10 ms·

Meaningful exits for founders (2016)

132 points by freediver 3y ago

benjaminwootton 3y ago
I think for most founders, exiting with 100% ownership of a small pie is a much better proposition than exiting with 10% of a large pie IF you have that decision to make. The risk, hard work and difficulty in the latter are exponentially greater.
yesimahuman 3y ago
Regardless of where you sit on the line between ambition and optimizing for founder outcomes, I think we can all agree first time founders aren't thinking about the math here enough and are far more susceptible to listening to what VCs say they should do and care about. Having been in this position, all I can say is I'm glad we didn't raise more money because we had far more exit options. I really appreciate what Bryce and indie have done to change the narrative here.
SandersAK 3y ago
The reason there is not a lot of dialogue around this is because the numbers don't work for all parties at the right time. When you have a small founder team, you need capital for essentially nothing to show. You can't raise that capital selling the $170M exit dream to angels or a fund. Conversely, VCs are assuming a 10% or less success rate across their portfolio. And of that, maybe 2-3% of portcos really returning everything. So they don't have the luxury of shepherding 100 portcos to $170M exits, since in reality, a $1b exit has a similar chance of happening as a $170M exit. Which is to say very very low. There's no magic sauce, no prime formula, no wizened or sageinvestor. It's a shit show from start to finish. You're best off finding investors who are on the same wavelength as you, and focusing less on whether you hit a home run or a grand slam. When you get to a place where you're printing cash or whatever, then sure, make sure the math works out for you. But for 99% of all founders, this question never comes, and they spend too much time thinking about it.
- latchkey 3y ago
  Sage advice. Most startups fail, so squabbling over the numbers has always seemed absurd to me. I'd rather see discussion along the lines of "what happens after we do well" because you have no idea of what "well" will be down the line.
  - seattle_spring 3y ago
    Ensuring you don't get screwed in equity agreements isn't "squabbling over numbers." What exactly are you saying is a waste of time?
    - latchkey 3y ago
      There is no way to ensure you don't get screwed in an equity agreement for a failed company. Since most startups fail, worrying about some future event that most likely won't happen, is a waste of time. Most equity agreements can also be rewritten with numerous "tricks" down the line. A cap table re-org is a great one. Another example: I got written out of a companies equity table once when they shut down the original company, sold the name to a new company for $1 and then did a DBA for the old company name. You're better off figuring out what happens when the company is actually successful, not what happens if it eventually becomes successful. Does that make better sense now?
- foobiekr 3y ago
  So in the failure case, very little of it matters, but in the success case the VC industry can be exceptionally predatory - participating preferences, multipliers, etc. etc. etc. Honestly, it takes no time at all to have clean term sheets and you don't have the option to fix it later.
  - halayli 3y ago
    The challenge is when several stakeholders are not in agreement with the rest.
ilrwbwrkhv 3y ago
It's crazy that a series d exit would net a founder 7 million and yet my bootstrapped business returned a 4 million profit for me last tax year. I think people need to learn more about how to scale a bootstrapped business. Even when I was getting started, I read a ton on VC funded businesses but not a lot on non VC funded businesses. I think there is tremendous amount of money to be made in bootstrapping as well. I think a lot of indie hackers / bootstrappers also think too small. You can definitely make 100s of millions of dollars without VC money. That part of reality has not been properly dispersed.
- randmeerkat 3y ago
  > Even when I was getting started, I read a ton on VC funded businesses but not a lot on non VC funded businesses. Any suggested reading for the non VC funded business?
  - ilrwbwrkhv 3y ago
    Not a lot that I can find. Essentially businesses are about making bets about what reality will look like in the future. So the better modeling you can do of reality, the more successful you can be. Earnestness is a strong word in my dictionary when it comes to testing ideas these days. I started seeing success when I stopped lying to myself and became earnest after over a decade of failure.
    - randmeerkat 3y ago
      > So the better modeling you can do of reality, the more successful you can be. How do you approach modeling? > Earnestness is a strong word in my dictionary when it comes to testing ideas these days. I started seeing success when I stopped lying to myself and became earnest after over a decade of failure. It sounds like there’s something here, but I’m not sure I understand what you mean. By being earnest do you mean being serious about the idea, or is it something else?
      - ilrwbwrkhv 3y ago
KaiserPro 3y ago
One thing that would be helpful to add to this post: 1) the chances of your company making it to series B 2) the chances of you as a founder actually making any money. Much of the startup "legend" of massive exits, everyone making lots of money, is exactly that: legend. VCs batch startups together because >90% will fail. Of those that do make it out of the incubator in any meaningful way, you can expect another 80% mortality over the next two years. Say you get aquihired, you're not going to get much of a share payout, if at all. Even if you get blockbuster hired (ie bought for 250million) you're probably going to get golden handcuffs rather than "fuck you" money upfront. Same for an IPO, your shares will be converted, but you can't exercise them until after n years.
- Scoundreller 3y ago
  > Say you get aquihired, you're not going to get much of a share payout, if at all. But often you turn your risky "stock investor" income into stable "bond investor" income. If you're ever able to convert a stock into a bond with the same net return, do it! I know I am with my savings these days.
bsuvc 3y ago
TLDR: dilution is a thing and investor incentives are not always aligned with founder, when it comes to early exit opportunities. --- But... I don't think there are really a lot of opportunities to exit at $38m in the early stages of a startup, even if your valuation says it is possible on paper. There just isn't much of a market for companies at that stage of growth. Imo, the more likely scenario is for a startup to either 1. fail to raise and run out of money, or 2. Become self-sustaining, but never successful enough to achieve a meaningful exit for the founders or investors, basically a "zombie" company that may never exit. In the second case, it is the investors that get screwed, as the founder has made a nice lifestyle business out of their investment. I think most investors realize this is one of the outcomes though, so "screwed" is probably too harsh of a term to use to describe it.
- yesimahuman 3y ago
  The second case isn't probably good for founders either. I don't think it would be easy to convince investors to let you take cash out of the business to any meaningful degree, but I suppose that depends on how much control you have over the business at that point.
- ClumsyPilot 3y ago
  > founder has made a nice lifestyle business out of their investment It’s perfectly reasonable that one might have a medium size business supporting the local economy. It’s a shame that VC model is hostile to this outcome.
  - bsuvc 3y ago
    Bootstrapping is a fine alternative to VC and more appropriate for many businesses. But it isn't hostile to want a return on your investments, and investors are not operating as a charity to support the local economy, although that does incidentally happen as a result of investments.
- ripberge 3y ago
  I think there are a lot more potential buyers of $38M companies than $380M companies, particularly if the burn rate is low. There are a lot of exits in this range in the B2B software space to private equity types of co's that are rolling up companies in a particular vertical.
Joel_Mckay 3y ago
This sums up the experience: https://www.youtube.com/watch?v=V12ZAZ4Jn8Q https://www.youtube.com/watch?v=V12ZAZ4Jn8Q
graiz 3y ago
The links referenced in the article didn't work, this was from 2016. https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2 https://medium.com/jme-venture-capital/meaningful-vc-exits-2... I couldn't find the capshare post but there was a similar slide deck from capshare: https://www.slideshare.net/IanBeckett3/analysing-5000-startup-cap-tables https://www.slideshare.net/IanBeckett3/analysing-5000-startu...
- carom 3y ago
  http://web.archive.org/web/20190412095003/https://www.capshare.com/blog/4-key-insights-from-5000-cap-tables/ http://web.archive.org/web/20190412095003/https://www.capsha...
dang 3y ago
Related: Meaningful Exits for Founders (2016) - https://news.ycombinator.com/item?id=17486303 https://news.ycombinator.com/item?id=17486303 - July 2018 (23 comments)
deleted 3y ago
[deleted]
santiagobasulto 3y ago
This is a great post, but I think it fails to see one important point... > a founder selling at the Series D price of $210M, would make the same amount of money at exit as they would have if they’d sold for $38M after having only raised a seed round (...) Lifetimes of work and risk lie between a Seed round and a Series D round. And, despite increasing the value of the underlying business 7x, the dollars at exit for the founder remain roughly the same. Even though the exit dollars might be the same, it's failing to see two important points: a) founders taking money off the table in early rounds. Founders can sell part of their equity at their company just as a personal "cash out" strategy. 1password founders took their Series A mainly for this. b) the network capital gained at a Series D company is NOWHERE near at a Series A company. It's impossible to put a dollar amount to that, but it'd say your career will be completely different from a successful Series A or Series D company.
- dublin 3y ago
  I'd take a solid cash cow producing producing value for customers at an A-round size over growing it to D-round size any day. Maybe because I've just been through enough of this crap to know that yes, you want to make money with your startup, but there are some things no amount of money can compensate you for... And a company spinning off a fair amount of cash can be grown surprisingly rapidly organically, though it does take several changes in how the company is run as it hits inflection points (there are usually several!) due to growth (e.g. people, processes, and effective business/marketing/sales oversight become more important to grow beyond $6-10M/yr...)
  - mdorazio 3y ago
    In the first scenario, how do you plan to return the A-round investor money at a multiple and timeframe they'll be happy with for their fund?
- mvkel 3y ago
  Yep. The founder of Hopin took 180M in secondaries while raising 1B, and just sold it for $15M!
logicallee 3y ago
[flagged]
- jonfromsf 3y ago
  What are you going on about?
ChrisArchitect 3y ago
(2016) Shared under different urls Anything new since?
khazhoux 3y ago
I’d love to see a similar analysis for non-founders. I.e., the other N-2 people at the startup. Like, how many hundred-millions or even billions will exit have to be before you get $500k as the Nth employee of a typical Series A/B/C/D?
canvascritic 3y ago
While we insist it's not about the cash, it's about this meritocratic fever-dream, we still obsess over VC returns, fund sizes, exit strategies. gil's analysis underscores this paradox - startups chasing after the elusive "meaningful exit", ideally returning the entire fund in one stroke. but here's where things get interesting. capshare's study reveals a predictable pattern of founder dilution based on rounds raised. by series d, founders own a mere 11-17% of their brainchild. employees fare slightly better with 17-21%, but investors take the lion's share at 66-68%. so, what does this mean for founders? well, they'd make as much selling at $210m in series d as they would selling for $38m post-seed round. More funding doesn't necessarily mean more money for founders, kind of obvious esp in the post-WeWork era. it's a stark reminder of the trade-offs involved in chasing VC dollars, which can chafe something like mcmaster-carr grade 3 steel wool. much like startup founders, it serves multiple roles, adapting based on need. it doesn't seek the limelight, focusing instead on getting the job done. perhaps there's a lesson there for startups obsessed with fund sizes and exits. basically it's not about how much you raise, but what you do with it.
- blackkettle 3y ago
  > For an industry that doesn’t do it for the money, we sure talk about money an awful lot in the world of startups. Do people really insist that this is the case with a straight face? The vast, vast, vast majority of startups exist to exploit a business niche that is either underserved or as-yet poorly understood, or to build an 'interesting' app. The point of all these is definitely and without doubt about building a successful business where 'successful' is a virtual synonym for 'profitable' and where 'profitable' also seamlessly serves as a proxy for 'meritocratic'. It seems really disingenuous to suggest that there is some nobler cause at work - and I don't think there is anything particularly wrong with that.
user_named 3y ago
The numbers I'm seeing in the comments certainly make the case for how unlikely it is for a startup employee to make anything off their startup stock options, if this is how unlikely it is for the founder to make anything.

132 points by freediver 3y ago

I think for most founders, exiting with 100% ownership of a small pie is a much better proposition than exiting with 10% of a large pie IF you have that decision to make. The risk, hard work and difficulty in the latter are exponentially greater.

yesimahuman 3y ago

Regardless of where you sit on the line between ambition and optimizing for founder outcomes, I think we can all agree first time founders aren't thinking about the math here enough and are far more susceptible to listening to what VCs say they should do and care about. Having been in this position, all I can say is I'm glad we didn't raise more money because we had far more exit options. I really appreciate what Bryce and indie have done to change the narrative here.

SandersAK 3y ago

The reason there is not a lot of dialogue around this is because the numbers don't work for all parties at the right time. When you have a small founder team, you need capital for essentially nothing to show. You can't raise that capital selling the $170M exit dream to angels or a fund. Conversely, VCs are assuming a 10% or less success rate across their portfolio. And of that, maybe 2-3% of portcos really returning everything. So they don't have the luxury of shepherding 100 portcos to $170M exits, since in reality, a $1b exit has a similar chance of happening as a $170M exit. Which is to say very very low. There's no magic sauce, no prime formula, no wizened or sageinvestor. It's a shit show from start to finish. You're best off finding investors who are on the same wavelength as you, and focusing less on whether you hit a home run or a grand slam. When you get to a place where you're printing cash or whatever, then sure, make sure the math works out for you. But for 99% of all founders, this question never comes, and they spend too much time thinking about it.

latchkey 3y ago
Sage advice. Most startups fail, so squabbling over the numbers has always seemed absurd to me. I'd rather see discussion along the lines of "what happens after we do well" because you have no idea of what "well" will be down the line.
- seattle_spring 3y ago
  Ensuring you don't get screwed in equity agreements isn't "squabbling over numbers." What exactly are you saying is a waste of time?
  - latchkey 3y ago
    There is no way to ensure you don't get screwed in an equity agreement for a failed company. Since most startups fail, worrying about some future event that most likely won't happen, is a waste of time. Most equity agreements can also be rewritten with numerous "tricks" down the line. A cap table re-org is a great one. Another example: I got written out of a companies equity table once when they shut down the original company, sold the name to a new company for $1 and then did a DBA for the old company name. You're better off figuring out what happens when the company is actually successful, not what happens if it eventually becomes successful. Does that make better sense now?
foobiekr 3y ago
So in the failure case, very little of it matters, but in the success case the VC industry can be exceptionally predatory - participating preferences, multipliers, etc. etc. etc. Honestly, it takes no time at all to have clean term sheets and you don't have the option to fix it later.
- halayli 3y ago
  The challenge is when several stakeholders are not in agreement with the rest.

ilrwbwrkhv 3y ago

It's crazy that a series d exit would net a founder 7 million and yet my bootstrapped business returned a 4 million profit for me last tax year. I think people need to learn more about how to scale a bootstrapped business. Even when I was getting started, I read a ton on VC funded businesses but not a lot on non VC funded businesses. I think there is tremendous amount of money to be made in bootstrapping as well. I think a lot of indie hackers / bootstrappers also think too small. You can definitely make 100s of millions of dollars without VC money. That part of reality has not been properly dispersed.

randmeerkat 3y ago
> Even when I was getting started, I read a ton on VC funded businesses but not a lot on non VC funded businesses. Any suggested reading for the non VC funded business?
- ilrwbwrkhv 3y ago
  Not a lot that I can find. Essentially businesses are about making bets about what reality will look like in the future. So the better modeling you can do of reality, the more successful you can be. Earnestness is a strong word in my dictionary when it comes to testing ideas these days. I started seeing success when I stopped lying to myself and became earnest after over a decade of failure.
  - randmeerkat 3y ago
    > So the better modeling you can do of reality, the more successful you can be. How do you approach modeling? > Earnestness is a strong word in my dictionary when it comes to testing ideas these days. I started seeing success when I stopped lying to myself and became earnest after over a decade of failure. It sounds like there’s something here, but I’m not sure I understand what you mean. By being earnest do you mean being serious about the idea, or is it something else?
    - ilrwbwrkhv 3y ago

KaiserPro 3y ago

One thing that would be helpful to add to this post: 1) the chances of your company making it to series B 2) the chances of you as a founder actually making any money. Much of the startup "legend" of massive exits, everyone making lots of money, is exactly that: legend. VCs batch startups together because >90% will fail. Of those that do make it out of the incubator in any meaningful way, you can expect another 80% mortality over the next two years. Say you get aquihired, you're not going to get much of a share payout, if at all. Even if you get blockbuster hired (ie bought for 250million) you're probably going to get golden handcuffs rather than "fuck you" money upfront. Same for an IPO, your shares will be converted, but you can't exercise them until after n years.

Scoundreller 3y ago
> Say you get aquihired, you're not going to get much of a share payout, if at all. But often you turn your risky "stock investor" income into stable "bond investor" income. If you're ever able to convert a stock into a bond with the same net return, do it! I know I am with my savings these days.

bsuvc 3y ago

TLDR: dilution is a thing and investor incentives are not always aligned with founder, when it comes to early exit opportunities. --- But... I don't think there are really a lot of opportunities to exit at $38m in the early stages of a startup, even if your valuation says it is possible on paper. There just isn't much of a market for companies at that stage of growth. Imo, the more likely scenario is for a startup to either 1. fail to raise and run out of money, or 2. Become self-sustaining, but never successful enough to achieve a meaningful exit for the founders or investors, basically a "zombie" company that may never exit. In the second case, it is the investors that get screwed, as the founder has made a nice lifestyle business out of their investment. I think most investors realize this is one of the outcomes though, so "screwed" is probably too harsh of a term to use to describe it.

yesimahuman 3y ago
The second case isn't probably good for founders either. I don't think it would be easy to convince investors to let you take cash out of the business to any meaningful degree, but I suppose that depends on how much control you have over the business at that point.
ClumsyPilot 3y ago
> founder has made a nice lifestyle business out of their investment It’s perfectly reasonable that one might have a medium size business supporting the local economy. It’s a shame that VC model is hostile to this outcome.
- bsuvc 3y ago
  Bootstrapping is a fine alternative to VC and more appropriate for many businesses. But it isn't hostile to want a return on your investments, and investors are not operating as a charity to support the local economy, although that does incidentally happen as a result of investments.
ripberge 3y ago
I think there are a lot more potential buyers of $38M companies than $380M companies, particularly if the burn rate is low. There are a lot of exits in this range in the B2B software space to private equity types of co's that are rolling up companies in a particular vertical.

Joel_Mckay 3y ago

This sums up the experience: https://www.youtube.com/watch?v=V12ZAZ4Jn8Q https://www.youtube.com/watch?v=V12ZAZ4Jn8Q

graiz 3y ago

The links referenced in the article didn't work, this was from 2016. https://medium.com/jme-venture-capital/meaningful-vc-exits-2bb5702776e2 https://medium.com/jme-venture-capital/meaningful-vc-exits-2... I couldn't find the capshare post but there was a similar slide deck from capshare: https://www.slideshare.net/IanBeckett3/analysing-5000-startup-cap-tables https://www.slideshare.net/IanBeckett3/analysing-5000-startu...

carom 3y ago
http://web.archive.org/web/20190412095003/https://www.capshare.com/blog/4-key-insights-from-5000-cap-tables/ http://web.archive.org/web/20190412095003/https://www.capsha...

dang 3y ago

Related: Meaningful Exits for Founders (2016) - https://news.ycombinator.com/item?id=17486303 https://news.ycombinator.com/item?id=17486303 - July 2018 (23 comments)

deleted 3y ago

[deleted]

santiagobasulto 3y ago

This is a great post, but I think it fails to see one important point... > a founder selling at the Series D price of $210M, would make the same amount of money at exit as they would have if they’d sold for $38M after having only raised a seed round (...) Lifetimes of work and risk lie between a Seed round and a Series D round. And, despite increasing the value of the underlying business 7x, the dollars at exit for the founder remain roughly the same. Even though the exit dollars might be the same, it's failing to see two important points: a) founders taking money off the table in early rounds. Founders can sell part of their equity at their company just as a personal "cash out" strategy. 1password founders took their Series A mainly for this. b) the network capital gained at a Series D company is NOWHERE near at a Series A company. It's impossible to put a dollar amount to that, but it'd say your career will be completely different from a successful Series A or Series D company.

dublin 3y ago
I'd take a solid cash cow producing producing value for customers at an A-round size over growing it to D-round size any day. Maybe because I've just been through enough of this crap to know that yes, you want to make money with your startup, but there are some things no amount of money can compensate you for... And a company spinning off a fair amount of cash can be grown surprisingly rapidly organically, though it does take several changes in how the company is run as it hits inflection points (there are usually several!) due to growth (e.g. people, processes, and effective business/marketing/sales oversight become more important to grow beyond $6-10M/yr...)
- mdorazio 3y ago
  In the first scenario, how do you plan to return the A-round investor money at a multiple and timeframe they'll be happy with for their fund?
mvkel 3y ago
Yep. The founder of Hopin took 180M in secondaries while raising 1B, and just sold it for $15M!

logicallee 3y ago

[flagged]

jonfromsf 3y ago
What are you going on about?

ChrisArchitect 3y ago

(2016) Shared under different urls Anything new since?

khazhoux 3y ago

I’d love to see a similar analysis for non-founders. I.e., the other N-2 people at the startup. Like, how many hundred-millions or even billions will exit have to be before you get $500k as the Nth employee of a typical Series A/B/C/D?

canvascritic 3y ago

While we insist it's not about the cash, it's about this meritocratic fever-dream, we still obsess over VC returns, fund sizes, exit strategies. gil's analysis underscores this paradox - startups chasing after the elusive "meaningful exit", ideally returning the entire fund in one stroke. but here's where things get interesting. capshare's study reveals a predictable pattern of founder dilution based on rounds raised. by series d, founders own a mere 11-17% of their brainchild. employees fare slightly better with 17-21%, but investors take the lion's share at 66-68%. so, what does this mean for founders? well, they'd make as much selling at $210m in series d as they would selling for $38m post-seed round. More funding doesn't necessarily mean more money for founders, kind of obvious esp in the post-WeWork era. it's a stark reminder of the trade-offs involved in chasing VC dollars, which can chafe something like mcmaster-carr grade 3 steel wool. much like startup founders, it serves multiple roles, adapting based on need. it doesn't seek the limelight, focusing instead on getting the job done. perhaps there's a lesson there for startups obsessed with fund sizes and exits. basically it's not about how much you raise, but what you do with it.

blackkettle 3y ago
> For an industry that doesn’t do it for the money, we sure talk about money an awful lot in the world of startups. Do people really insist that this is the case with a straight face? The vast, vast, vast majority of startups exist to exploit a business niche that is either underserved or as-yet poorly understood, or to build an 'interesting' app. The point of all these is definitely and without doubt about building a successful business where 'successful' is a virtual synonym for 'profitable' and where 'profitable' also seamlessly serves as a proxy for 'meritocratic'. It seems really disingenuous to suggest that there is some nobler cause at work - and I don't think there is anything particularly wrong with that.

user_named 3y ago

The numbers I'm seeing in the comments certainly make the case for how unlikely it is for a startup employee to make anything off their startup stock options, if this is how unlikely it is for the founder to make anything.