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VC Decries Airbnb’s Recent Funding for Founder Control and Cashout

296 points by sriramk 15y ago

kposehn 15y ago
This is a very interesting article! I do think that he makes a very good point that if you are already 90% vested, why be so concerned about dilution? I definitely think that, as founders, when we get liquidity we need to make sure the people that helped get us where we are get a slice as well. After all, we aren't the only people that make a company succeed.
gojomo 15y ago
The special one-time-dividend to vested early stockholders seemed a little fishy when I noticed in Groupon's S-1... but maybe it's just an efficient way to reward existing value without larger dilution/valuation. If employees with unexercised but vested options were given a heads-up that such an unusual early dividend was coming – so that they too could choose to qualify – that might address much of Palihapitiya's concern about fairness.
- canistr 15y ago
  I'm probably wrong or misunderstanding the whole issue, but if it is true that new investors are simply paying early stockholders a special dividend, then wouldn't that make this a Ponzi Scheme?
  - michaelchisari 15y ago
    While we could argue back and forth about whether it technically is a Ponzi scheme, whether that definition fits or not, it's profoundly problematic. We already exist in a relatively volatile industry that has seen it's fair shares of bubbles and busts. We don't need to add another unethical and chaotic variable to the pile.
  - ssx 15y ago
    This is not the definition of a Ponzi Scheme, you should probably look it up on wikipedia. But I do agree with the article, dividend's like this are not the spirit of building a good company. Just founders who want a huge pay-day. I would have understood 1m-4m, but not 21m, thats a huge percentage of their investment.
    - gojomo 15y ago
      No, it's not a huge percentage of their stake. They still retain massive stakes in a risky private company with a $1.2B+ valuation. They're just diversifying a little. You wouldn't ask an investor to prove their commitment by putting 100% of their net worth in a single venture. Investors are diversified. Smart founders should be, too, as soon as they are able.
      - ssx 15y ago
        It is a huge percentage of their funding, around 1/6th. If a company where to raise 6m and the founders got 1m not by equity, but by dividends! That just doesn't happen. If the founder's want to sell some of their equity, I'm fine with that, but that is NOT what happened here. This is purely a pay-day. If I knew my company was going to be the next eBay for realestate, why would you hamper your company by taking 21m off the table. This signals greed and/or being unsure of your future success.
        gojomo 15y ago
        If the founders retain a majority, this is less than 4% of their stake — that percentage is more relevant in analyzing the confidence signalling and motivations than a superficially large "$21 million" figure.
        ssx 15y ago
        Clearly you still don't understand. They didn't sell 4% of their stake. If they did that, it would be somewhat reasonable. What they got was a dividend. In other words a bonus. And yes the figure is still "large" because it is 1/6th of their funding that goes to their pockets, rather than the company.
- sunir 15y ago
  Not really. I am not a lawyer but it seems to me that is not the case. Employee stock options are meant not to be exercised until they are saleable. When you can them early in a private company your capital is locked up in a dead asset yet you have to pay capital gains taxes. The dividend would have to be huge. Further watch out for insider trading. The value of the stock when the option was struck has to price in the promised dividend.
  - gojomo 15y ago
    My hunch is that for early-enough employees the dividend value could dwarf the exercise price, making the decision to exercise a no-brainer.
    - JoachimSchipper 15y ago
      Hence the mention of capital gains taxes.
      - gojomo 15y ago
        This is probably a 'qualified dividend' already taxed at same rate as long-term cap gains.
        deleted 15y ago
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        gojomo 15y ago
        Not sure what you're disputing. 'Qualified dividend' treatment only requires a 60 day holding period. Also, those with founders shares have almost certainly held (via an 83b election) the shares long enough for long-term capital-gains treatment, as well. If you're saying that yes, the dividend treatment may save them on taxes (or at least be no worse) than other approaches, we agree. For employees who might have to exercise vested nonqualified options to collect the dividend, other ordinary income taxes may apply... but shares that were early enough could still be in a dividend-is-more-than-all-exercise-and-tax-costs situation, again making the participation a riskless no-brainer... in fact helping them set an earlier start date for future capital-gains calculations. If they're not in the no-brainer situation, they'd have to decide whether the dividend and early-holding-period-start was worth the cost/risk of converting to actual equity. That's a matter of tax law and risk-affinity... any dilemmas created by having a new range of possible choices aren't a knock against the offer of a dividend.
kloncks 15y ago
How uncommon are dividends like these happening within a VC-round?
bigohms 15y ago
Perhaps a rethink is needed of bringing the public sentiment into the equation by making this communique open. I appreciate that it does shed more light into the strong dilution resistant finance. However, the round particulars are private and the fair play would go privately to the guys with it. Seems to be a lot of this going around these days.
paulkoer 15y ago
I think the interesting question here is who leaked this email to allthingsd. If the VC really wanted to give the Airbnbs a heads up (as he makes it sound in the email ... take care, let's keep in touch, etc) then I don't think there was any necessity to leak this and I am quite sure the Airbnbs wouldn't want it out in the open either. And then... the Groupon comparison kind of sticks in your mind, doesn't it? I don't know, I get the feeling there is more behind this ...
- veyron 15y ago
  Here's what probably happened: 1) Chamath talked with airbnb, and he felt that he was scoffed or otherwise disregarded 2) Chamath talked with Reid Hoffman, and both concur on the matter 3) Reid and others talk with AirBNB but the airbnb people stuck to their guns 4) Chamath believes that he is right in his view, and hopes that by going to the public, others (i.e. PG) will pressure airbnb to reconsider (especially with the groupon comparison) Now, I don't know the airbnb founders directly, but I'm certain that if they felt that other investors were concerned about the arrangement, they would either change the terms or decline to take the opportunity. If Chamath doesnt want to participate, its his prerogative, and expressing his concern to the public really doesn't help his prospects of investing with airbnb or any other yc company.
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sek 15y ago
A founder who believes in his business, will never cash out early. period. He would always get more after an IPO or exit. So why would he? I assume the founders are not stupid, they know their valuation is not justified.
- staunch 15y ago
  This line of thinking has been thoroughly discredited. Many of the most successful companies today had founders that took money off the table early. If they didn't believe in the company they could just sell it today for $500 million (or whatever) and put $50 million in their pockets instead of $5 million.
  - steve8918 15y ago
    Taking money off the table implies selling their stake, ie. shares. They didn't sell their shares. They gave themselves a one-time dividend.
    - staunch 15y ago
      You're right that selling shares is far more common, but the concept is the same. The founders raised an extra $20 million so they could sock it away themselves.
- colinplamondon 15y ago
  What? It's a whole lot easier to swing for the fences when you're already a millionaire. Selling 5% of your total shares for $3,000,000 sets you up well for life. Not great, but well. At 4% interest that's $120k/year. After that, it's gravy.
  - sek 15y ago
    It also takes a lot of pressure from you and maybe distracts from building the company. On Wallstreet they call this "fuck you money".
trim 15y ago
Didn't Chamath make most of his money cashing out Facebook stock early? Does anyone remember the story about him from a few weeks ago?
- polymath21 15y ago
  From what I understand, Chamath is okay with cashing out by selling your stock, but what the AirBnB founders are doing is just paying themselves a dividend of $20M (essentially just paying themselves a lump sum out of their funding round and not affecting any of their stock). Please correct me if I'm wrong.
  - steve8918 15y ago
    This is my understanding as well. Chamath says that it's fine if all employees have access to this ability to cash out shares, but it sounds like AirBnB is essentially withdrawing money directly from the company, with no opportunity from employees to participate. He says it's basically a cash-grab that only the founders are participating in. I have a hard time disagreeing with him. Did any founders of great companies ever do something like this? From my recollection, I don't believe Bezos, Jobs, Gates, etc ever did anything like this.
    - tptacek 15y ago
      So, I assume you'd agree also that the VCs shouldn't be able to take a dollar out of a deal until employee common stock is liquid? And that they shouldn't be able to take a dollar in management fees until their capital has created a pro-rata amount of liquidity for the employee common stock of one of their investments? No? That's ridiculous? I agree.
    - abalone 15y ago
      But there is a $9.6M secondary component to the deal as well. Employees can participate in that, no?
- deleted 15y ago
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patio11 15y ago
I must have missed the post where a VC said "Guys, sorry, love your company but I couldn't in good conscience participate in a round where the rich people get paid and the poor people are told to wait for an exit." I must have missed that post quite frequently, because that describes every VC round ever. A $120 million investment round means that about $2.4 million in cash money just moved from the limited partners (universities, pension funds, wealthy families) into the pockets of the VC firm's partners. Not stock, not options: cash money. This is the way the system has always worked, since time immemorial. VCs get paid a management fee (about 2%) win or lose, and a percentage of the profits when they win. Just something to keep in mind when someone mentions their strong principles in the course of a discussion over how dang expensive butter is these days. [Edit to add: My description of management fees is slightly simplified and ignores salient things like the fact that they recur annually.]
- credo 15y ago
  You're correct. VCs play a game where they win with other people's money. They make good money regardless of performance (for example, 10-year VC returns seem to be trailing 10-year stock market returns). They make a killing if their portfolio companies do well. Are you suggesting that this VC pattern justifies the actions of founders who take $21M as dividends ? (to be more precise - founders of a young private company that is dependent on external investment for financing itself)
  - patio11 15y ago
    Are you suggesting that this VC pattern justifies the actions of founders who take $21M as dividends ? I don't think that particularly requires moral justification, any more than an engineer saying "That offer is interesting but I would prefer $5,000 more and an extra week of vacation" requires moral justification. Capitalism happens. Sometimes, it even happens to rich people. Edit for context: "Capitalism happens" is shorthand I frequently use for "Sometimes one party in honest negotiation with another has leverage, perhaps because of how supply and demand for the product being sold shake out, and this is natural and not particularly noteworthy." I usually say it when rich people complain how much money they are paying for things like e.g. engineers or shares in a hot startup.
pheaduch 15y ago
Interesting that he brings up Apple as during their IPO, if it wasn't for Wozniak and his "Woz Plan" the majority of Apple employees and the former earlier employees would have been frozen out of the IPO. Jobs was very much against giving up his share of the pie. To me, being greedy is hardly the worst trait to have as entrepreneur.
- abbott 15y ago
  what traits are worse than greed for (successful) entrepreneurs? you highlight woz's intervention, but then say greed isn't as bad as...?
  - philwelch 15y ago
    It's strange that wanting to get rich is even considered a bad trait for an entrepreneur. Off the top of my head, I'd say stupidity, laziness, cowardice, and soft-headedness are probably worse traits.
ispivey 15y ago
The problem Chamath is highlighting is not that the founders are cashing out. Or that early employees are not getting cash -- everyone with vested common stock gets a proportional amount of the cash. The big difference is that since the founders aren't selling stock, they aren't being diluted, so the employees with unvested stock don't get more of the company. Basically, vested common gets paid, common doesn't get diluted at all, unvested common gets relatively screwed (they'd own more of the company if it were a secondary sale). Of course, dividend vs secondary also affects the investors' price, but I can't see Chamath making such a stink about a simple matter of price.
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grellas 15y ago
A few thoughts: 1. It is bad form for this sort of thing to be aired publicly. It may give us a voyeuristic fascination on something that is depicted as an internal intrigue within a prominent up-and-coming startup but this is fundamentally company confidential information that is not capable of being aired publicly without significant distortion. Who can answer the implied charges of impropriety? Those most directly affected by whatever is happening can’t do so without violating duties of confidentiality. Yet what are they supposed to do? Sit by while people now start making invidious comparisons of their activities with, say, the increasingly notorious Groupon venture? Come out and declare "I am not a crook"? Start attacking the author of the email, who may have intended it as a confidential communication and not even have had a role in its being leaked? Or start to spread over the public record all sorts of confidential discussions in hopes of trying to defend their reputations? I don’t know how this got leaked. But it amounts to an inherently unfair attack that is almost impossible to defend just by the nature of the case. In law, we learn early on that a one-sided story can almost always be made to sound compelling, while on a full airing it can just as easily be shown as just the opposite. 2. There is a long-time tension in the startup world between founders and VCs and, as someone who has worked closely with founders for nearly three decades, I can say unequivocally that it has not been the VCs who have tended to get the short end of the stick when the inequities arise. Now that fact does not justify founder abuse, if that is what happens in a given case (I say nothing about this case - we really don’t know the facts). For decades, investors categorically refused to let founders take even a penny out of the company as they were urged to "swing for the fences" to ensure that the investors got their projected minimum 10-to-1 one return on investment. And when they missed, it was the investors who would force a merger or sale of the company, take out their liquidation preference to get a return on their money, and leave founders with a zero-equity return after perhaps years of working for little or no salary and putting in 20-hour workdays in the process. This value proposition may have paid in a big way for founders in select companies but it has also left large numbers of seriously harmed founders in its wake over the years. Today, this is changed somewhat and founders at times have opportunities to balance their risks along the way as they strike their bargains with the VCs. How, when, and to what extent they take any money out along the way is a completely legitimate issue to be fought for by founders and resisted by investors as circumstances dictate. But the overriding goal of letting founders spread some of their risk is completely bona fide. The details get resolved by the founders, the company, and the investors through private negotiation, not through a public airing. If investors choose to accept something that sounds aggressive to the rest of us, that is their calculated risk. Last I checked, they qualified as "sophisticated investors." 3. Is it good policy to have a dividend declared for the benefit of insiders and for founders to take significant cash out of a company in the early stages even while other employees may not have that opportunity? Maybe, maybe not. That is a legitimate question for debate and it should be cast as a policy debate, not as a perverse prying into the details of a particular company whose circumstances we do not really know. The traditional justification for requiring founders to ride it out to the bitter end with no prospect of any real return unless the company hit it big is that it is important that founders have "skin in the game," i.e., show a real commitment to the venture as opposed to making opportunistic short-term moves that further their immediate gain at the expense of the venture. That is a legitimate concern at all times in a startup but so too is the idea of fairness to founders. Why, when founders have the power to assert more control, should they voluntarily accede to a historic policy the keeps them in handcuffs and leaves them with basically an all-or-nothing proposition in whether they ever get anything significant out of the venture? This makes no sense and it is natural that founders would want to change this older pattern and practice. We can debate to our heart's content whether this is good for startups or not - that should be a policy debate (including over where exact lines ought to be drawn on cash take-outs), not an excuse to take what might amount to cheap shots at a founding team that certainly deserves better treatment than to have a one-sided debate carried on at its expense.
shawnee_ 15y ago
Separately, when you look at successful tech companies, it seems that dividends are an approach used by cash rich operations to distribute excess earnings — in fact, the most successful, cash rich tech company in the world, Apple, hasn’t issued a dividend and they have more than $75B in cash! The fact that companies can get away with something like this is absolutely ludicrous. It illustrates just how far the stock market has gone from its original purpose. Back before companies had the ability to sweet-talk investors with bulging pockets, companies wanting capital had to raise it the good-old-fashioned-way: IPO. IPO used to have the ability to allow a company to access as much capital as it would reasonably need to grow. But with the preponderance of heavily privatized companies milking both the private AND the public side of the investment machine, the value-creating just cannot be accounted for properly. Something in the gears here needs to be tweaked. A company like Apple with $75B cash (if that's true) should have a legal and an ethical obligation to pay out dividends to its shareholders. Tight-fisting cash doesn't do anything to the wealth-creating mechanism in our capitalistic society.
- nerfhammer 15y ago
  Ah, but if they paid it out in dividends, it would be taxed! Apple's cash hoard is functioning as a giant insurance policy against Apple's stock price, which if you buy and hold, never gets taxed.
  - megablast 15y ago
    Also a lot of Apples "cash" is overseas, where it would lose a lot to be bought back in.
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munaf 15y ago
Chamath's response: http://uncrunched.com/2011/10/01/chamath-palihapitiyas-statement-on-airbnb-email-fiasco/ http://uncrunched.com/2011/10/01/chamath-palihapitiyas-state...
- nhangen 15y ago
  You mean "Arrington's response?" Oh how Michael loves to insert himself into every piece of drama he can get his hands on.
cletus 15y ago
Absolutely 100% agree. Founders cashing out is a big red flag. I said it about Groupon. I've said it before. This really is taking it to the next level: cashing out with a dividend to retain control and ownership. I absolutely agree that for any cash out it should be open way beyond the founders. In fact, this is a good way for larger startups to kick the 500-shareholder limit can just a bit further down the street. I see Airbnb as a fundamentally risky business. At some point Airbnb will be large enough to warrant the attention of local and state authorities because many people offering places to stay are doing so illegally or in violation of their own lease agreements. This woman who had her apartment wrecked is just the tip of the iceberg. It is only a matter of time before a headline about a serious physical assault or worse. Airbnb can count their lucky stars it was "only" a ransacking and vandalism.
- portman 15y ago
  >> Founders cashing out is a big red flag. No, it's not. Palihapitiya agreed that there should be a secondary component to the financing. When a company is "shooting for the moon" and has a chance at a >$1B exit, investors want the entrepreneurs to cash out a portion of their stock, because it gives them the financially flexibility to swing for the fences. It aligns the founders and management team with the late-stage investors. Fred Wilson does a great job explaining why founders and early investors cashing out in late-stage financings is a Good Thing for everyone. http://www.avc.com/a_vc/2010/01/the-tug-of-war-between-ma-and-vc.html http://www.avc.com/a_vc/2010/01/the-tug-of-war-between-ma-an... http://www.avc.com/a_vc/2010/08/angel-liquidity.html http://www.avc.com/a_vc/2010/08/angel-liquidity.html
  - georgespencer 15y ago
    > Palihapitiya agreed that there should be a secondary component to the financing. Agreed. I think what OP meant was "founders cashing out [using this method rather than a secondary sale]" is a big red flag.
- 0x12 15y ago
  Probably the founders of AirBnB would agree that theirs is a risky business, which is one excellent reason to take some money off the table. Think of it as hedging your bets, on the one hand you keep a large chunk of stock because the company may weather all the storms ahead successfully, on the other hand it may not. The insecurity can be translated in to a strategy where you remove some money now in case the 'worst case scenario' becomes a fact. Nobody is forcing any of these guys to do business under these terms. If the VC doesn't want to be part of the round then they should just pass on it, it's not like there is a guy with a gun behind them making them ink the contract. If they don't like the terms, don't do the deal.
tworats 15y ago
It's important to note that the VC is not objecting to the founders taking cash off the table. He's objecting to the method (dividends as opposed to a secondary sale). His arguments are convincing to me - and I'm a founder so my bias is naturally for the founders.
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gabaix 15y ago
Why do the founders want to cash out? It looks to me you can increase your salary to live a good life, while waiting for the big exit. I understood Groupon did this because they thought Groupon was at its peak. Is that the same thing for AirBnB? Am I missing something here?
- SoftwareMaven 15y ago
  The founders aren't getting diluted in the deal, since they are being distributed as dividends. This will give them the opportunity to run past third to slide home instead of taking the standing triple, since they won't be left with nothing if the umpire calls them out.
  - gabaix 15y ago
    Got it. Also dividends are better than higher wages for tax purposes.
rdl 15y ago
This looks like two issues: 1) Founders de-risking a successful but still growing company at a series b or later financing (or even a late series a). I really don't see a problem with founders diversifying their personal portfolios (otherwise, many have 100% in company stock AND debt from school, etc.). You don't want them to get distracted, but being short on cash doesn't help you make a successful product. 2) De-risking via a special dividend, vs. secondary sale of stock. Yes, it lets founders avoid selling some shares. If you're doing it at a $1b valuation, it doesn't seem like a major factor either way, but if there could be a precedent for people raising $20-50mm rounds, dividend vs. sale might be a better way to put $1-2mm in the pocket of each founder after a few years, so they can shoot for a >$1b exit. I'm curious if this form was suggested by the AirBnB side (or their law firm) or the VCs.
Hitchhiker 15y ago
The Vanity of Wealth and Honor " If you see in a province the oppression of the poor and the violation of justice and righteousness, do not be amazed at the matter, for the high official is watched by a higher, and there are yet higher ones over them. But this is gain for a land in every way: a king committed to cultivated fields. He who loves money will not be satisfied with money, nor he who loves wealth with his income; this also is vanity. When goods increase, they increase who eat them, and what advantage has their owner but to see them with his eyes? Sweet is the sleep of a laborer, whether he eats little or much, but the full stomach of the rich will not let him sleep. " - Ecclesiastes 5:8-12
0x12 15y ago
If you don't like the terms of the deal, don't do the deal (he doesn't want to do the deal, see third and next to last paragraphs of the email). A VC complaining about the terms under the pretense that 'the little guy is treated unfairly' is a bit like royalty complaining about the price of cake. Nobody forces him to do this deal on these terms. He's just scared to miss out on a big hit, he'd like the ring side seats to be cheaper by keeping all the money in the company or by buying out some of the founder stock. Too bad, you can't have it both ways. He may have a point about early employees (a 'special dividend' that excludes certain shareholders is not very elegant) but it is not his to make, and the dividend in this case was to 'common stock' which seems to imply that anybody with vested shares participates in that dividend. His 'concern' is about the unvested employees, but that's a nonsense argument, as long as your stock is unvested, you don't have any stock. Options do not participate in dividends until you exercise them, they never do because they are not stock and that's a pretty clear-cut thing. Pretty low-class to dump this email in the public domain, I think that people will remember this when dealing with this particular investor in the future.
NY_Entrepreneur 15y ago
Ah, what a morality play -- secrecy, power, greed, collusion, dirty dealing, guilt, shame, etc.! If HN can't outgrow the fascination with morality plays, then what hope is there for the rest of society and society as a whole? We need a new Web site: VC_secret_confessions.com!
bond 15y ago
Follow up: http://allthingsd.com/20111002/airbnb-investor-chamath-palihapitiya-settle-differences-with-employees-to-get-liquidity/ http://allthingsd.com/20111002/airbnb-investor-chamath-palih...
crazyfoo 15y ago
Cross-posting from my Quora answer: http://www.quora.com/Airbnb/Why-are-Airbnbs-founders-excluding-their-employees-from-the-21M-cashout-in-their-112M-round/answer/Josh-McFarland http://www.quora.com/Airbnb/Why-are-Airbnbs-founders-excludi... I have no knowledge of specifics outside of the ATD article mentioned, but my read says that the dividend will go to all common shareholders. So employees who have both vested and exercised shares will receive their pro-rated portion of the proceeds as well. It just seems that the founders must hold 93% of the vested shares (21/22.5), which is reasonable given that they started vesting years ago, when they were still in their cereal-selling phase. Addressing the founders' decision to dividend-to-common instead of secondary selling some of their common shares: In a typical venture financing, only preferred shares are sold, and there is a price per share that is set by the round's valuation. After closing, the price per share of the common shares/options is determined by external auditors in what is called a 409A valuation process. This process is a little bit of a game, whereby the company tries to come up with reasons (financial models, market comps, etc.) to depress the price of the common shares relative to preferred. This has the benefit of giving subsequent hires a lower exercise price on their options (and eventual higher profit upon exit.) The price delta between the classes can be as high as 10:1, though it's usually closer to 3:1 and narrows as a company approaches IPO. However, were anyone (founders or employees) to sell common stock in the round, the common price per share would jump to exactly this new clearing price. Since Airbnb is a hot company, it's reasonable to think that buyers would be willing to pay a market price for common that's not far below preferred. And that would mean less upside for all future employees. A dividend-to-common avoids this. Because Airbnb is so young and fast growing, they still need the allure of the upside of stock options to recruit and retain talent. Any sophisticated investor should understand this dynamic. And yet this dividend annoys them because it means there's a wealth transfer occurring that doesn't increase their ownership. Let's assume for a second that I'm right and that all vested/exercised common shareholders will see some of the dividend. As food for thought, what if Airbnb had instead said they were going to spend $21M of their newly raised capital for cash bonuses for anyone who had worked for them more than a year -- distributed per employee via this equation: total hours worked * total value created... would the Valley's response have been less uproarious?

296 points by sriramk 15y ago

This is a very interesting article! I do think that he makes a very good point that if you are already 90% vested, why be so concerned about dilution? I definitely think that, as founders, when we get liquidity we need to make sure the people that helped get us where we are get a slice as well. After all, we aren't the only people that make a company succeed.

gojomo 15y ago

The special one-time-dividend to vested early stockholders seemed a little fishy when I noticed in Groupon's S-1... but maybe it's just an efficient way to reward existing value without larger dilution/valuation. If employees with unexercised but vested options were given a heads-up that such an unusual early dividend was coming – so that they too could choose to qualify – that might address much of Palihapitiya's concern about fairness.

canistr 15y ago
I'm probably wrong or misunderstanding the whole issue, but if it is true that new investors are simply paying early stockholders a special dividend, then wouldn't that make this a Ponzi Scheme?
- michaelchisari 15y ago
  While we could argue back and forth about whether it technically is a Ponzi scheme, whether that definition fits or not, it's profoundly problematic. We already exist in a relatively volatile industry that has seen it's fair shares of bubbles and busts. We don't need to add another unethical and chaotic variable to the pile.
- ssx 15y ago
  This is not the definition of a Ponzi Scheme, you should probably look it up on wikipedia. But I do agree with the article, dividend's like this are not the spirit of building a good company. Just founders who want a huge pay-day. I would have understood 1m-4m, but not 21m, thats a huge percentage of their investment.
  - gojomo 15y ago
    No, it's not a huge percentage of their stake. They still retain massive stakes in a risky private company with a $1.2B+ valuation. They're just diversifying a little. You wouldn't ask an investor to prove their commitment by putting 100% of their net worth in a single venture. Investors are diversified. Smart founders should be, too, as soon as they are able.
    - ssx 15y ago
      It is a huge percentage of their funding, around 1/6th. If a company where to raise 6m and the founders got 1m not by equity, but by dividends! That just doesn't happen. If the founder's want to sell some of their equity, I'm fine with that, but that is NOT what happened here. This is purely a pay-day. If I knew my company was going to be the next eBay for realestate, why would you hamper your company by taking 21m off the table. This signals greed and/or being unsure of your future success.
      - gojomo 15y ago
        If the founders retain a majority, this is less than 4% of their stake — that percentage is more relevant in analyzing the confidence signalling and motivations than a superficially large "$21 million" figure.
        ssx 15y ago
        Clearly you still don't understand. They didn't sell 4% of their stake. If they did that, it would be somewhat reasonable. What they got was a dividend. In other words a bonus. And yes the figure is still "large" because it is 1/6th of their funding that goes to their pockets, rather than the company.
sunir 15y ago
Not really. I am not a lawyer but it seems to me that is not the case. Employee stock options are meant not to be exercised until they are saleable. When you can them early in a private company your capital is locked up in a dead asset yet you have to pay capital gains taxes. The dividend would have to be huge. Further watch out for insider trading. The value of the stock when the option was struck has to price in the promised dividend.
- gojomo 15y ago
  My hunch is that for early-enough employees the dividend value could dwarf the exercise price, making the decision to exercise a no-brainer.
  - JoachimSchipper 15y ago
    Hence the mention of capital gains taxes.
    - gojomo 15y ago
      This is probably a 'qualified dividend' already taxed at same rate as long-term cap gains.
      - deleted 15y ago
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        gojomo 15y ago
        Not sure what you're disputing. 'Qualified dividend' treatment only requires a 60 day holding period. Also, those with founders shares have almost certainly held (via an 83b election) the shares long enough for long-term capital-gains treatment, as well. If you're saying that yes, the dividend treatment may save them on taxes (or at least be no worse) than other approaches, we agree. For employees who might have to exercise vested nonqualified options to collect the dividend, other ordinary income taxes may apply... but shares that were early enough could still be in a dividend-is-more-than-all-exercise-and-tax-costs situation, again making the participation a riskless no-brainer... in fact helping them set an earlier start date for future capital-gains calculations. If they're not in the no-brainer situation, they'd have to decide whether the dividend and early-holding-period-start was worth the cost/risk of converting to actual equity. That's a matter of tax law and risk-affinity... any dilemmas created by having a new range of possible choices aren't a knock against the offer of a dividend.

kloncks 15y ago

How uncommon are dividends like these happening within a VC-round?

bigohms 15y ago

Perhaps a rethink is needed of bringing the public sentiment into the equation by making this communique open. I appreciate that it does shed more light into the strong dilution resistant finance. However, the round particulars are private and the fair play would go privately to the guys with it. Seems to be a lot of this going around these days.

paulkoer 15y ago

I think the interesting question here is who leaked this email to allthingsd. If the VC really wanted to give the Airbnbs a heads up (as he makes it sound in the email ... take care, let's keep in touch, etc) then I don't think there was any necessity to leak this and I am quite sure the Airbnbs wouldn't want it out in the open either. And then... the Groupon comparison kind of sticks in your mind, doesn't it? I don't know, I get the feeling there is more behind this ...

veyron 15y ago
Here's what probably happened: 1) Chamath talked with airbnb, and he felt that he was scoffed or otherwise disregarded 2) Chamath talked with Reid Hoffman, and both concur on the matter 3) Reid and others talk with AirBNB but the airbnb people stuck to their guns 4) Chamath believes that he is right in his view, and hopes that by going to the public, others (i.e. PG) will pressure airbnb to reconsider (especially with the groupon comparison) Now, I don't know the airbnb founders directly, but I'm certain that if they felt that other investors were concerned about the arrangement, they would either change the terms or decline to take the opportunity. If Chamath doesnt want to participate, its his prerogative, and expressing his concern to the public really doesn't help his prospects of investing with airbnb or any other yc company.

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sek 15y ago

A founder who believes in his business, will never cash out early. period. He would always get more after an IPO or exit. So why would he? I assume the founders are not stupid, they know their valuation is not justified.

staunch 15y ago
This line of thinking has been thoroughly discredited. Many of the most successful companies today had founders that took money off the table early. If they didn't believe in the company they could just sell it today for $500 million (or whatever) and put $50 million in their pockets instead of $5 million.
- steve8918 15y ago
  Taking money off the table implies selling their stake, ie. shares. They didn't sell their shares. They gave themselves a one-time dividend.
  - staunch 15y ago
    You're right that selling shares is far more common, but the concept is the same. The founders raised an extra $20 million so they could sock it away themselves.
colinplamondon 15y ago
What? It's a whole lot easier to swing for the fences when you're already a millionaire. Selling 5% of your total shares for $3,000,000 sets you up well for life. Not great, but well. At 4% interest that's $120k/year. After that, it's gravy.
- sek 15y ago
  It also takes a lot of pressure from you and maybe distracts from building the company. On Wallstreet they call this "fuck you money".

trim 15y ago

Didn't Chamath make most of his money cashing out Facebook stock early? Does anyone remember the story about him from a few weeks ago?

polymath21 15y ago
From what I understand, Chamath is okay with cashing out by selling your stock, but what the AirBnB founders are doing is just paying themselves a dividend of $20M (essentially just paying themselves a lump sum out of their funding round and not affecting any of their stock). Please correct me if I'm wrong.
- steve8918 15y ago
  This is my understanding as well. Chamath says that it's fine if all employees have access to this ability to cash out shares, but it sounds like AirBnB is essentially withdrawing money directly from the company, with no opportunity from employees to participate. He says it's basically a cash-grab that only the founders are participating in. I have a hard time disagreeing with him. Did any founders of great companies ever do something like this? From my recollection, I don't believe Bezos, Jobs, Gates, etc ever did anything like this.
  - tptacek 15y ago
    So, I assume you'd agree also that the VCs shouldn't be able to take a dollar out of a deal until employee common stock is liquid? And that they shouldn't be able to take a dollar in management fees until their capital has created a pro-rata amount of liquidity for the employee common stock of one of their investments? No? That's ridiculous? I agree.
  - abalone 15y ago
    But there is a $9.6M secondary component to the deal as well. Employees can participate in that, no?
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patio11 15y ago

I must have missed the post where a VC said "Guys, sorry, love your company but I couldn't in good conscience participate in a round where the rich people get paid and the poor people are told to wait for an exit." I must have missed that post quite frequently, because that describes every VC round ever. A $120 million investment round means that about $2.4 million in cash money just moved from the limited partners (universities, pension funds, wealthy families) into the pockets of the VC firm's partners. Not stock, not options: cash money. This is the way the system has always worked, since time immemorial. VCs get paid a management fee (about 2%) win or lose, and a percentage of the profits when they win. Just something to keep in mind when someone mentions their strong principles in the course of a discussion over how dang expensive butter is these days. [Edit to add: My description of management fees is slightly simplified and ignores salient things like the fact that they recur annually.]

credo 15y ago
You're correct. VCs play a game where they win with other people's money. They make good money regardless of performance (for example, 10-year VC returns seem to be trailing 10-year stock market returns). They make a killing if their portfolio companies do well. Are you suggesting that this VC pattern justifies the actions of founders who take $21M as dividends ? (to be more precise - founders of a young private company that is dependent on external investment for financing itself)
- patio11 15y ago
  Are you suggesting that this VC pattern justifies the actions of founders who take $21M as dividends ? I don't think that particularly requires moral justification, any more than an engineer saying "That offer is interesting but I would prefer $5,000 more and an extra week of vacation" requires moral justification. Capitalism happens. Sometimes, it even happens to rich people. Edit for context: "Capitalism happens" is shorthand I frequently use for "Sometimes one party in honest negotiation with another has leverage, perhaps because of how supply and demand for the product being sold shake out, and this is natural and not particularly noteworthy." I usually say it when rich people complain how much money they are paying for things like e.g. engineers or shares in a hot startup.

pheaduch 15y ago

Interesting that he brings up Apple as during their IPO, if it wasn't for Wozniak and his "Woz Plan" the majority of Apple employees and the former earlier employees would have been frozen out of the IPO. Jobs was very much against giving up his share of the pie. To me, being greedy is hardly the worst trait to have as entrepreneur.

abbott 15y ago
what traits are worse than greed for (successful) entrepreneurs? you highlight woz's intervention, but then say greed isn't as bad as...?
- philwelch 15y ago
  It's strange that wanting to get rich is even considered a bad trait for an entrepreneur. Off the top of my head, I'd say stupidity, laziness, cowardice, and soft-headedness are probably worse traits.

ispivey 15y ago

The problem Chamath is highlighting is not that the founders are cashing out. Or that early employees are not getting cash -- everyone with vested common stock gets a proportional amount of the cash. The big difference is that since the founders aren't selling stock, they aren't being diluted, so the employees with unvested stock don't get more of the company. Basically, vested common gets paid, common doesn't get diluted at all, unvested common gets relatively screwed (they'd own more of the company if it were a secondary sale). Of course, dividend vs secondary also affects the investors' price, but I can't see Chamath making such a stink about a simple matter of price.

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grellas 15y ago

A few thoughts: 1. It is bad form for this sort of thing to be aired publicly. It may give us a voyeuristic fascination on something that is depicted as an internal intrigue within a prominent up-and-coming startup but this is fundamentally company confidential information that is not capable of being aired publicly without significant distortion. Who can answer the implied charges of impropriety? Those most directly affected by whatever is happening can’t do so without violating duties of confidentiality. Yet what are they supposed to do? Sit by while people now start making invidious comparisons of their activities with, say, the increasingly notorious Groupon venture? Come out and declare "I am not a crook"? Start attacking the author of the email, who may have intended it as a confidential communication and not even have had a role in its being leaked? Or start to spread over the public record all sorts of confidential discussions in hopes of trying to defend their reputations? I don’t know how this got leaked. But it amounts to an inherently unfair attack that is almost impossible to defend just by the nature of the case. In law, we learn early on that a one-sided story can almost always be made to sound compelling, while on a full airing it can just as easily be shown as just the opposite. 2. There is a long-time tension in the startup world between founders and VCs and, as someone who has worked closely with founders for nearly three decades, I can say unequivocally that it has not been the VCs who have tended to get the short end of the stick when the inequities arise. Now that fact does not justify founder abuse, if that is what happens in a given case (I say nothing about this case - we really don’t know the facts). For decades, investors categorically refused to let founders take even a penny out of the company as they were urged to "swing for the fences" to ensure that the investors got their projected minimum 10-to-1 one return on investment. And when they missed, it was the investors who would force a merger or sale of the company, take out their liquidation preference to get a return on their money, and leave founders with a zero-equity return after perhaps years of working for little or no salary and putting in 20-hour workdays in the process. This value proposition may have paid in a big way for founders in select companies but it has also left large numbers of seriously harmed founders in its wake over the years. Today, this is changed somewhat and founders at times have opportunities to balance their risks along the way as they strike their bargains with the VCs. How, when, and to what extent they take any money out along the way is a completely legitimate issue to be fought for by founders and resisted by investors as circumstances dictate. But the overriding goal of letting founders spread some of their risk is completely bona fide. The details get resolved by the founders, the company, and the investors through private negotiation, not through a public airing. If investors choose to accept something that sounds aggressive to the rest of us, that is their calculated risk. Last I checked, they qualified as "sophisticated investors." 3. Is it good policy to have a dividend declared for the benefit of insiders and for founders to take significant cash out of a company in the early stages even while other employees may not have that opportunity? Maybe, maybe not. That is a legitimate question for debate and it should be cast as a policy debate, not as a perverse prying into the details of a particular company whose circumstances we do not really know. The traditional justification for requiring founders to ride it out to the bitter end with no prospect of any real return unless the company hit it big is that it is important that founders have "skin in the game," i.e., show a real commitment to the venture as opposed to making opportunistic short-term moves that further their immediate gain at the expense of the venture. That is a legitimate concern at all times in a startup but so too is the idea of fairness to founders. Why, when founders have the power to assert more control, should they voluntarily accede to a historic policy the keeps them in handcuffs and leaves them with basically an all-or-nothing proposition in whether they ever get anything significant out of the venture? This makes no sense and it is natural that founders would want to change this older pattern and practice. We can debate to our heart's content whether this is good for startups or not - that should be a policy debate (including over where exact lines ought to be drawn on cash take-outs), not an excuse to take what might amount to cheap shots at a founding team that certainly deserves better treatment than to have a one-sided debate carried on at its expense.

shawnee_ 15y ago

Separately, when you look at successful tech companies, it seems that dividends are an approach used by cash rich operations to distribute excess earnings — in fact, the most successful, cash rich tech company in the world, Apple, hasn’t issued a dividend and they have more than $75B in cash! The fact that companies can get away with something like this is absolutely ludicrous. It illustrates just how far the stock market has gone from its original purpose. Back before companies had the ability to sweet-talk investors with bulging pockets, companies wanting capital had to raise it the good-old-fashioned-way: IPO. IPO used to have the ability to allow a company to access as much capital as it would reasonably need to grow. But with the preponderance of heavily privatized companies milking both the private AND the public side of the investment machine, the value-creating just cannot be accounted for properly. Something in the gears here needs to be tweaked. A company like Apple with $75B cash (if that's true) should have a legal and an ethical obligation to pay out dividends to its shareholders. Tight-fisting cash doesn't do anything to the wealth-creating mechanism in our capitalistic society.

nerfhammer 15y ago
Ah, but if they paid it out in dividends, it would be taxed! Apple's cash hoard is functioning as a giant insurance policy against Apple's stock price, which if you buy and hold, never gets taxed.
- megablast 15y ago
  Also a lot of Apples "cash" is overseas, where it would lose a lot to be bought back in.

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munaf 15y ago

Chamath's response: http://uncrunched.com/2011/10/01/chamath-palihapitiyas-statement-on-airbnb-email-fiasco/ http://uncrunched.com/2011/10/01/chamath-palihapitiyas-state...

nhangen 15y ago
You mean "Arrington's response?" Oh how Michael loves to insert himself into every piece of drama he can get his hands on.

cletus 15y ago

Absolutely 100% agree. Founders cashing out is a big red flag. I said it about Groupon. I've said it before. This really is taking it to the next level: cashing out with a dividend to retain control and ownership. I absolutely agree that for any cash out it should be open way beyond the founders. In fact, this is a good way for larger startups to kick the 500-shareholder limit can just a bit further down the street. I see Airbnb as a fundamentally risky business. At some point Airbnb will be large enough to warrant the attention of local and state authorities because many people offering places to stay are doing so illegally or in violation of their own lease agreements. This woman who had her apartment wrecked is just the tip of the iceberg. It is only a matter of time before a headline about a serious physical assault or worse. Airbnb can count their lucky stars it was "only" a ransacking and vandalism.

portman 15y ago
>> Founders cashing out is a big red flag. No, it's not. Palihapitiya agreed that there should be a secondary component to the financing. When a company is "shooting for the moon" and has a chance at a >$1B exit, investors want the entrepreneurs to cash out a portion of their stock, because it gives them the financially flexibility to swing for the fences. It aligns the founders and management team with the late-stage investors. Fred Wilson does a great job explaining why founders and early investors cashing out in late-stage financings is a Good Thing for everyone. http://www.avc.com/a_vc/2010/01/the-tug-of-war-between-ma-and-vc.html http://www.avc.com/a_vc/2010/01/the-tug-of-war-between-ma-an... http://www.avc.com/a_vc/2010/08/angel-liquidity.html http://www.avc.com/a_vc/2010/08/angel-liquidity.html
- georgespencer 15y ago
  > Palihapitiya agreed that there should be a secondary component to the financing. Agreed. I think what OP meant was "founders cashing out [using this method rather than a secondary sale]" is a big red flag.
0x12 15y ago
Probably the founders of AirBnB would agree that theirs is a risky business, which is one excellent reason to take some money off the table. Think of it as hedging your bets, on the one hand you keep a large chunk of stock because the company may weather all the storms ahead successfully, on the other hand it may not. The insecurity can be translated in to a strategy where you remove some money now in case the 'worst case scenario' becomes a fact. Nobody is forcing any of these guys to do business under these terms. If the VC doesn't want to be part of the round then they should just pass on it, it's not like there is a guy with a gun behind them making them ink the contract. If they don't like the terms, don't do the deal.

tworats 15y ago

It's important to note that the VC is not objecting to the founders taking cash off the table. He's objecting to the method (dividends as opposed to a secondary sale). His arguments are convincing to me - and I'm a founder so my bias is naturally for the founders.

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gabaix 15y ago

Why do the founders want to cash out? It looks to me you can increase your salary to live a good life, while waiting for the big exit. I understood Groupon did this because they thought Groupon was at its peak. Is that the same thing for AirBnB? Am I missing something here?

SoftwareMaven 15y ago
The founders aren't getting diluted in the deal, since they are being distributed as dividends. This will give them the opportunity to run past third to slide home instead of taking the standing triple, since they won't be left with nothing if the umpire calls them out.
- gabaix 15y ago
  Got it. Also dividends are better than higher wages for tax purposes.

rdl 15y ago

This looks like two issues: 1) Founders de-risking a successful but still growing company at a series b or later financing (or even a late series a). I really don't see a problem with founders diversifying their personal portfolios (otherwise, many have 100% in company stock AND debt from school, etc.). You don't want them to get distracted, but being short on cash doesn't help you make a successful product. 2) De-risking via a special dividend, vs. secondary sale of stock. Yes, it lets founders avoid selling some shares. If you're doing it at a $1b valuation, it doesn't seem like a major factor either way, but if there could be a precedent for people raising $20-50mm rounds, dividend vs. sale might be a better way to put $1-2mm in the pocket of each founder after a few years, so they can shoot for a >$1b exit. I'm curious if this form was suggested by the AirBnB side (or their law firm) or the VCs.

Hitchhiker 15y ago

The Vanity of Wealth and Honor " If you see in a province the oppression of the poor and the violation of justice and righteousness, do not be amazed at the matter, for the high official is watched by a higher, and there are yet higher ones over them. But this is gain for a land in every way: a king committed to cultivated fields. He who loves money will not be satisfied with money, nor he who loves wealth with his income; this also is vanity. When goods increase, they increase who eat them, and what advantage has their owner but to see them with his eyes? Sweet is the sleep of a laborer, whether he eats little or much, but the full stomach of the rich will not let him sleep. " - Ecclesiastes 5:8-12

0x12 15y ago

If you don't like the terms of the deal, don't do the deal (he doesn't want to do the deal, see third and next to last paragraphs of the email). A VC complaining about the terms under the pretense that 'the little guy is treated unfairly' is a bit like royalty complaining about the price of cake. Nobody forces him to do this deal on these terms. He's just scared to miss out on a big hit, he'd like the ring side seats to be cheaper by keeping all the money in the company or by buying out some of the founder stock. Too bad, you can't have it both ways. He may have a point about early employees (a 'special dividend' that excludes certain shareholders is not very elegant) but it is not his to make, and the dividend in this case was to 'common stock' which seems to imply that anybody with vested shares participates in that dividend. His 'concern' is about the unvested employees, but that's a nonsense argument, as long as your stock is unvested, you don't have any stock. Options do not participate in dividends until you exercise them, they never do because they are not stock and that's a pretty clear-cut thing. Pretty low-class to dump this email in the public domain, I think that people will remember this when dealing with this particular investor in the future.

NY_Entrepreneur 15y ago

Ah, what a morality play -- secrecy, power, greed, collusion, dirty dealing, guilt, shame, etc.! If HN can't outgrow the fascination with morality plays, then what hope is there for the rest of society and society as a whole? We need a new Web site: VC_secret_confessions.com!

bond 15y ago

Follow up: http://allthingsd.com/20111002/airbnb-investor-chamath-palihapitiya-settle-differences-with-employees-to-get-liquidity/ http://allthingsd.com/20111002/airbnb-investor-chamath-palih...

crazyfoo 15y ago

Cross-posting from my Quora answer: http://www.quora.com/Airbnb/Why-are-Airbnbs-founders-excluding-their-employees-from-the-21M-cashout-in-their-112M-round/answer/Josh-McFarland http://www.quora.com/Airbnb/Why-are-Airbnbs-founders-excludi... I have no knowledge of specifics outside of the ATD article mentioned, but my read says that the dividend will go to all common shareholders. So employees who have both vested and exercised shares will receive their pro-rated portion of the proceeds as well. It just seems that the founders must hold 93% of the vested shares (21/22.5), which is reasonable given that they started vesting years ago, when they were still in their cereal-selling phase. Addressing the founders' decision to dividend-to-common instead of secondary selling some of their common shares: In a typical venture financing, only preferred shares are sold, and there is a price per share that is set by the round's valuation. After closing, the price per share of the common shares/options is determined by external auditors in what is called a 409A valuation process. This process is a little bit of a game, whereby the company tries to come up with reasons (financial models, market comps, etc.) to depress the price of the common shares relative to preferred. This has the benefit of giving subsequent hires a lower exercise price on their options (and eventual higher profit upon exit.) The price delta between the classes can be as high as 10:1, though it's usually closer to 3:1 and narrows as a company approaches IPO. However, were anyone (founders or employees) to sell common stock in the round, the common price per share would jump to exactly this new clearing price. Since Airbnb is a hot company, it's reasonable to think that buyers would be willing to pay a market price for common that's not far below preferred. And that would mean less upside for all future employees. A dividend-to-common avoids this. Because Airbnb is so young and fast growing, they still need the allure of the upside of stock options to recruit and retain talent. Any sophisticated investor should understand this dynamic. And yet this dividend annoys them because it means there's a wealth transfer occurring that doesn't increase their ownership. Let's assume for a second that I'm right and that all vested/exercised common shareholders will see some of the dividend. As food for thought, what if Airbnb had instead said they were going to spend $21M of their newly raised capital for cash bonuses for anyone who had worked for them more than a year -- distributed per employee via this equation: total hours worked * total value created... would the Valley's response have been less uproarious?