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Someone refused to acquire a company for (presumably) tens of millions of dollars because a founder took a below market salary and then made up for it after a f

by CPLX 5y ago

Someone refused to acquire a company for (presumably) tens of millions of dollars because a founder took a below market salary and then made up for it after a funding round with a 100k payment? How did discovering this affect the acquirer's investment thesis? Presumably they felt like the company's growth potential and revenue was sufficient to invest many millions to own it, but then this changed their evaluation? Not that I think it's best practices for a founder to do this with investor money, but it sounds like a just-so story. I'm guessing there was more to it than this. It seems like VC's always have a perfect anecdotal narrative of why it's in everyone's best interest to do things that make the VC firm more money.

anamax 5y ago
> Someone refused to acquire a company for (presumably) tens of millions of dollars because a founder took a below market salary and then made up for it after a funding round with a 100k payment? Yes. It goes to the CEO's honesty and character. When you find something like this in due diligence, you start wondering what you haven't found. This is somewhat similar to https://www.insider.com/van-halen-brown-m-ms-contract-2016-9 https://www.insider.com/van-halen-brown-m-ms-contract-2016-9
PragmaticPulp 5y ago
More or less, yes. Although it wasn't a single $100K payment. It was a pattern of bragging about "taking a $1 salary in the early days" while doing essentially the opposite on the books. When investing you can't due diligence everything. When you find a couple instances of the CEO telling you one thing but then doing something else and using accounting tricks hide it, it raises red flags. It's rarely ever just a single lapse of judgment like that.
- ska 5y ago
  Agree this would (and should) raise eyebrows. If enough of a pattern it probably makes sense to spike the deal. At very least, it's going to change your risk profile.
- CPLX 5y ago
  Seems to me the issue is lying. Lying about what you did with the money is definitely a red flag. I think any sane investor would worry about a CEO making financial misrepresentations. But the actual behavior of taking low compensation and then making up for it when the company later has excess funds seems completely defensible if it's done without deception.
  - PragmaticPulp 5y ago
    Compensation has very specific meaning, though. In a startup, compensation packages for executives (especially the CEO) will be approved by the board, which probably includes lead investors. If the CEO is negotiating a specific compensation but then doing anything to pay themselves outside of the compensation channels, it's nearly impossible to do this in a way that isn't somewhat dishonest or misleading. Unless, of course, they go to the board and negotiate a bonus for themselves through normal compensation channels. But no, literally just paying yourself company money because you decided you were underpaid in the past is a huge no-no, no matter how justified you feel as CEO. Executive compensation always always always goes through the board.
    - CPLX 5y ago
      Yes of course. Turns out the CEO in question was engaged in deception and self-dealing and self-enrichment without consent of shareholders. Sounds like a good reason to back out of a deal. Unlike the reason you originally stated which was excessive compensation. As I pointed out that’s not a good reason. Clearly there was more to the story.
  - anamax 5y ago
    > it when the company later has excess funds The company didn't have "excess funds". When you do a raise, you tell investors how you're going to spend the money. There may be a lot of money in the bank, but it's not "excess", it's merely not yet spent. If he didn't disclose that $100k before the investment, he took it from what he told investors that the money would go for.
deleted 5y ago
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by CPLX 5y ago

anamax 5y ago

> Someone refused to acquire a company for (presumably) tens of millions of dollars because a founder took a below market salary and then made up for it after a funding round with a 100k payment? Yes. It goes to the CEO's honesty and character. When you find something like this in due diligence, you start wondering what you haven't found. This is somewhat similar to https://www.insider.com/van-halen-brown-m-ms-contract-2016-9 https://www.insider.com/van-halen-brown-m-ms-contract-2016-9

PragmaticPulp 5y ago

More or less, yes. Although it wasn't a single $100K payment. It was a pattern of bragging about "taking a $1 salary in the early days" while doing essentially the opposite on the books. When investing you can't due diligence everything. When you find a couple instances of the CEO telling you one thing but then doing something else and using accounting tricks hide it, it raises red flags. It's rarely ever just a single lapse of judgment like that.

ska 5y ago
Agree this would (and should) raise eyebrows. If enough of a pattern it probably makes sense to spike the deal. At very least, it's going to change your risk profile.
CPLX 5y ago
Seems to me the issue is lying. Lying about what you did with the money is definitely a red flag. I think any sane investor would worry about a CEO making financial misrepresentations. But the actual behavior of taking low compensation and then making up for it when the company later has excess funds seems completely defensible if it's done without deception.
- PragmaticPulp 5y ago
  Compensation has very specific meaning, though. In a startup, compensation packages for executives (especially the CEO) will be approved by the board, which probably includes lead investors. If the CEO is negotiating a specific compensation but then doing anything to pay themselves outside of the compensation channels, it's nearly impossible to do this in a way that isn't somewhat dishonest or misleading. Unless, of course, they go to the board and negotiate a bonus for themselves through normal compensation channels. But no, literally just paying yourself company money because you decided you were underpaid in the past is a huge no-no, no matter how justified you feel as CEO. Executive compensation always always always goes through the board.
  - CPLX 5y ago
    Yes of course. Turns out the CEO in question was engaged in deception and self-dealing and self-enrichment without consent of shareholders. Sounds like a good reason to back out of a deal. Unlike the reason you originally stated which was excessive compensation. As I pointed out that’s not a good reason. Clearly there was more to the story.
- anamax 5y ago
  > it when the company later has excess funds The company didn't have "excess funds". When you do a raise, you tell investors how you're going to spend the money. There may be a lot of money in the bank, but it's not "excess", it's merely not yet spent. If he didn't disclose that $100k before the investment, he took it from what he told investors that the money would go for.

deleted 5y ago

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