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I always thought stuff like this happened to OTHER founders, but would never happen to me. But my board fired me six months after closing our series A. The adv

• gonehome 5y ago
  Can’t you structure things like Zuckerberg or Palantir and just have the founder retain unilateral company control?
  • pfarrell 5y ago
    Sure... If your company is so attractive that the investors will go along with it. IMHO, Facebook's history is an outlier. Most startups aren't positioned with the leverage they had when raising money. I don't know enough about Palantir's history to comment.
    • hinkley 5y ago
      When the orders of magnitude change, so does the correct solution. In other words: Stop comparing your startup to FAANG. You are not FAANG. If you were, everyone else would know it. Since you aren't, their strategies don't work for you.
      • streetcat1 5y ago
        Well, the FAANG did not know that they will be a FAANG in the first years.
        • H8crilA 5y ago
          Actually they often knew they're exceptional. This is a bit later than the first few years, but all of Microsoft, Facebook, Google, Apple were very highly profitable (on gaap, not some xxx-adjusted ebidta bullshit) at their IPO, and for a while before, with hockey stick revenue growth. And the IPOs happened much earlier in the company lifecycle back then. Look up old S-1s.
    • gonehome 5y ago
      I think Founder’s Fund and Thiel are desirable because of how they treat founders. I wrote that first comment before finishing the article (which is a good article people should read it). His first advice is basically to try to do what I asked if you can.
    • streetcat1 5y ago
      This kind of depends on the interest rates and the Nasdaq (50%). The number of VC in the market(30%) and the allocation of LP to VC (10%). I see the VC asset class as an arbitrage on private company valuation. As the number of VC increase the arbitrage opportunity disappear and switch sides, from the buyer to the seller. I.e. founders are getting to arbitrage the VCs. Personally I think that there is a market failure here, where the government protect mom and pop investors from making risky bets on early stage startups, and yet allow them to invest on some crypto scams with no questions. I envision that, like cannabis, this will be solved soon in the form of some sort of public stock exchange for startups.
  • m12k 5y ago
    You can - but then your startup needs to be that much more attractive to get investors in the first place.
  • doktorhladnjak 5y ago
    In theory, yes. But even that is no guarantee. Travis Kalanick had control through supervoting shares at Uber, but the investors forced him to resign and passed governance changes that made all shares equal in voting power. Even with founders having voting power, it's possible for the board or investors to exert other leverage.
    • vimy 5y ago
      How did they force him if he had control?
      • nostrademons 5y ago
        He was forced out days after his mother died and his father was in the hospital. There are some life events where you just don't have a whole lot of fight left in you to deal with a hostile board of directors.
      • wpietri 5y ago
        If you still need investors to put in more money, you're never really in control.
      • miohtama 5y ago
        Here is the story > Indeed, Kalanick had some tepid support inside the company. But his vote counting rankled even his defenders. He was also calling executives daily, asking for detailed information about the business. Even worse, he ordered the security team to dig through an employee’s email to see if that person was leaking a potentially damaging story. It all proved too much for the 16-person executive team, which signed a letter to Uber’s board—but clearly directed at Kalanick—asking them to refrain from reaching out to employees or meddling in the company’s daily affairs. Kalanick’s own handpicked executives turned against him. > Somehow, amid the dysfunction, Uber hired Khosrowshahi, who impressed the board with a thoughtful PowerPoint presentation that included a slide that read, “There can be only one CEO at a time.” Khosrowshahi was all that Kalanick wasn’t or couldn’t be: humble, a good listener, and a diplomat. In a pointed reversal of Kalanick’s mantra, he would say: “We don’t have a PR problem; we have an ‘us’ problem—we have behaved poorly.” And when the city of London revoked Uber’s operating license in September, Khosrowshahi visited, met with taxi regulators, and published an open letter. “On behalf of everyone at Uber globally, I apologize,” he wrote. “We will appeal this decision on behalf of millions of Londoners, but we do so with the knowledge that we must also change.” https://www.bloomberg.com/news/features/2018-01-18/the-fall-of-travis-kalanick-was-a-lot-weirder-and-darker-than-you-thought https://www.bloomberg.com/news/features/2018-01-18/the-fall-...
  • jasode 5y ago
    >Can’t you structure things like Zuckerberg or Palantir and just have the founder retain unilateral company control? Fyi... Zuckerberg didn't "retain" unilateral control. He lost his 65% majority ownership control because it was reduced (diluted) to 40% when Peter Thiel invested in 2004.[1] What eventually happened was that Zuckerberg later consolidated voting power from other shareholders like Sean Parker and Accel Partners.[2] Why would they give voting power to Zuckerberg?!? Because Zuckerberg was doing a good job running the company. Yes, Facebook also later set up class B shares with 10x voting power for Zuckerberg. But investors won't accommodate founders with that structure unless the company is a big success. So in short, MZ lost 65% control, and then eventually got majority voting power back after some business events. Even though he now only owns ~14% of Facebook, an article said his voting share was still at majority of ~58%.[3] [1] Facebook ownership was divided between Zuckerberg, with 65%, Saverin, with 30%, and Moskovitz, with 5%. After the transaction, the new company was divided between Zuckerberg, with 40%, Saverin, with 24%, Moskovitz, with 16%, and Thiel with 9%. The rest, about 20%, went to an options pool for future employees. -- from : https://www.businessinsider.com/how-mark-zuckerberg-booted-his-co-founder-out-of-the-company-2012-5 https://www.businessinsider.com/how-mark-zuckerberg-booted-h... [2] https://venturebeat.com/2012/02/01/zuck-power-play/ https://venturebeat.com/2012/02/01/zuck-power-play/ [3] https://www.bloomberg.com/news/articles/2021-05-26/facebook-board-rejects-proposals-to-reduce-zuckerberg-s-power https://www.bloomberg.com/news/articles/2021-05-26/facebook-...
    • repomies69 5y ago
      If the company makes bucketlots of money, the board isn't going to change the CEO, even if he would be a total arse in board meetings. I think it has to be repeated that investors want returns for their investments. Also, if the company happens to make money despite of lousy CEO, the board will highly probably keep the lousy CEO. All these founder-centric stories makes it looks like board will fire the CEO just for fun, or just because they happen to get the idea out of the blue. Actually it is a lot of pain and work for the board to try to find a new (better) CEO and they probably realize that they will fail (statistically speaking). So, the board will fire the CEO only in a situation where they genuinely believe that average replacement from the market will do a better job running the company. They don't fire on a whim.
• mritchie712 5y ago
  I’ve been doing a lot of research on debt as an alternative to VC. A ton of options out there. Keeping notes here for anyone interested https://www.trypaper.io/ https://www.trypaper.io/
  • cambel 5y ago
    Just be aware with debt there are other forcing functions at play
    • mritchie712 5y ago
      Absolutely. Just another option that's not talked about as much, so I've been trying to shed some light on it. If want capital without the "help" from VCs, there are options there, but as you said, with different downsides (mainly being on the hook for repayment).
  • bluGill 5y ago
    It isn't unheard of for banks to get someone on your board as part of the debt agreement. Though probably only in deals far larger than anything in the VC range.
    • mritchie712 5y ago
      Many of the debt players are realizing their advantage over VC is lack of control over your company. For example, check out https://timiacapital.com/ https://timiacapital.com/. A lot of their marketing is around "Retaining control" and "No warrants and no harsh covenants".
      • martinald 5y ago
        It seems quite crazy that this hasn't happened earlier. It seems to me most VC rounds are usually used to mostly finance sales and marketing growth, which if they have a positive RoI should really be debt, as that's the whole point of it! Equity funding to me should be used less for that and more for R&D and product development where the RoI is harder to calculate, or may not exist at all.
• option_greek 5y ago
  That's so sad but also super impressive. I'm not sure if you are ready to but may we know your current and previous startups.
  • soperj 5y ago
    Current start up is in their profile.
  • cambel 5y ago
    https://www.linkedin.com/in/rsweeney21/ https://www.linkedin.com/in/rsweeney21/
• drno123 5y ago
  Who was your investor? So other startups know who to avoid.
  • gp 5y ago
    Don't want to dox, but you should be able to find it on crunchbase. I'm not surprised about the story given who's in that round.
    • scrollaway 5y ago
      > I'm not surprised about the story given who's in that round. Care to elaborate?
      • wellthisisgreat 5y ago
        I am also very interested
    • aledalgrande 5y ago
      email the fun details XD
  • buryat 5y ago
    2017-10-04 Series A - Numetric $13M Insight Partners — lead investor Hack VC EPIC Ventures Draper Associates Aaron Skonnard https://www.crunchbase.com/funding_round/numetric-series-a--91f3fe48 https://www.crunchbase.com/funding_round/numetric-series-a--...
    • CityOfThrowaway 5y ago
      Yeah this checks out, these people have a reputation for this behavior.
    • javajosh 5y ago
      If firing the CEO is a (the?) major degree of freedom for investors/boards, why are these events not recorded on crunchbase? That would seem to be a natural addition. I'd also like to see events related to dilution using valuation and any other major DoF that a board might have.
• adtac 5y ago
  >Then a year after I got fired the series A investor led the next round of funding and decided to value the company at $0, so I got diluted by 99.99% Was it made impossible for you to be an investor in that round? Could you have prevented 99.99% dilution that way?
  • hn_throwaway_99 5y ago
    So the existing stock the CEO had, made through his blood sweat and tears, was worth nothing, but you'd expect him to want to pay for the ability to buy more stock in the company he was just kicked out of?
    • adtac 5y ago
      No, I'm just curious if it was possible technically. Obviously it's super unethical to do this to your CEO.
    • hobbyjogger 5y ago
      At a $0 valuation (assuming that's accurate) you'd be paying almost nothing to participate in the round (assuming you had a contractual right or were given the opportunity to participate).
  • kelnos 5y ago
    It's hard to participate in a funding round when you don't have much money, as the parent says.
• somerando7 5y ago
  Question from someone uneducated on this topic: is it impossible to get VC levels of investment without giving away board seats? Is a board even required for private companies?
  • tptacek 5y ago
    I'm not the most informed person on HN who can respond to this but as a general rule it's within the bounds of normality to raise single-digit millions in unpriced rounds ("seeds") that don't generally have board seats attached, but your first significant priced round (your "A" round) will essentially always give up board seats. Formal boards are not required for private companies.
    • hobbyjogger 5y ago
      Delaware (and all or at least most other states) requires at least one member on the board of directors for any corporation, whether it's private or public.
      • tptacek 5y ago
        For bootstrapped (for lack of a better term) companies these "boards" are pure formalities; it's a running joke among bootstrappers that they flip a coin to figure out who the listed corporate officers are going to be.
      • nostrademons 5y ago
        The incorporator, board member, investor, CEO (President), Treasurer, Secretary, and sole employee can all be the same person.
    • somerando7 5y ago
      There's nothing legally requiring me to give any seats for investment though right? Reading through this and my gutt feeling is that if I had a company doing really well I would do my absolute best to not give up any control over it - but idk how many investors would be willing to invest in that case (if we were doing really well though, I assume at least some would?)
• buryat 5y ago
  what about your cofounder?
• hinkley 5y ago
  They don't have to value the company at $0 to fuck you over once you're gone. The current board can depreciate all of the shares by 50% and then issue themselves twice their original shares so they break even. Then do the same thing a couple of rounds later. I haven't seen $0 but I knew a few people who got diluted to a joke. It doesn't take but a factor of 2-4 dilution of your outlook to drastically change your opinion of how you spent that time.
  • jasode 5y ago
    >They don't have to value the company at $0 to fuck you over once you're gone. The current board can depreciate all of the shares by 50% and then issue themselves twice their original shares so they break even. Mark Zuckerberg tried a variation of that game to cut out Eduardo Saverin's shares when they changed the company from a Florida LLC to a Delaware Inc. Well, Saverin sued and Facebook lost that lawsuit; they settled. Saverin got ~4% ownership worth $5+ billion at the time. https://www.businessinsider.com/exclusive-heres-the-email-zuckerberg-sent-to-cut-his-cofounder-out-of-facebook-2012-5 https://www.businessinsider.com/exclusive-heres-the-email-zu...
    • Kranar 5y ago
      Facebook did not lose any lawsuit. A settlement is a far cry from a loss and judging from the outcome, it looks like Saverin got screwed over. So basically, the board will try to screw you over; if you're not in a strong enough position to do something about it then you're out of luck, if you are strong enough to do something about it, then you might be able to recoup some of what you're entitled to.
    • distribot 5y ago
      Anyone know how Zuckerberg avoided the same thing happening to him? Bezos was a 30 year old with a decade of experience in finance, I assume he was quite savvy. But Zuckerberg was a teen.
      • djyaz1200 5y ago
        Shawn Fanning
• breischl 5y ago
  Had this happen on a much smaller scale as an employee. I (foolishly) bought out some of my options when I left the company. Years later they sold it, but structured the deal such that the major investors got paid out all the proceeds, leaving zero for the common shares. Yes, I realize preferred shares and payout preferences and so forth. The really galling part is that the exec team (who had themselves acquired, not built, the company) paid themselves massive bonuses. The employees mostly got a token amount and a kick out the door. Common shares got zero. Thanks guys. tl;dr, shares in a non-public company are a lottery ticket at best. Just like options, but more expensive.
  • javajosh 5y ago
    All the horror stories around VC money and shennanigans like this make bootstrapping look not just appealing, but required. It's an iterated game that they play a lot, and you play once, and they have no incentive to play fair. I'm glad some of them were named and shamed in this thread, though. Like, why would anyone take money from someone who has acted in bad faith many times in the past? It reeks of unaccountable power and information asymmetry, two of my least favorite things.
    • tomp 5y ago
      You probably could make a good point but this makes no sense: > It's an iterated game that they play a lot, and you play once, and they have no incentive to play fair. The player who plays multiple times ("iterated game") has more of an incentive to play fair. That's basic game theory. If you only play once, noone can "punish" you in the next game if you cheat.
      • javajosh 5y ago
        I didn't mean iterated game in the game theory sense, because that implies both counter-parties play against each other repeatedly. It's like when you get a mortgage - it's a once-in-a-lifetime for you, and a Tuesday for them. They know exactly how to (and have mechanisms in place) enforce every part of a contract they've been using and improving for decades; you barely understand the contract because its the first time you've ever seen anything like it, and you have no machinery in place to understand or enforce your side of it. They have one contract they enforce against 1M counter-parties; meanwhile you have 100 different contracts you're supposed to enforce ...at the same level of care and capability? That's never going to happen, and so all you're left with is heuristics like "surely they'll treat me fairly!" It honestly seems extremely foolish to take VC money under these circumstances.
• magicalhippo 5y ago
  > On the bright side, the new CEO ran the company into the ground. I've seen this up close several times, and countless times afar. Successful company gets bought by bigger company, new owners replace the successful management, new management runs company into ground in short order. Remains possibly sold for scraps to former competitors. Like... is there something they're getting out of this I don't fathom? Or are they just repeating the mistakes of others again and again and again?
  • CapitalistCartr 5y ago
    It's often hubris, but I have personally seen it done to dispose of competition. They could have decided to be better at running their own company, but, of course, big corporations don't work that way. Nope, buy that troublesome startup, run it out of gas, problem solved.
    • cutemonster 5y ago
      If there're any texts to read about this that you like, it'd be interesting to hear
• mindvirus 5y ago
  Super curious about this - aren't there laws about fiduciary duty in most countries?
• throwaway894345 5y ago
  Does anyone have a good idea about the laws for valuation tricks and the ways companies skirt them? A company for which I had stock options recently was sold to a larger company, but the deal seems to have been coordinated such that the investors with privileged shares (or whatever they're called) got their money, but the peasant shares (again, I forget the terms) were worthless--all of the "key employees" got generous bonuses and the employees still with the company were to be rewarded by the buyer with (presumably) valuable stock. I wasn't really banking on these options as part of my financial plan, but surely this sort of thing is illegal, right? What are good search criteria for someone who just wants to learn more about these laws and loopholes for the future (I know I can talk to a lawyer if I want to pursue action in my specific case)? What are the ways a company can legally fuck me over?
  • sulam 5y ago
    The structure you describe is 1) legal and 2) typical. Preferred shares cost more, but for that extra money they come with preference. What is preference? It can vary, but the term that matters most is that they get to earn their money first. A 1X Preferred share (very generous) will be paid their investment back before anyone else sees a dime. Often shares are not 1X, they can be 2X or 3X, which means they will get more than they put in before anyone else sees a dime. There are more variations, but this is what matters in the story you’re telling. Common shares, which is what employees receive, are much, much cheaper (the strike price will often be pennies on the dollar compare to preferred shares that investors receive). However they simply convert to common stock when they’re exercised, with no special treatment. How does anyone make money then? The answer has to do with liquidity events that are large enough that everyone is getting their money. If money is limited, the investors get it first.
  • smallerfish 5y ago
    Everybody doing startups should pick up and read Venture Deals. It explains the various tiers of stock well. PS the last VCs who funded us have a 2x preference (we were out of options and it was the only money on the table.) In retrospect we should have just shut down and gotten a few years of our lives back.
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• amelius 5y ago
  Why didn't it happen to Bezos or Musk?
  • Danieru 5y ago
    Lol. How do you think Musk became CEO? He IS the investor who pushed out the founder CEO.
    • amelius 5y ago
      How about Bezos then?
  • secondaryacct 5y ago
    Tesla is an MBA case study of CEO-aligned board (which is bad for public companies, Im sure you can see why now), probably because Musk had most of the seed capital. As to how he kept enough out of his previous ventures, I dont know.
    • garmaine 5y ago
      > which is bad for public companies, Im sure you can see why now Tesla is the world's most valuable car company. What is bad about that now?
• deleted 5y ago
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• marcosdumay 5y ago
  > but what am I going to do about it? They have billions of dollars and I had no money. There are still many options. You just have to search harder... > On the bright side, the new CEO ran the company into the ground. And this is the real risk. There are plenty of legal ways to make stock worthless.
• codingdave 5y ago
  That was a disappointing and strange day - I was in the last group of devs hired before all that went down, but I understand if we are just vague memories at this point. I choose to focus a bit differently on how that all went. There is enough negativity from it all to go around, but I find it better for my own well-being to focus on the positive. (To be fair, you had more skin in the game, so I understand our difference in approach.) Specifically, you and the other folks who hired me gave me a great opportunity to come join a modern team, learn a more modern stack than I had been on before that time, and it was a good growth experience for me, so you deserve thanks for giving us that chance. Thanks! I consider that experience to be pivotal to converting me from being just another old legacy coder, and instead empowering me to modernize my skill set. I look back on that experience not as a failed startup, but as a valuable learning curve that has helped me succeed in the work I've done since that time. Even events with poor endings can bring positive results to who we are, and where we go next.
• jacquesm 5y ago
  Unless you have reasons not to naming and shaming investors and boardmembers that did this would be A-ok with me.
• moneywoes 5y ago
  Can someone please elaborate how that is possible?
• sandbags 5y ago
  Something I don't understand from here in the UK: if they did a new round wouldn't you have pre-emption rights? So, if they set the valuation to $0 you'd be able to afford to take them up and avoid dilution? What am I missing?