6 ms·

Can someone please explain why the investors were not able to recoup their initial investment of 800K$ when the company sold for 4 million? Thanks in advance.

pavlov 6y ago
The founder had the guts to tell the investors that there’s a deal on the table, but he’s not going to do it unless the VCs walk away from the investment. It wasn’t a growth story, so from that point of view it was dead money for the VCs anyway. But why would they agree to the founder’s payout at their expense? Either the VCs are very impressed with this founder and plan to participate in his next company, or they’re fed up and just wanted to be rid of him.
nemothekid 6y ago
It's not that they weren't able to. It's that the 800k isn't worth the legal fees and the possible PR damage (Bessemer doesn't want to be known as non-founder friendly because they made a fuss over 800k). It's been repeated a couple times in this thread, but VC make money by 10x-100x their original investment. They invested 800k expecting to make back 8M-80M. Anything less than that isn't worth the additional time, especially for a seed stage investment where they might have 50-60 of these per year. I think, for anyone trying to start a company and take VC funding to understand how the VC business model works. A VC incentives are much different than a founder's much of the time. In this case, the best case for the VC is for the founder to continue working on the company.
- jariel 6y ago
  It is absolutely not 'non founder friendly' for a VC to go after their 'participating' value especially when there is actually money on the table. There would be zero negative PR fallout from that. This founder basically ripped off his investors, it's completely unethical - and he'll never get a dime of VC money again. If VC firms didn't care about getting their 1x money out then the terms wouldn't be there in the first place. It's normal to do that, and a $500M firm returning 10% a year takes 20% of that, so 2% which is not really a huge amount of money for a team of people.
nrmitchi 6y ago
It kind of sounds like Josh had a number in mind, which would allow him "financial independence", and that number was 3.7M. If the investors insisted on recouping that 800k, leaving Josh with ~3M, it sounds like it wouldn't have hit his number, he wouldn't have sold, and.... the investors would be in the exact same place. Effectively, it sounds like they just chose to not block the sale for something that, in the end, would have made no difference to them (but would have prevented the founder from leaving). Josh ended up better, the employees ended up better, and the investors _really_ didn't end up in a worse place (in actuality, they probably now get to write this off as a loss and not worry about it anymore, so maybe a bit of a pro?).

pavlov 6y ago

The founder had the guts to tell the investors that there’s a deal on the table, but he’s not going to do it unless the VCs walk away from the investment. It wasn’t a growth story, so from that point of view it was dead money for the VCs anyway. But why would they agree to the founder’s payout at their expense? Either the VCs are very impressed with this founder and plan to participate in his next company, or they’re fed up and just wanted to be rid of him.

nemothekid 6y ago

It's not that they weren't able to. It's that the 800k isn't worth the legal fees and the possible PR damage (Bessemer doesn't want to be known as non-founder friendly because they made a fuss over 800k). It's been repeated a couple times in this thread, but VC make money by 10x-100x their original investment. They invested 800k expecting to make back 8M-80M. Anything less than that isn't worth the additional time, especially for a seed stage investment where they might have 50-60 of these per year. I think, for anyone trying to start a company and take VC funding to understand how the VC business model works. A VC incentives are much different than a founder's much of the time. In this case, the best case for the VC is for the founder to continue working on the company.

jariel 6y ago
It is absolutely not 'non founder friendly' for a VC to go after their 'participating' value especially when there is actually money on the table. There would be zero negative PR fallout from that. This founder basically ripped off his investors, it's completely unethical - and he'll never get a dime of VC money again. If VC firms didn't care about getting their 1x money out then the terms wouldn't be there in the first place. It's normal to do that, and a $500M firm returning 10% a year takes 20% of that, so 2% which is not really a huge amount of money for a team of people.

nrmitchi 6y ago

It kind of sounds like Josh had a number in mind, which would allow him "financial independence", and that number was 3.7M. If the investors insisted on recouping that 800k, leaving Josh with ~3M, it sounds like it wouldn't have hit his number, he wouldn't have sold, and.... the investors would be in the exact same place. Effectively, it sounds like they just chose to not block the sale for something that, in the end, would have made no difference to them (but would have prevented the founder from leaving). Josh ended up better, the employees ended up better, and the investors _really_ didn't end up in a worse place (in actuality, they probably now get to write this off as a loss and not worry about it anymore, so maybe a bit of a pro?).