting the company, when it was already profitable. PlentyOfFish, HotOrNot, Reddit, Wufoo all raised either nothing or just angel money before being acquired. When you're capital efficient, you get to keep the majority of any sale price. The current crop of unicorns like Uber, Lyft, WeWork, Postmates, DoorDash, Instacart, AirBnB, and Stripe have all taken massive amounts of capital though, sometimes in the multi billions of dollars. That has to be returned to the investors before the common shares (founders & employees) make anything. If they hit on hard times before a liquidity event, there's a good chance that the common will be wiped out, and investors effectively own the company. Why shouldn't they, when they put up all the money that the company's been burning?

a13n 7y ago
It's also interesting to consider the role SoftBank has played in this shift. Whoever takes SoftBank money will have the deepest pockets and will be able to play hard against competition. This means you're pretty much forced to either take SoftBank's money, or compete against someone else with SoftBank's money. They don't care much who takes their money, because either way they have the most funded pony in the race.
- cortesoft 7y ago
  In certain fields, sure... but even SoftBank isn't investing in EVERY market. Not everyone has a SoftBank funded competitor.
  - a13n 7y ago
    Sure, only the markets that are worth investing billions into winning
tdumitrescu 7y ago
> Github took a $50M Series A on a valuation of $500M; VCs owned 10% of the company, and the 3 founders + employees split the remaining 90% of its $7.5B acquisition. They raised another $250M in 2015. Still a lot less funding than they ultimately sold for, but the common pool certainly wasn't 90% of the value at their exit.
bcrosby95 7y ago
All the companies you're talking about have 1 thing in common: they're considered successes. You're going back in time and cherry picking companies that made it out alive. The early 00s/late 90s were full of companies that took Google levels of money that crashed and burned. There were also tons of companies that took little-to-no outside funding that crashed and burned.
- victoro0 7y ago
  Well of course. If he used examples that crashed and burned the reader would not have heard of them.
- nostrademons 7y ago
  For brevity I omitted all of the dot-com flameouts and also the Web 2.0 startups that never got off the ground, but IMHO they support my larger point. In the late 90s we had a lot of companies that took a lot of money, and the founders and employees got nothing out of them other than painful experiences. When you look at one of the successful "fat" startups (PayPal), Max Levchin's take ($34M) of the $1.6B acquisition was on the same order as the Wufoo founder's take of their $35M acquisition, or the Viaweb founders take of their $49M acquisition. Even Amazon - probably the most successful "fat" startup in history - languished below its dot-com peak until AWS came out in 2007. Margins matter. Capital efficiency matters. If you want to actually make money, you should make lots of profits on small amounts of invested capital, not lose lots of money on large amounts of invested capital.
  - mattmaroon 7y ago
    But what if your competitor is willing to lose lots of money on large amounts of invested capital until you are out of business? Uber and Lyft have it tough in that regard. At the end of the day they've got product market fit in a profitable industry. I mean the very worst case is they become more efficient cab companies, and cab companies have been making money for a very long time. Their prices are artificially low due to competition, and they are in sort of a prisoner's dilemma. eventually one of them will go broke and the other will raise prices, or something will change about the market (such as driverless cars coming). But if one of them passes up raising and losing money they lose.
jariel 7y ago
Should be noted that Stripe et. al. are paying premium salaries and as they are well funded with customers and income, they're not very risky, or rather, probably the same amount of 'employment risk' as most other private entities. If they are not pushing everyone to work late hours and long weekends ... then there's little reason to expect that later employees should 'get rich' from a buyout - though they should get something. Earlier / Senior staff should get something more as well. Worth noting: Canadian 'News Magnate' Conrad Black went to jail for 'carving out' sales of assets like this as kind of a sales fee. The shareholders not only sued him but he went to jail over it. The tiny but important difference would be the 'buyout carveouts' are backed by shareholders to incent execs to stay on while Black's dealings were ostensibly not (although they probably should have been). And of course Black was a foreigner and this has a material difference in the USA (and many other countries) where non-citizens end up getting treated differently for a variety of reasons.
- user5994461 7y ago
  Not sure if you mean now or a few years ago. Either way, don't believe all the stripe marketing hype. I was working at a small startup circa 2015, around 100 employees. We looked carefully into payment providers to try to reduce costs. Turns out Stripe was very small, we would be their main customer with a 2 digit percentage of all transactions if we moved our payments through them. Stripe had (has?) few customers and little volume. Meaning very little revenues, because that's a small percentage fee of all that. It was a fairly risky business and it wouldn't be sustainable without a fair amount of capital upfront and many years.
  - chipotle_coyote 7y ago
    While it's hard to get confirmed metrics on Stripe given that they're private, it strikes me as unlikely that a 100-person startup would have been Stripe's "main customer" in mid-2015. Analysts estimated their annual revenue to be $450M that year based on a payment volume of $20B, with customers that at that point included Lyft and Slack.
    - 7y ago
enra 7y ago
Just to note that it's not useful to group all of these companies together. While they all have massive valuations, and raised lot of funding, they don't have similar businesses at all, or capital efficiencies. The market is also different today than it was with Microsoft or Google. Companies are expected and also need to grow faster (or others will). It took Microsoft 10 years to break $100M in revenue. All companies on your list are about 10 years old but have revenues in several billions. WeWork's problem was that while they valuation was $47B, they also had $47B committed in long term leases (essentially debt). Uber & Lyft, are in war and their scale hasn't helped the economics as much since neither can get a monopoly on demand or the supply side of the market. Postmates, Doordash, Instacart, all likely operate with large gross volumes but low transaction sizes and low margins which can be challenging. Airbnb has now more cash the bank than they have ever raised ($3.5B) and it's growing [1]. I suspect Stripe's financials are strong as well. Free cash flow, and the ability to use or invest it well, eventually lead to a great business. Raising a lot of money doesn't necessarily mean that you are burning a lot of it, and the economics of the business matters. It's also likely Airbnb will do a direct listing since they don't actually need the cash. Which is also potentially better for employees than traditional IPOs. Disclaimer: I used to work at Airbnb, but this is all public information or speculation on my part. [1]:https://twitter.com/KateClarkTweets/status/1184933412231995392 https://twitter.com/KateClarkTweets/status/11849334122319953...
- codesushi42 7y ago
  No you have it all wrong. Lyft, Uber, WeWork etc are burning money and failing spectacularly because they aren't software companies. They're too tied to traditional markets and their economics don't magically work out because they've tried to throw software into the mix. We are at the inflection point where they are all about to crash and burn. Good riddance.
  - vanniv 7y ago
    Those companies aren't that different than the dot-com era companies. "We're not $boring_business, we're $boring_business_but_internet" (or, today, it'd be boring but mobile)
ram_rar 7y ago
How does liquidation preference work, when companies go IPO?
- sidlls 7y ago
  For employee shareholders of common stock, their stock has the same market value that anyone who's buying for the first time through a broker sees. It's not like they are going to be forced to hand over proceeds of sales on the market back to investors.
- yumraj 7y ago
  At an IPO the preferred stock holders have an option to convert to common stock, which they invariably take. It's specified in the term sheet. As such after the IPO all stocks are common stocks which are valued at the market price.
- techslave 7y ago
  it doesn’t apply
NullPrefix 7y ago
> Microsoft took nothing except a small mezzanine round (to align incentives with the I-bankers) right before IPO. > to align incentives with the I-bankers What does that even mean?
- KON_Air 7y ago
  funding where higher risk takers get paid more but "controlling rights" remains with smaller invester(s), so I guess MS didn't want to give up any control by selling shares, other then select few.
- nostrademons 7y ago
  When a company goes public, they usually hire an investment banking firm to manage the process. The I-bank does a lot of work to properly value the firm and price the IPO right, but part of their job is also drumming up interest among potential buyers of the stock. Like any securities offering, the IPO is basically an auction where the amount of money you raise, and the terms you raise it at, depends critically on how many people you can get interested in your offering and how excited they are. One way to incentivize the I-bank to do their very best to get the highest price for the shares, and to keep the price high, is to make them shareholders themselves. Thus, Microsoft did a small (Crunchbase reports it as $1M) financing round with their investment bank right before IPOing, despite not needing the money at all. Any dilution is more than made up for by the better IPO price; basically, the I-bank got to share in their upside by making their upside bigger.
4ntonius8lock 7y ago
> Why shouldn't they, when they put up all the money that the company's been burning? Because there is another group that's putting up all the work. In startups, that work is generally more intense and risk laden, which is why employees are offered shares as part of compensation. Otherwise, why would they be offering shares? Both groups deserve protection. The SEC was created so that people couldn't swindle each other in a legal manner. It works to some degree for investors who are, by the definition of these types of investors, rich ($1mm in assets or $200k/income). But it clearly isn't working for the people doing the work. So our system protects the rich, but not the people who apply a trade. If you think that's ok, fine. But I find it terribly unfair. Joint stock companies exist as a result of legislation, the separation of capital and management requires courts for mediation. I can't see why someone wouldn't support changing it to be more equitable to all involved, especially if it is done based on merit (where labor and capital are both weighed as equal inputs at the time of distribution of large liquidity events)
- sokoloff 7y ago
  That labor is being paid cash along the way. It might additionally be getting common stock, under the same terms of other common shareholders, which is to say, behind the preferred shareholders, who are behind the bond holders.
  - greggman2 7y ago
    I'm surprised how many people don't get this part. Person A, investor puts in $100k Person B, employee gets paid $100k Company fails. Person A lost $100k Person B gained $100k This is why person A gets the lion's share of the rewards if the company succeed. Person B risked nothing. Person A risked $100k. The typical retort from Person B is they could have gone to a different company so their risk was to work for this particular company. For example they could have gone to a FAANG company and made a high salary but instead went to some startup at a lower salary on the risk that it would succeed. From one POV that is a risk but it's not your money until it's in your hands. Future money is similar to saying well "if I won the lottery tomorrow". Until you do actually win that money it doesn't really count. You can use that line of reasoning in negotiations (you want me to join your startup but I have an offer from a FANNG company, sweeten the deal if you want me). But after that you didn't actually take a risk relevant to the company. Instead you made a choice to be paid X amount for your labor. Note: I've never been on the investing side, only the employee side, but for some reason I've never felt ripped off since I knew I was taking no risk.
kevstev 7y ago
A late reply, but I was just rereading this thread and it reminded me of a few recruiter pitches that seemed to seem it was a positive that a company just had a series E round of funding. I mean on the one hand, they do have enough of a business case to get that many checks, but on the other, my first thought was that there was no upside at all there most likely.

a13n 7y ago

It's also interesting to consider the role SoftBank has played in this shift. Whoever takes SoftBank money will have the deepest pockets and will be able to play hard against competition. This means you're pretty much forced to either take SoftBank's money, or compete against someone else with SoftBank's money. They don't care much who takes their money, because either way they have the most funded pony in the race.

cortesoft 7y ago
In certain fields, sure... but even SoftBank isn't investing in EVERY market. Not everyone has a SoftBank funded competitor.
- a13n 7y ago
  Sure, only the markets that are worth investing billions into winning

tdumitrescu 7y ago

> Github took a $50M Series A on a valuation of $500M; VCs owned 10% of the company, and the 3 founders + employees split the remaining 90% of its $7.5B acquisition. They raised another $250M in 2015. Still a lot less funding than they ultimately sold for, but the common pool certainly wasn't 90% of the value at their exit.

bcrosby95 7y ago

All the companies you're talking about have 1 thing in common: they're considered successes. You're going back in time and cherry picking companies that made it out alive. The early 00s/late 90s were full of companies that took Google levels of money that crashed and burned. There were also tons of companies that took little-to-no outside funding that crashed and burned.

victoro0 7y ago
Well of course. If he used examples that crashed and burned the reader would not have heard of them.
nostrademons 7y ago
For brevity I omitted all of the dot-com flameouts and also the Web 2.0 startups that never got off the ground, but IMHO they support my larger point. In the late 90s we had a lot of companies that took a lot of money, and the founders and employees got nothing out of them other than painful experiences. When you look at one of the successful "fat" startups (PayPal), Max Levchin's take ($34M) of the $1.6B acquisition was on the same order as the Wufoo founder's take of their $35M acquisition, or the Viaweb founders take of their $49M acquisition. Even Amazon - probably the most successful "fat" startup in history - languished below its dot-com peak until AWS came out in 2007. Margins matter. Capital efficiency matters. If you want to actually make money, you should make lots of profits on small amounts of invested capital, not lose lots of money on large amounts of invested capital.
- mattmaroon 7y ago
  But what if your competitor is willing to lose lots of money on large amounts of invested capital until you are out of business? Uber and Lyft have it tough in that regard. At the end of the day they've got product market fit in a profitable industry. I mean the very worst case is they become more efficient cab companies, and cab companies have been making money for a very long time. Their prices are artificially low due to competition, and they are in sort of a prisoner's dilemma. eventually one of them will go broke and the other will raise prices, or something will change about the market (such as driverless cars coming). But if one of them passes up raising and losing money they lose.

jariel 7y ago

Should be noted that Stripe et. al. are paying premium salaries and as they are well funded with customers and income, they're not very risky, or rather, probably the same amount of 'employment risk' as most other private entities. If they are not pushing everyone to work late hours and long weekends ... then there's little reason to expect that later employees should 'get rich' from a buyout - though they should get something. Earlier / Senior staff should get something more as well. Worth noting: Canadian 'News Magnate' Conrad Black went to jail for 'carving out' sales of assets like this as kind of a sales fee. The shareholders not only sued him but he went to jail over it. The tiny but important difference would be the 'buyout carveouts' are backed by shareholders to incent execs to stay on while Black's dealings were ostensibly not (although they probably should have been). And of course Black was a foreigner and this has a material difference in the USA (and many other countries) where non-citizens end up getting treated differently for a variety of reasons.

user5994461 7y ago
Not sure if you mean now or a few years ago. Either way, don't believe all the stripe marketing hype. I was working at a small startup circa 2015, around 100 employees. We looked carefully into payment providers to try to reduce costs. Turns out Stripe was very small, we would be their main customer with a 2 digit percentage of all transactions if we moved our payments through them. Stripe had (has?) few customers and little volume. Meaning very little revenues, because that's a small percentage fee of all that. It was a fairly risky business and it wouldn't be sustainable without a fair amount of capital upfront and many years.
- chipotle_coyote 7y ago
  While it's hard to get confirmed metrics on Stripe given that they're private, it strikes me as unlikely that a 100-person startup would have been Stripe's "main customer" in mid-2015. Analysts estimated their annual revenue to be $450M that year based on a payment volume of $20B, with customers that at that point included Lyft and Slack.
  - 7y ago

enra 7y ago

Just to note that it's not useful to group all of these companies together. While they all have massive valuations, and raised lot of funding, they don't have similar businesses at all, or capital efficiencies. The market is also different today than it was with Microsoft or Google. Companies are expected and also need to grow faster (or others will). It took Microsoft 10 years to break $100M in revenue. All companies on your list are about 10 years old but have revenues in several billions. WeWork's problem was that while they valuation was $47B, they also had $47B committed in long term leases (essentially debt). Uber & Lyft, are in war and their scale hasn't helped the economics as much since neither can get a monopoly on demand or the supply side of the market. Postmates, Doordash, Instacart, all likely operate with large gross volumes but low transaction sizes and low margins which can be challenging. Airbnb has now more cash the bank than they have ever raised ($3.5B) and it's growing [1]. I suspect Stripe's financials are strong as well. Free cash flow, and the ability to use or invest it well, eventually lead to a great business. Raising a lot of money doesn't necessarily mean that you are burning a lot of it, and the economics of the business matters. It's also likely Airbnb will do a direct listing since they don't actually need the cash. Which is also potentially better for employees than traditional IPOs. Disclaimer: I used to work at Airbnb, but this is all public information or speculation on my part. [1]:https://twitter.com/KateClarkTweets/status/1184933412231995392 https://twitter.com/KateClarkTweets/status/11849334122319953...

codesushi42 7y ago
No you have it all wrong. Lyft, Uber, WeWork etc are burning money and failing spectacularly because they aren't software companies. They're too tied to traditional markets and their economics don't magically work out because they've tried to throw software into the mix. We are at the inflection point where they are all about to crash and burn. Good riddance.
- vanniv 7y ago
  Those companies aren't that different than the dot-com era companies. "We're not $boring_business, we're $boring_business_but_internet" (or, today, it'd be boring but mobile)

ram_rar 7y ago

How does liquidation preference work, when companies go IPO?

sidlls 7y ago
For employee shareholders of common stock, their stock has the same market value that anyone who's buying for the first time through a broker sees. It's not like they are going to be forced to hand over proceeds of sales on the market back to investors.
yumraj 7y ago
At an IPO the preferred stock holders have an option to convert to common stock, which they invariably take. It's specified in the term sheet. As such after the IPO all stocks are common stocks which are valued at the market price.
techslave 7y ago
it doesn’t apply

NullPrefix 7y ago

> Microsoft took nothing except a small mezzanine round (to align incentives with the I-bankers) right before IPO. > to align incentives with the I-bankers What does that even mean?

KON_Air 7y ago
funding where higher risk takers get paid more but "controlling rights" remains with smaller invester(s), so I guess MS didn't want to give up any control by selling shares, other then select few.
nostrademons 7y ago
When a company goes public, they usually hire an investment banking firm to manage the process. The I-bank does a lot of work to properly value the firm and price the IPO right, but part of their job is also drumming up interest among potential buyers of the stock. Like any securities offering, the IPO is basically an auction where the amount of money you raise, and the terms you raise it at, depends critically on how many people you can get interested in your offering and how excited they are. One way to incentivize the I-bank to do their very best to get the highest price for the shares, and to keep the price high, is to make them shareholders themselves. Thus, Microsoft did a small (Crunchbase reports it as $1M) financing round with their investment bank right before IPOing, despite not needing the money at all. Any dilution is more than made up for by the better IPO price; basically, the I-bank got to share in their upside by making their upside bigger.

4ntonius8lock 7y ago

> Why shouldn't they, when they put up all the money that the company's been burning? Because there is another group that's putting up all the work. In startups, that work is generally more intense and risk laden, which is why employees are offered shares as part of compensation. Otherwise, why would they be offering shares? Both groups deserve protection. The SEC was created so that people couldn't swindle each other in a legal manner. It works to some degree for investors who are, by the definition of these types of investors, rich ($1mm in assets or $200k/income). But it clearly isn't working for the people doing the work. So our system protects the rich, but not the people who apply a trade. If you think that's ok, fine. But I find it terribly unfair. Joint stock companies exist as a result of legislation, the separation of capital and management requires courts for mediation. I can't see why someone wouldn't support changing it to be more equitable to all involved, especially if it is done based on merit (where labor and capital are both weighed as equal inputs at the time of distribution of large liquidity events)

sokoloff 7y ago
That labor is being paid cash along the way. It might additionally be getting common stock, under the same terms of other common shareholders, which is to say, behind the preferred shareholders, who are behind the bond holders.
- greggman2 7y ago
  I'm surprised how many people don't get this part. Person A, investor puts in $100k Person B, employee gets paid $100k Company fails. Person A lost $100k Person B gained $100k This is why person A gets the lion's share of the rewards if the company succeed. Person B risked nothing. Person A risked $100k. The typical retort from Person B is they could have gone to a different company so their risk was to work for this particular company. For example they could have gone to a FAANG company and made a high salary but instead went to some startup at a lower salary on the risk that it would succeed. From one POV that is a risk but it's not your money until it's in your hands. Future money is similar to saying well "if I won the lottery tomorrow". Until you do actually win that money it doesn't really count. You can use that line of reasoning in negotiations (you want me to join your startup but I have an offer from a FANNG company, sweeten the deal if you want me). But after that you didn't actually take a risk relevant to the company. Instead you made a choice to be paid X amount for your labor. Note: I've never been on the investing side, only the employee side, but for some reason I've never felt ripped off since I knew I was taking no risk.

kevstev 7y ago

A late reply, but I was just rereading this thread and it reminded me of a few recruiter pitches that seemed to seem it was a positive that a company just had a series E round of funding. I mean on the one hand, they do have enough of a business case to get that many checks, but on the other, my first thought was that there was no upside at all there most likely.