5 ms·

Pardon my ignorance but how often do insiders get their stakes cashed out after funding rounds like this, as opposed to using the money for operations or growin

by ben1040 15y ago

Pardon my ignorance but how often do insiders get their stakes cashed out after funding rounds like this, as opposed to using the money for operations or growing the business? My lack of knowledge about corporate finance and the part of that blog post that refers to cashouts is making me see Groupon as more of a DrKoop.com or Webvan than it may be. But nevertheless I can't see how struturing a funding deal like that benefits anyone other than the insiders who got in early enough?

raganwald 15y ago
The IPO makes investors very, very, very rich. The Groupon executives have built something that is going to make the investors and the bankers very, very, very rich. Why shouldn't they be rewarded for creating all this value? I am not being sarcastic. That's how business works: If I can make you a lot of money, you need to share some of that with me, or I'll go make someone else a lot of money. The Groupon deal is a business built to flip to the public. The structure benefits the insiders, but it benefits the VCs who cashed them out invested in the last round even more, and it will benefit the bankers. And that's why they can get away with getting rich right away: Because they're making a lot of other people rich.
- portman 15y ago
  Genuine question for raganwald: you consistently capitalize it as GroupOn, even though the press and the company itself capitalize it as Groupon. I know you're a careful, deliberate and consistent writer, so this is clearly intentional. Any particular reason why?
  - raganwald 15y ago
    Oh! My mind thought "Group Buying On _____," but now that you say it's actually "Group>o<n," I guess they mean "Group Coupon."
    - portman 15y ago
      It's intended to be a portmanteau of Group + Coupon, pronounced \ˈgrüˌpän I've had an affinity for portmanteaus ever since I was 10, when I saw "portmanteau" in Through the Looking Glass and thought Lewis Carrol was talking about me. So I tend to be irrationally defensive of them.
      - mariuskempe 15y ago
        That's one of the funniest things I've ever read on HN
      - ChuckN 15y ago
        Is 'portmanteau' a portmanteau?
      - btilly 15y ago
        Is that why your user name is an abbreviation of portmanteau?
        portman 15y ago
        No, my first name is actually "Portman".
        btilly 15y ago
        That makes for a nice coincidence then!
        alanfalcon 15y ago
        Or is simply the underlying reason why he thought Carrol was talking about him.
- gvb 15y ago
  That is also what a Ponzi scheme is also, except a Ponzi scheme is losing money hand-over-fist in a hidden way. With a Ponzi scheme, the piling on of new investors covers up the losses... for a while. Hmmmm, that sounds almost exactly like Groupon. While their losses are pretty well known, they are waving their hands (accounting gimmicks) and saying "That's not a loss. Honest."
  - encoderer 15y ago
    A ponzi scheme is, by definition, zero sum. And it is, by definition, opaque. New investors pay-out old investors. This was a buy-out of early shareholders. If you expand buy-outs to be considered a "ponzi scheme" than so is anything where somebody buys an asset from somebody else aided by a broker. When the payout is a dividend, both the new and old investors feel that their principle is remains and they could cash-out at will. What you have with Groupon was certainly bad PR to people like yourself and thousands of others who are tuned-in to this sort of news. But it most certainly was nothing like a Ponzi scheme. First, it's not zero-sum. The "machine" of Groupon produces $1.x dollars in value for every $1 of capital. Second, the new investors knew when they invested that many of the shares they were buying were being held by existing shareholders and did not come from the company's pool. They knew that to acquire the share of the company they wanted to hold, they'd have to buy-out these earlier investors and that it would of course be at a premium to their initial investment. Finally, the early investors knew that they were being bought-out, that they were selling their shares to a 3rd party.
- Lambent_Cactus 15y ago
  Making some people very rich is not the same thing as creating value. If Groupon investors get rich at the expense of retail investors, that's bad. If the Groupon founders get rich at the expense of retail investors and later venture investors, that's also bad. In fact it's worse, because they have more information about the business than the investors do. The closer you are to the center of the business, the more you are implicated if it turns out to be a giant pump-and-dump scheme. The founders are the rotten core of that scheme.
  - raganwald 15y ago
    I disagree that the founders somehow have a higher and nobler responsibility to retail investors than VCs. The VCs are the professionals, they sit on the board and direct its activities. These ideas about the difference between management and bankers made sense when IBM or US Steel went to the public markets to raise money in the old days, but where Tech Startups are concerned I am skeptical that founders are pulling the wool over the VC's eyes. But I suspect we're quibbling over who gets the lion's share of the tar and feathers :-) UPDATE: But yes, I agree about the word "value."
    - Lambent_Cactus 15y ago
      Yes, 'rotten core' was a bit strong. :P I don't know anything about Groupon's specific case, and it's certainly true that in many cases the VC's will be the more experienced and better informed, and therefore more culpable party. Comity!
portman 15y ago
>> "how often do insiders get their stakes cashed out" While this used to be the exception, it is starting to become the norm. The technical term is "secondary". Fred Wilson has been doing a great job chronicling the rise of these transactions for almost 2 years. (He calls them "DST-style" investments.) http://www.avc.com/a_vc/2011/02/some-thoughts-on-public-and-private-markets.html http://www.avc.com/a_vc/2011/02/some-thoughts-on-public-and-... http://www.avc.com/a_vc/2009/04/a-second-market-is-emerging.html http://www.avc.com/a_vc/2009/04/a-second-market-is-emerging.... http://www.avc.com/a_vc/2010/08/angel-liquidity.html http://www.avc.com/a_vc/2010/08/angel-liquidity.html http://www.avc.com/a_vc/2009/09/founder-liquidity.html http://www.avc.com/a_vc/2009/09/founder-liquidity.html
SwellJoe 15y ago
As others have noted, it's become much more common. Partly because IPOs have become so uncommon, and the majority of large investments are private equity rather than public offerings. If they have no hope of a near-term IPO (because there was no IPO market for a while), founders can get frustrated locking up their time, effort, money, etc. into a company and start looking for acquisitions. If the investors don't want to see an early acquisition, and want the company to keep growing, the founders and investors may agree on an exit, or partial cash-out, for the founders that allows the company to keep growing. It's not much different from the IPOs during the dotcom bubble: It makes the founders rich, and possibly pays off early investors, and transfers more ownership to the buyer (in the IPO case, the public is the buyer, in the private equity case, it is a VC or investment bank or conglomerate of the former). In this case, it confirms for me that Groupon was built to flip. If it accidentally becomes a profitable company that lasts, I'll probably be as surprised as the founders (who, as you note, have already mostly cashed out; sure, they'll make more from the IPO, because I'm sure they still have some stock, but they locked in winnings already, and are mostly gambling with other peoples money from now on).
- prpon 15y ago
  I find that groupon using most of its funding from last round to payout people questionable. I can understand founders wanting to cash out a portion of their equity before going public. However, when you are raising money say 10 million to fund growth etc, what % is considered reasonable to pay founders before it raises red flags to investors?
- brandoncor 15y ago
  "In this case, it confirms for me that Groupon was built to flip" If it was built to flip wouldn't they have accepted Google's offer?
  - SwellJoe 15y ago
    The founders would have accepted Google's offer, absent that cash-out. The investors behind them gave them a no-lose way to continue growing, while still cashing out and becoming pretty damned rich.
mikeryan 15y ago
Its greater fool investing. The last round probably had a lot of "We're going to IPO in a year" which means that last round is expecting to get their payday on an IPO and, frankly, future company performance be damned. I'm not as skeptical as some on Groupon's future I think they still have a vast amount of room to grow. But this lack of a focus on fundamentals is how bubbles get made.

by ben1040 15y ago

raganwald 15y ago

The IPO makes investors very, very, very rich. The Groupon executives have built something that is going to make the investors and the bankers very, very, very rich. Why shouldn't they be rewarded for creating all this value? I am not being sarcastic. That's how business works: If I can make you a lot of money, you need to share some of that with me, or I'll go make someone else a lot of money. The Groupon deal is a business built to flip to the public. The structure benefits the insiders, but it benefits the VCs who cashed them out invested in the last round even more, and it will benefit the bankers. And that's why they can get away with getting rich right away: Because they're making a lot of other people rich.

portman 15y ago
Genuine question for raganwald: you consistently capitalize it as GroupOn, even though the press and the company itself capitalize it as Groupon. I know you're a careful, deliberate and consistent writer, so this is clearly intentional. Any particular reason why?
- raganwald 15y ago
  Oh! My mind thought "Group Buying On _____," but now that you say it's actually "Group>o<n," I guess they mean "Group Coupon."
  - portman 15y ago
    It's intended to be a portmanteau of Group + Coupon, pronounced \ˈgrüˌpän I've had an affinity for portmanteaus ever since I was 10, when I saw "portmanteau" in Through the Looking Glass and thought Lewis Carrol was talking about me. So I tend to be irrationally defensive of them.
    - mariuskempe 15y ago
      That's one of the funniest things I've ever read on HN
    - ChuckN 15y ago
      Is 'portmanteau' a portmanteau?
    - btilly 15y ago
      Is that why your user name is an abbreviation of portmanteau?
      - portman 15y ago
        No, my first name is actually "Portman".
        btilly 15y ago
        That makes for a nice coincidence then!
        alanfalcon 15y ago
        Or is simply the underlying reason why he thought Carrol was talking about him.
gvb 15y ago
That is also what a Ponzi scheme is also, except a Ponzi scheme is losing money hand-over-fist in a hidden way. With a Ponzi scheme, the piling on of new investors covers up the losses... for a while. Hmmmm, that sounds almost exactly like Groupon. While their losses are pretty well known, they are waving their hands (accounting gimmicks) and saying "That's not a loss. Honest."
- encoderer 15y ago
  A ponzi scheme is, by definition, zero sum. And it is, by definition, opaque. New investors pay-out old investors. This was a buy-out of early shareholders. If you expand buy-outs to be considered a "ponzi scheme" than so is anything where somebody buys an asset from somebody else aided by a broker. When the payout is a dividend, both the new and old investors feel that their principle is remains and they could cash-out at will. What you have with Groupon was certainly bad PR to people like yourself and thousands of others who are tuned-in to this sort of news. But it most certainly was nothing like a Ponzi scheme. First, it's not zero-sum. The "machine" of Groupon produces $1.x dollars in value for every $1 of capital. Second, the new investors knew when they invested that many of the shares they were buying were being held by existing shareholders and did not come from the company's pool. They knew that to acquire the share of the company they wanted to hold, they'd have to buy-out these earlier investors and that it would of course be at a premium to their initial investment. Finally, the early investors knew that they were being bought-out, that they were selling their shares to a 3rd party.
Lambent_Cactus 15y ago
Making some people very rich is not the same thing as creating value. If Groupon investors get rich at the expense of retail investors, that's bad. If the Groupon founders get rich at the expense of retail investors and later venture investors, that's also bad. In fact it's worse, because they have more information about the business than the investors do. The closer you are to the center of the business, the more you are implicated if it turns out to be a giant pump-and-dump scheme. The founders are the rotten core of that scheme.
- raganwald 15y ago
  I disagree that the founders somehow have a higher and nobler responsibility to retail investors than VCs. The VCs are the professionals, they sit on the board and direct its activities. These ideas about the difference between management and bankers made sense when IBM or US Steel went to the public markets to raise money in the old days, but where Tech Startups are concerned I am skeptical that founders are pulling the wool over the VC's eyes. But I suspect we're quibbling over who gets the lion's share of the tar and feathers :-) UPDATE: But yes, I agree about the word "value."
  - Lambent_Cactus 15y ago
    Yes, 'rotten core' was a bit strong. :P I don't know anything about Groupon's specific case, and it's certainly true that in many cases the VC's will be the more experienced and better informed, and therefore more culpable party. Comity!

portman 15y ago

>> "how often do insiders get their stakes cashed out" While this used to be the exception, it is starting to become the norm. The technical term is "secondary". Fred Wilson has been doing a great job chronicling the rise of these transactions for almost 2 years. (He calls them "DST-style" investments.) http://www.avc.com/a_vc/2011/02/some-thoughts-on-public-and-private-markets.html http://www.avc.com/a_vc/2011/02/some-thoughts-on-public-and-... http://www.avc.com/a_vc/2009/04/a-second-market-is-emerging.html http://www.avc.com/a_vc/2009/04/a-second-market-is-emerging.... http://www.avc.com/a_vc/2010/08/angel-liquidity.html http://www.avc.com/a_vc/2010/08/angel-liquidity.html http://www.avc.com/a_vc/2009/09/founder-liquidity.html http://www.avc.com/a_vc/2009/09/founder-liquidity.html

SwellJoe 15y ago

As others have noted, it's become much more common. Partly because IPOs have become so uncommon, and the majority of large investments are private equity rather than public offerings. If they have no hope of a near-term IPO (because there was no IPO market for a while), founders can get frustrated locking up their time, effort, money, etc. into a company and start looking for acquisitions. If the investors don't want to see an early acquisition, and want the company to keep growing, the founders and investors may agree on an exit, or partial cash-out, for the founders that allows the company to keep growing. It's not much different from the IPOs during the dotcom bubble: It makes the founders rich, and possibly pays off early investors, and transfers more ownership to the buyer (in the IPO case, the public is the buyer, in the private equity case, it is a VC or investment bank or conglomerate of the former). In this case, it confirms for me that Groupon was built to flip. If it accidentally becomes a profitable company that lasts, I'll probably be as surprised as the founders (who, as you note, have already mostly cashed out; sure, they'll make more from the IPO, because I'm sure they still have some stock, but they locked in winnings already, and are mostly gambling with other peoples money from now on).

prpon 15y ago
I find that groupon using most of its funding from last round to payout people questionable. I can understand founders wanting to cash out a portion of their equity before going public. However, when you are raising money say 10 million to fund growth etc, what % is considered reasonable to pay founders before it raises red flags to investors?
brandoncor 15y ago
"In this case, it confirms for me that Groupon was built to flip" If it was built to flip wouldn't they have accepted Google's offer?
- SwellJoe 15y ago
  The founders would have accepted Google's offer, absent that cash-out. The investors behind them gave them a no-lose way to continue growing, while still cashing out and becoming pretty damned rich.

mikeryan 15y ago

Its greater fool investing. The last round probably had a lot of "We're going to IPO in a year" which means that last round is expecting to get their payday on an IPO and, frankly, future company performance be damned. I'm not as skeptical as some on Groupon's future I think they still have a vast amount of room to grow. But this lack of a focus on fundamentals is how bubbles get made.