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You don't win 100x-ers by squeezing founders over tiny exits. VC funds have a duty to their LP base to maximize returns, but I would argue the good will genera

You don't win 100x-ers by squeezing founders over tiny exits. VC funds have a duty to their LP base to maximize returns, but I would argue the good will generated by moves like this are what protect their ability to get into "hot" companies and thus protect those returns. Pursuing your strategy would likely harm the fund's reputation and their ability to return LP capital in the future. Also - a point of nuance. VCs are not in the habit of writing off everything, that would be a false takeaway from this article. If the amount invested was bigger or the exit was more like 2x or 3x for the VCs, your points of criticism would be more valid.

jariel 6y ago
"squeezing founders over tiny exits." They are not 'squeezing' remotely. Otherwise, there would be not such thing as 1x participating in the deal in the first place. Getting your $800K back while the founder gets $3M is not 'squeezing' it's literally just a transaction. Also - a founder negotiating a price outside the valuation of the shares is getting very close to illegal (Conrad Black went to jail for this). I think the founder was actually lucky that the funds simply didn't care.
- kjksf 6y ago
  Reading between the lines, this deal wouldn't happen if investors didn't agree to write off their investment. So their choice was between nothing today or nothing later. Tax-wise it was probably better to write it off now than carry a zombie investment into the future. Like you said: their investment was a transaction and they made rational choice. It's the emotional "we can't loose money" or "how dare the founder sell without us getting a cut" that would be a worse choice.
  - jariel 6y ago
    Either way he's definitely ended his entrepreneurial career. Nobody is going to put a dime into a guy who does that - the risk that he'd do something much grander when the stakes are much higher is obviously there. He should have sold the company, honoured the terms of his agreement.
    - tehlike 6y ago
      People are downvoting you, mostly because you are making a big deal out of a very simple situation. As one commenter said above, they would either get nothing, or nothing, and the VC firm, through the publicity they are getting now, will very likely profit from this sign of good will.
- tptacek 6y ago
  It's squeezing if it impacts your dealflow, which is something VC firms compete for. This 4MM acquisition is a soft landing, not a blowout. Bessemer and GC want a bite at the apple in other deals, where founders and management will be influenced by their behavior in this deal. It's one thing to maximize your returns in a successful exit. But for Baremetrics' investors, the returns on this investment might as well be $0; the model is that the winners pay for the losers by generating outsized returns. The ultimate returns that these funds will generate for their LPs are defined by the 10+x's, not by the Baremetrics'.
- RedditKon 6y ago
  re: 1x participating Straw man argument. 1x participating are standard terms. I'm not sure why any investor would forego using standard terms, even at the early stage, to their detriment. re: "squeezing" You're perfectly free to have that opinion. Clearly both firms with extensive investment experience did not feel that way. re: "illegality" I have no idea what parallel you're making here, or what "negotiating a price outside the valuation fo the shares" means. Financing documents typically make it very clear what rights each party has upon a financing event and/or exit event. Whether each party chooses to exercise that right is up to them. There is absolutely no reason to believe Josh did anything illegal here.
  - jariel 6y ago
    >>> '1x participating' are the likely standard terms, meaning the investors should be getting their 1x out of this deal at least. There's no 'straw man'. >>> Asking for the 1x back on a sale is not 'squeezing' - it's literally in the contract, a normative part of these transactions. It happens all the time. "Clearly both firms with extensive investment experience did not feel that way." - no, that they didn't 'go after the money' doesn't imply they would be 'squeezing' if they did. What it implies is that in all likelihood, it probably just wasn't worth the hassle. The investors got robbed, but at least they can write it off. Asking for money from someone who is essentially refusing to give it back to you is not 'squeezing' by any definition. >>> "Illegality" - in the article Josh mentioned that he had some kind of deal with the acquirer whereby 'not matter what, he would get his $3.7M'. If the acquirer is agreeing to terms with one 'insider shareholder' to the detriment of the others, that's fraud, and it's illegal. Josh has a fiduciary responsibility to represent in good faith on behalf of all of the shareholders. Clearly in this situation, he came out with a nice exit, while his investors got $0. It also seems pretty clear that Josh and the acquirer were going to make sure that Josh was 'taken care of as part of the deal'. Conrad Black went to jail because he was selling off assets of the company, but also getting a large 'consulting fee' from the acquiring entity to him personally. The shareholders felt that was defrauding them of what would otherwise be valuation/money they should receive. In this companies transaction, it seems pretty clear that the investors were probably into it for $800K (participating) and then 15% or whatever they owned - but they got nothing. He benefited while the other shareholders did not - this looks like it might illegal - but it probably would only be considered so if someone took them to court over it, which obviously they wont. It's a fine line between 'negotiating hard' and simply saying 'I have your money, you're not going to get it, so that's that'.
probe 6y ago
I don't think OP's points would - VC really is about getting into 100x deals, and the "cost" multistage funds would take on to do that is quite high. See Sequoia walking away AFTER giving $21M funding b/c of a conflict of interest with Stripe - https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-million-to-a-payments-startup-it-funded-as-it-walks-away-from-deal/ https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-...

jariel 6y ago

"squeezing founders over tiny exits." They are not 'squeezing' remotely. Otherwise, there would be not such thing as 1x participating in the deal in the first place. Getting your $800K back while the founder gets $3M is not 'squeezing' it's literally just a transaction. Also - a founder negotiating a price outside the valuation of the shares is getting very close to illegal (Conrad Black went to jail for this). I think the founder was actually lucky that the funds simply didn't care.

kjksf 6y ago
Reading between the lines, this deal wouldn't happen if investors didn't agree to write off their investment. So their choice was between nothing today or nothing later. Tax-wise it was probably better to write it off now than carry a zombie investment into the future. Like you said: their investment was a transaction and they made rational choice. It's the emotional "we can't loose money" or "how dare the founder sell without us getting a cut" that would be a worse choice.
- jariel 6y ago
  Either way he's definitely ended his entrepreneurial career. Nobody is going to put a dime into a guy who does that - the risk that he'd do something much grander when the stakes are much higher is obviously there. He should have sold the company, honoured the terms of his agreement.
  - tehlike 6y ago
    People are downvoting you, mostly because you are making a big deal out of a very simple situation. As one commenter said above, they would either get nothing, or nothing, and the VC firm, through the publicity they are getting now, will very likely profit from this sign of good will.
tptacek 6y ago
It's squeezing if it impacts your dealflow, which is something VC firms compete for. This 4MM acquisition is a soft landing, not a blowout. Bessemer and GC want a bite at the apple in other deals, where founders and management will be influenced by their behavior in this deal. It's one thing to maximize your returns in a successful exit. But for Baremetrics' investors, the returns on this investment might as well be $0; the model is that the winners pay for the losers by generating outsized returns. The ultimate returns that these funds will generate for their LPs are defined by the 10+x's, not by the Baremetrics'.
RedditKon 6y ago
re: 1x participating Straw man argument. 1x participating are standard terms. I'm not sure why any investor would forego using standard terms, even at the early stage, to their detriment. re: "squeezing" You're perfectly free to have that opinion. Clearly both firms with extensive investment experience did not feel that way. re: "illegality" I have no idea what parallel you're making here, or what "negotiating a price outside the valuation fo the shares" means. Financing documents typically make it very clear what rights each party has upon a financing event and/or exit event. Whether each party chooses to exercise that right is up to them. There is absolutely no reason to believe Josh did anything illegal here.
- jariel 6y ago
  >>> '1x participating' are the likely standard terms, meaning the investors should be getting their 1x out of this deal at least. There's no 'straw man'. >>> Asking for the 1x back on a sale is not 'squeezing' - it's literally in the contract, a normative part of these transactions. It happens all the time. "Clearly both firms with extensive investment experience did not feel that way." - no, that they didn't 'go after the money' doesn't imply they would be 'squeezing' if they did. What it implies is that in all likelihood, it probably just wasn't worth the hassle. The investors got robbed, but at least they can write it off. Asking for money from someone who is essentially refusing to give it back to you is not 'squeezing' by any definition. >>> "Illegality" - in the article Josh mentioned that he had some kind of deal with the acquirer whereby 'not matter what, he would get his $3.7M'. If the acquirer is agreeing to terms with one 'insider shareholder' to the detriment of the others, that's fraud, and it's illegal. Josh has a fiduciary responsibility to represent in good faith on behalf of all of the shareholders. Clearly in this situation, he came out with a nice exit, while his investors got $0. It also seems pretty clear that Josh and the acquirer were going to make sure that Josh was 'taken care of as part of the deal'. Conrad Black went to jail because he was selling off assets of the company, but also getting a large 'consulting fee' from the acquiring entity to him personally. The shareholders felt that was defrauding them of what would otherwise be valuation/money they should receive. In this companies transaction, it seems pretty clear that the investors were probably into it for $800K (participating) and then 15% or whatever they owned - but they got nothing. He benefited while the other shareholders did not - this looks like it might illegal - but it probably would only be considered so if someone took them to court over it, which obviously they wont. It's a fine line between 'negotiating hard' and simply saying 'I have your money, you're not going to get it, so that's that'.

probe 6y ago

I don't think OP's points would - VC really is about getting into 100x deals, and the "cost" multistage funds would take on to do that is quite high. See Sequoia walking away AFTER giving $21M funding b/c of a conflict of interest with Stripe - https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-million-to-a-payments-startup-it-funded-as-it-walks-away-from-deal/ https://techcrunch.com/2020/03/09/sequoia-is-giving-away-21-...