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Sell for half a billion and get nothing (2021)

• EchoChamberMan 3y ago
  "FanDuel founders to receive no cash from sale to Paddy Power Betfair" https://news.ycombinator.com/item?id=17485246 https://news.ycombinator.com/item?id=17485246 (July 8, 2018) Shamrock Capital Advisers and Kohlberg Kravis Roberts are the two mentioned investors, I believe.
  • fnbr 3y ago
    Private equity firms. I’d never take money from them.
  • lupire 3y ago
    Gambling company should know the house always wins. If I read crunchbase correctly FanDuel got $350M in funding by 2015, and sold for $465M 9 years later, for 33% ROI, or about 3%/yr. Founders don't deserve anything just for managing to hold on to investor capital and not lose it. Investing money at below market rates is not an achievement. Founders and employees weren't robbed. Also, OP is just a bad ad.
    • hn_throwaway_99 3y ago
      Your timing is wrong here, which breaks your calculations. I read some other articles that said FanDuel got $75 million in 2014 and $275 million in 2015, and then they sold in 2018, so not sure where you're getting your "9 years" from.
      • quickthrower2 3y ago
        Still not great ROI.
        • zen928 3y ago
          A moving goalpost isn't a great argument either.
          • quickthrower2 3y ago
            SPY is beta roi, and it probably did worse than that.
      • lupire 3y ago
        I apologize. I misread something as saying the sale was this year. So the return was about 10%/yr, which is decent but not "make me a multi-multimillionaire". I presume everyone working got cash during their tenure, not just unpreferred stock. The claim that the valuation was artificially deflated due to conflict of interest seems stronger than the concern about liquidation preferences. FanDuel's 10x valuation growth from 2015-2020 backs up the charge of deflation. https://www.wsj.com/articles/fanduel-founders-former-employees-sue-over-getting-nothing-in-deal-11582663343 https://www.wsj.com/articles/fanduel-founders-former-employe...
• ralph84 3y ago
  If you can’t find investors who will invest at 1x preference, it’s a sign that you should seriously consider shutting down rather than raising more funding.
  • frfl 3y ago
    What you say sounds reasonable. Can you provide any anecdotal evidence or case study that would make your comment less random-dude-on-HN-said-this and more grounded in fact/evidence. Edit: I mean specifically something like this article that was linked in another comment on this thread, https://medium.com/@andrewkemendo/first-time-founders-and-the-trouble-with-founder-friendly-terms-e804a9783b5c https://medium.com/@andrewkemendo/first-time-founders-and-th... Just to help ground what you suggest in your comment to something concrete.
    • dvt 3y ago
      I think that the idea is that if you need (operative word) to buy one dollar for two dollars (not exactly the scenario, but imo the analogy works), then your business probably sucks. This is true more often than it is false. Basically, you're betting the one dollar will turn into 2+ dollars, but by that point the business model should've already been proven.
  • ergocoder 3y ago
    Or raise at 3x preference and take millions in secondary
• gumby 3y ago
  Liq prefs vanished during the ZIRP and I haven’t seen them return…yet. But the founders do have some leverage. If there is no incentive to do the deal they can just… not cause the deal to happen (different from blocking it, just not working on it). This is the same reasons you see big pay packets for the execs when a company is doing poorly or is bankrupt: otherwise they could just go do something else (get a different job). The poor guy on the assembly line may not have the same option.
  • yieldcrv 3y ago
    maybe in Silicon Valley, but in New England and other less mature markets nothing has ever changed feel free to change my view, for anyone passing by
    • wmf 3y ago
      If you won't move to get materially better funding I guess you deserve what happens next.
    • pclmulqdq 3y ago
      New England tends to have startup companies that are either biotechs or hard techs. It's not surprising to have to take bad terms for those companies.
      • gumby 3y ago
        FWIW I have started both in Silicon Valley and never had to take unfavorable terms like that.
    • gumby 3y ago
      I’ve only started companies in Silicon Valley (not even in SF once it started to get tech too) but have been on board in NY, Cambridge MA, and Europe. As a broad generalization: investors in Northern California are more afraid of missing out on the upside than losing some in the downside. The further east you go the more risk averse they get, until by the time you get to Europe the terms tend to be quite abusive because the investors are so worried about losing their money.
• deleted 3y ago
  [deleted]
• ldjkfkdsjnv 3y ago
  I think the perception of raising venture capital has soured. You really are an employee. Many founders of well known companies make far less than you would expect. Generate and own a SAAS business that does 1M in ARR, and you can almost walk away with 5-10M. This can be done in a few years. Do that with a venture backed business, they will force you to raise a series A and shoot for a 200M+ outcome. If you dont increase revenue, they want you to fail/go to zero trying to shoot for the moon. You might spend the next 5 years at a 200k salary, while you could have reached financial security at FAANG. Also, many companies have less respect for founders than you would expect. Its not the career boost people think it will be. You are building a different skill set thats not as useful inside a high paying tech company, aside from engineering. Which even then, is very different at a startup.
  • ralph84 3y ago
    It’s not a great time to be a VC investor either. Megacap tech stocks have outperformed most VC funds as of late.
• BobbyTables2 3y ago
  I’ve always wondered what it means to be a “founder” when it is done with everyone else’s money. Are they not just effectively employees at that point? I fear such abuse of such just feeds a narcissistic species that focuses mainly on executive headshots and snazzy websites. Too many startup websites scream, “look, we have a website, $$$ millions, and an executive board — we’re all grown up now!” without actually having much clue. Medium sized business are more self confident and don’t bother. The small business founder that starts as employee #1 and grows organically is an entirely different animal and fully deserves the title.
  • pclmulqdq 3y ago
    Having bootstrapped and also founded VC-backed companies, the VCs are effectively making you an employee. But you get to gamble some of your paycheck, so it's a bargain a lot of people are interested in. A lot of my friends who are in the VC space see "X person sold company Y for $500 million" and sort of assume that X made at least $100 million from that transaction, when they very often didn't. The bootstrapping/small money path is so much more like actually starting a business, but it's a lot harder. On top of the investment, you get a lot of free publicity and some legitimate street cred from having gotten VC investment.
    • lagt_t 3y ago
      After all these years of VC funding, I can't believe there is still "street cred" attached to it. Not contradicting you, I'm just flabbergasted people haven't caught on their track record.
      • pclmulqdq 3y ago
        I don't know why, but I think a lot of providers treat it as a crackpot filter. These days, I see more crackpots getting VC funding than not, though.
  • devjab 3y ago
    They are just employees on some level, but they are also typically owners with a lot of risk on the table themselves. Even if they come in with what would be “a lot” of money to most of us, it can’t compete with investment capital. We build energy plants with investor money as an example. They don’t invest in us, but into the projects we run, so it’s a little bit different than having someone invest in us (but I’ll get to that). We don’t solely build a power plant with investor money though, we build it with a mix of investor money, loans and our own money, and that last bit just got a whole lot larger (meaning we can do much larger projects) with private equity investing into us directly. So now instead of doing a tiny mom-and-pops sort of solar plant, we can build some of the largest solar plants in the world. The payout on the other side isn’t linear either, there is much, much, more money in a single large plant than in a hundred tiny plants. Especially when you sell the product a few years after its completion. In the current world, maybe it would’ve been better to not take private equity on board, but at the time it was done, nobody knew Putin would invade, that the global supply lines and manufacturing power would never recover from covid, or, that interest rates would go above 15% in countries where they were below 1%. Everyone knew the low interest rates wouldn’t stay, but we sure didn’t expect them to go so far above 8%. Anyway, even if the world hadn’t gone to shit, our company would still have been 10-20 people and not in the hundreds if we hadn’t acquired the massive amount of funds. Since while our founders are rather rich, they aren’t that rich, and this would’ve limited the company growth to such a significant degree that even two years of economic turmoil has us at a level we would’ve likely never reached. It’s not all gloom and doom either, people still need power after all. So you’re both right and wrong, founders sort of become employees, but not really. How much they lean toward the employee “title” typically depends on their deals.
• ackbar03 3y ago
  of course, hindsight is 20/20, but... Why did they accept the deal with the investors?? That seems like a horrible deal? Google search shows they only raised $416mio total, roughly speaking anything above that and below $559mio the investors could have accepted, pocketed a quick and tidy profit, screw everyone else, and nobody can do anything about it. Or is that too naive of me?
  • petesergeant 3y ago
    Because the founders assumed they'd be able to turn the money invested into more than a 2x return
    • b112 3y ago
      Indeed. And the founders agreed to this, and to the liquidation preference too. They knew the terms, knew what they were getting, and could have decided to not engage. (They took millions, and surely must have engaged an excellent lawyer and sought advice, right? So they knew, or should have known.) I agree that this can suck, but at the same time... would anyone be sad for the investors if they lost it all too? At least the founders and employees likely received some form of salary. If anything, it is the employees that are out. The founders negotiated these terms, knew of what they committed to. The employees took options, likely without full optics into all of this. edit: other parts of this say the CEO agreed to the terms, after the founders were pushed out. Still, what I say stands. The employees are the ones losing here, everyone else had optics into what the deal was. Something to always think of when an employee and being offered terms. Insistence to know the funding arrangement seems key. Even perhaps the contractual option to be able to get your shares out, cashed, as part of any new funding deal seems prudent.
  • lupire 3y ago
    Time value of money. You don't get paid to sit on money. You ar paid of you grow the money. The founders wasted investor money on a non profitable enterprise. Employees got paid for doing non profitable work for investors. No one screwed anyone,they just flopped at their business and got rescued by a buyer.
• AndrewKemendo 3y ago
  I wrote this in 2015 in response to Mark Suster suggesting that founders "Run" from liquidation preference and preference overhang in early deals: "Run where? When I talk to my fellow early stage east coast founders, the majority aren’t beating away founder friendly term sheets. Even seed stage companies with revenue and traction raising relatively small amounts are giving away board seats and agreeing to multiple preferences because they have nowhere else to go. For founders, these deals can be make or break. For investors they can hold out and the only downside is slightly lower yield. So there is asymmetry in needs which means founders have little leverage." https://medium.com/@andrewkemendo/first-time-founders-and-the-trouble-with-founder-friendly-terms-e804a9783b5c https://medium.com/@andrewkemendo/first-time-founders-and-th...
  • frfl 3y ago
    You wrote that back in 2015. What, in your experience, has changed since then? 2021 would've probably, I'm guessing, been a lot more favorable for founders, but 2022/23/24 is likely a lot less favorable.
    • AndrewKemendo 3y ago
      I stepped out of investing about two years ago because i couldn’t stomach the persistent narcissistic greed dressed up as virtue once I saw it for what it was. The last I saw it was just as bad and frankly getting worse for founders, as investors pulled back when the Fed moved on interest rates. Basically everyone just stopped taking risk except for the giant institutional funds and even then, as of last year were most just doubling down on existing. I heard similar actually last month at an event I was at - funds are sitting on dry powder and not doing cap calls.
      • lumost 3y ago
        Out of curiousity - how does a VC fund hold onto "powder"? Do they have terms to invest in a liquid fund, or some other arrangement? Seems like they'd face tough returns if they held powder for long.
• jmward01 3y ago
  I have a friend that has given up on options. Even if he were to be #10 somewhere he would take any extra pay over any options. Stories like this show the wisdom of that. Are there really that many success stories for people other than for VCs and (maybe) founders out there anymore? Even if your options (eventually) get you 200k, how much did they cost you in years of lower pay. Even with a payout, considering interest on that missing pay was it worth it?
  • Analemma_ 3y ago
    It's not just your friend: a lot of people have given up on options. Obviously they're underrepresented here on HN because this is a startup-focused forum, but I know many, many people who have concluded "options have an EV of zero, startups pay options in lieu of market-rate salary, therefore startups are a raw deal; I will only go to FAANGs". They're sort of a dark matter universe since they are only visible in their absence here, but I do think that startups don't have access to the same talent pool as they used to, and sooner or later this will catch up with the ecosystem.
    • yieldcrv 3y ago
      it looks like bi-modal distribution of compensation in tech, where there are tech startups paying one amount and options, and FAANG paying another amount plus liquid shares but crypto organizations have added another wrench for more than half a decade, leaving the other startups aside, they are startups paying one amount, and skipping the options and paying their employees RSUs of their liquid crypto tokens, competing directly with FAANGs on compensation as employees can sell those tokens just as - or even more easily - than they can sell shares in a brokerage account I'm saying it as if its news because the crowd here relies on people they respect saying the same thing to believe it in the absence of public and common knowledge, and that likely hasn't happened in the topic of anything crypto/web3 industry here
    • yieldcrv 3y ago
      > startups pay options in lieu of market-rate salary this is true but this is largely due to an unworkable tax treatment of giving out illiquid shares to employees that rely on employment for money, and the longstanding tax regime would seek to tax employees that have higher value shares even if they can't get cash to pay for it. so this has left private companies in an uncompetitive situation with options as the poor workaround, analogous to chemotherapy where it hurts everyone in the absence of a better treatment, but you might come out ahead
• throwaway4736 3y ago
  The CEO who signed all of those term sheets is STILL crying, like five years later, about how badly he supposedly got hosed, as if someone else’s signature is on all of those documents. It’s pathetic.
  • hakdbha 3y ago
    [dead]
  • exogeny 3y ago
    You're the only person in this thread so far who seems to have a clear understanding of who is the one to blame in this story.
  • whiterknight 3y ago
    And why would the technicalities of the contract make any difference to the sentiment of not being paid for your work? Situations evolve. You hope you get the contracts right, but you also hope you have trust to work with people as they do.
• giantg2 3y ago
  If I sell my company for $1T, but I financed $999B of it, should I expect to get a payout? Financing generally requires interest. Seems like the headline is trying to invoke outrage.
  • sb8244 3y ago
    What if you raised 500B and still got nothing? That can happen with 2x or 3x liquidation preference. IDK FanDuel structure (not in article), but they only raised ~ 400M. Yet the investors got every dime up to 550+M.
    • jojobas 3y ago
      Nobody forces you to sign away these preferences and participation. It might be a reasonable reflection of your pre-money worth (i.e. near zero) or it might not be.
    • giantg2 3y ago
      From an investor standpoint, if I were risking that much momey on a high risk venture, I would want that kind of return to make it worth while and cover the others that don't make it.
      • sb8244 3y ago
        That's the name of the game. 1x non participating is a fine way to offset some risk. Anything more than that is greed.
      • dukeyukey 3y ago
        From a founder/early employee perspective, if I were risking that much _literal lifespan_ on a high-rish venture, I'd want some kind of return to make it worthwhile.
        • giantg2 3y ago
          You mean like a salary and benefits?
• Brian_K_White 3y ago
  ahhh fucking ad
• eschneider 3y ago
  This sort thing is uncommon only in that there was eventually a high dollar liquidity event. When negotiating offers, I always try to get some idea of the financing and the liquidation preferences, if only so I can get some idea of what we'd have to pull in for shares to be "in the money" and quite often the number would be something insane like this. You just value the shares at zero. :/
• awadekar 3y ago
  Value creation and value capture are often misaligned for founders. In a nutshell, stories like these are why we're building out TXF - a fund for founders to invest with their equity. Structured as a fund with a diligence process to ensure quality. Hoping to make venture capital a little fairer for founders. If anyone's interested...https://docsend.com/view/dtrtu8y7eczki9dz https://docsend.com/view/dtrtu8y7eczki9dz
• justinlloyd 3y ago
  I am currently working with a start-up where the company is incapable of meeting its capex obligations. The founder raised a good amount of capital from investors a few years ago, and that provided a decent runway, but there's no traction, no KPIs, and whilst we've built some impressive technology, impressive technology does not bring in revenue. One of the problems (amongst many) is that the primary stakeholder has a perfectionist attitude to the user experience. Which in a start-up is deadly. Now, as I said, the start-up cannot meet its capex obligations and the current funding round is looking grim. It is definitely going to be a down round and it ain't going to be pretty should a term sheet get thrust under our collective noses. To get the developers motivated to stick around a little longer, "generous" equity packages are on offer, with a request to convert over-due back pay and future payments too, into equity . When I sought transparency - "Can I see the cap table?" - "Can I see the terms of the investors?" - "Can I see anything?" - the answer was invariably "no." Essentially, they're asking me to make a nominal investment of over $200K in the company, accepting common stock in lieu of pay without any insight into the financials or the terms provided to other investors. It's worth noting that I had previously given the start-up a sweetheart deal, significantly discounting my usual rate and offering generous payment terms, in the spirit of support and belief in the project. This makes the current scenario even more disheartening. Compound that with what has become an overall toxic environment that I have euphemistically called "challenging" when asked to sum it up, and the future isn't bright enough to wear shades. Now this isn't exactly my first rodeo. I've seen the beautiful side of start-ups and liquidity events. And I've seen the dreadfully ugly side too. Hard lessons learned. And the ugly side shows up way more than the pretty one. I swear, some entrepreneurs must think I stepped off the boat yesterday.
  • hamburglar 3y ago
    > "Can I see the cap table?" - "Can I see the terms of the investors?" These questions should become so normalized that founders don’t bat an eye at it. If I am an early employee, we are partners. Wanting to know my percentage and the company’s liabilities before I sign is not unreasonable. I also want to hear you talk convincingly about your plans for future investment.
    • 3y ago
• wly_cdgr 3y ago
  LOL @ the idea that the investors are the ones who take on the largest risks. Investors barely deserve 1x, never mind anything higher.
  • dvko 3y ago
    I’m a bootstrapped founder but hard disagree with this take. Surely it can’t be the founder taking home a healthy salary from day 1 despite the company being far away from any revenue at all that is taking the risk in your book?
    • wly_cdgr 3y ago
      It absolutely is. The typical SV investor is risking essentially nothing - a portion of their wealth that does not make a meaningful difference for their standard of living. And they are free to do whatever they like while they wait for their investment to play out. The founder, on the other hand, is risking years of their one life (and probably their one YOUTH) - years that could have been spent in a myriad other ways.
  • realusername 3y ago
    Yeah there's a lot of rationalizing going on here, the investors have more generous terms because they have a lot of market power compared to anybody else at the company, nothing more, nothing less. It doesn't necessarily correlate with risks.
  • dasil003 3y ago
    This is a naive and simplistic view that immediately breaks down in the face of individual freedom. Founders are not forced to take investment, nor are investors force to make it. Terms must be negotiated. You can say liquidation preference should be forbidden, but that's a slippery slope. Many founders accept a liquidation for larger valuation, and many deals would not happen without it. I'm not sure why we would draw the moral line here since the risk of founding and joining startups exists either way.
• grensley 3y ago
  FanDuel was really a lose-lose-lose - Investors got a meager return - Company and employees got nothing from the sale - Consumers got a gambling addiction
  • deleted 3y ago
    [deleted]
  • arthurofbabylon 3y ago
    Isn't there a funny saying about this kind of situation? Something about two economists shitting their pants...? Economist-A offered his friend, Economist-B, $20 to shit his pants. Then the deal was reciprocated, with Economist-B offering Economist-A $20 if he shat his pants. At the end, Economist-B turns to his friend and says, "does it feel like we both just shat our pants for nothing?," to which Economist-A replied, "no, we created $40 of value."
• szundi 3y ago
  Who are these VCs?
• jv22222 3y ago
  > Lessons Learned: Build a Very Fundable Startup > Every founder should learn from this disastrous scenario the importance of building a very healthy, fundable startup. A healthy, vibrant startup draws more investors during fundraising. The competition gives founders the leverage to negotiate for more founder-friendly terms. Healthy startups get better valuations, better terms, and raise funds with much less effort. Hmm. The lesson I learn from that is to bootstrap/self-fund, rather than get investment in the first place.
  • aetherspawn 3y ago
    Yeah I have a small business and I sway strongly towards being contempt with letting the business grow at its own rate. No, it won’t have a 1 bil payout, but you make your own rules and you’ll get a healthy cash out from the dividends after only 1 year or so. It also forces you to keep pivoting and finding a cash cow rather than assuming your initial plan was any good. We’re on like plan #10 now and in hindsight if we went with any of our original plans we’d still be burning money whereas current plan was profitable after just 1 month once we figured it out.
    • wdh505 3y ago
      Contempt is not equal to content. I think autocorrect got you
    • gnicholas 3y ago
      > No, it won’t have a 1 bil payout Does anything have a $1B payout for the founder? I guess there are a few companies that achieve this, but it takes only a modicum of humility to realize you're not likely to be one of the most successful founders this decade.
      • DaiPlusPlus 3y ago
        Even if anyone gets a cool $1b, the IRS is going to come for a good chunk of that...
        • 3y ago
• ShadowBanThis01 3y ago
  [dead]
• exogeny 3y ago
  FanDuel is going to do like $6B in revenue this year. This entire story above happened for three reasons: 1. The CEO made terrible decisions in regards to how much and who they raised from. They got in over their hands as the company grew and the entire founding team got fired. 2. The CEO immediately after, who took over an unprofitable business that wasn't growing and was in bad shape after the merger with DraftKings got called off, took a deal that was the best he could do at the time. That CEO was a non-founding CFO before taking over, and was basically put in the C-Suite by KKR as a term of their investment in the business. 3. That deal to PaddyPowerBetfair, now Flutter, was completed about a year before PASPA was repealed and sports betting was legalized in the US. Had #2 happened a year later, or if #2 had happened with that information in mind, the deal terms would have been insanely different and way more valuable. It's very easy in retrospect to say that the original CEO should have taken different terms, or that the following CEO should have taken a better deal. That's all hindsight. All that said, I have zero sympathy for the original CEO and founders. I feel loads of sympathy for the employees, but again, if they stayed on after the deal, they're now sitting on an absolute gusher of cash.
  • b112 3y ago
    You know #3 is curious to me. I wonder what sort of optics the investors had on this, and if there were side deals after the forced sale.
  • cellis 3y ago
    Easy to say they’re sitting on a gusher of cash that was bought with hundreds of millions of ZIRP dollars worth of ads and a time when fantasy everything was nascent. They were in an absolute dogfight with Draftkings and losing iirc. I’m sure things look rosy now but back then there wasn’t really any way to say if they’d win and that’s reflected in the terms they raised at.
  • jmuguy 3y ago
    Not knowing anything about this my first thought was what the hell did they spend that investment on to justify it in the first place? Were they just in a user acquisition war with draft kings and spending a ton on ads?
• ilrwbwrkhv 3y ago
  It's almost like there are 2 worlds. One is this and the other is my world where I'm taking home 4 million a year bootstrapped.
• smurda 3y ago
  This is happening more now. Liquidation preference was included in 20% of all Series B-E Silicon Valley venture financings in Q3 last year. When a company is not doing well and there are no other investors who will finance the next stage of the company, investors have the leverage and can include a liq pref and drag along to force other shareholders to sell. https://assets.fenwick.com/banner-images/Silicon-Valley-Venture-Capital-Survey-Third-Quarter-2023-Updated.pdf https://assets.fenwick.com/banner-images/Silicon-Valley-Vent...
  • esafak 3y ago
    Great document, but I could not find any mention of "drag along".
    • smurda 3y ago
      Yeah, there’s good data on liq pref. For the drag I was just referencing the original article in this thread. Both liq pref and drag are such onerous terms that the only way investors can get them is when the company has lost their leverage by not having other interested investors.
• irjustin 3y ago
  As a founder, this is painful to read because the founders+employees did everything they could to make sure the business was successful and by all accounts, it was. This might be the one case where I personally would accept the business failing is a better outcome.
• dclowd9901 3y ago
  > Because they take on significant risks, investors expect to get “VIP” head-of-line privileges to be paid upon a liquidation event such as an acquisition. I’d like to challenge this notion. Risk comes from one factor and one factor only: how much skin do you have in the game? Skin isn’t money. Skin is how much are you in for. How much would this hurt if you lost. The ultra rich, when investing, have actually very little skin in the game. A million here, a million there. What’s the difference? They’ll still be impossibly wealthy even if everything goes tits up. Those folks should not make the big bucks in a deal. They haven’t risked anything, even some notion that they “risked” investing their money in this vs that: they picked the winner in this case. It’s fanciful thinking I know, but I see it as _the primary_ problem with either capitalism, or ultra wealth. The system favors people with the most money, and the people with the most money control the system.
  • Ray20 3y ago
    >A million here, a million there. What’s the difference? Like you said - the difference is a million here, a million there. >They’ll still be impossibly wealthy even if everything goes tits up. They will millions less impossibly wealthy >Those folks should not make the big bucks in a deal. Why? Why is it wrong for them to make the big bucks in a mutually beneficial deal? >They haven’t risked anything They literally risked millions >but I see it as _the primary_ problem with either capitalism, or ultra wealth I don't completely understand what exactly the problem is >and the people with the most money control the system. This is literally one of the strengths of capitalism over any other system: even people with the most money don't have control over the system.
• d--b 3y ago
  Being the devil's advocate here. These liquidation things are happening when the company does badly. The founders (and the investors) were probably hoping to do a lot better than what they settled for. Half a billion dollar is great, but not so great if you thought you were going for 10bn... Without knowing the amount of the investment that the two investors made, the multiplier and the participation, and how the company was actually doing, all argument is moot. Who knows how much the investors put on the table in the first place. They took a risk, tried to have their ass covered should things turn bad, everybody agreed. Then shit happened and these guys managed to sell the thing before losing it all. Also, the founders probably got paid pretty decently in all their founding rounds, so I don't feel too sorry for them...
• gnicholas 3y ago
  It's worth mentioning that the founders were no longer with the company, and the terms of their prior exit are not public: > In this case, the minority shareholders are FanDuel's original founders, Nigel and Lesley Eccles, Tom Griffiths, Rob Jones, and Chris Stafford. None of the original co-founders still work at FanDuel, and it doesn't look like their original efforts will be rewarded — according to the deal documents, they're not going to make any money at all off of the company's sale. Of course, it's not clear what the financial terms were surrounding their departures from the company, and they could have negotiated a pay package [1] Getting precisely zero is not terribly likely if the founders are still with the company, since they would typically be considered key to the value of the company (at least for a time). There is/was apparently also a lawsuit about this deal. [2] 1: https://www.businessinsider.com/fanduel-founders-likely-to-lose-out-from-paddy-power-acquisition-2018-7 https://www.businessinsider.com/fanduel-founders-likely-to-l... 2: https://www.wsj.com/articles/fanduel-founders-former-employees-sue-over-getting-nothing-in-deal-11582663343 https://www.wsj.com/articles/fanduel-founders-former-employe...
• wolframhempel 3y ago
  It's important to say that this isn't in the VCs interest either. As a VC, you want to keep the founders motivated to make you money and grow the pie - or at least to stay on and continue what they are doing. Taking away their personnel incentives through over boarding liquidation preferences is in neither side's interest. This is even more true when it comes to future investments. Founders talk to each other. And articles, such as this one, get the word out. So - next time you're choosing a VC for your promising startup, will you go with the one that forced the last company into a sale that left them with nothing - or will you go with one with a more founder friendly track record?
• bernardlunn 3y ago
  The free money era is over. It is time for that message to sink in for both founders and investors. VC funds want founders to shoot for the moon but protect themselves by a) having a portfolio b) liquidation preference. As a founder you don’t have either. VC funds are not investors, they are middlemen who take very little risk.
• hermitcrab 3y ago
  This article is a great advertisement for bootstrapping your business, rather than taking funding (not suitable in every case though).
• andrewstuart 3y ago
  Who were the investors?
• wtgthrow 3y ago
  The concept that you can sell for X, and X is large and you get nothing shouldn't be a surprise in itself. Investors wouldn't make money if they made every founder rich regardless of the risk they take. That said, in this case sounds like the founders were f'd over. Why did they accept those terms, why didn't a lawyer or advocate advise against it?
• andyish 3y ago
  They got time, salaries, and a credit line while they developed and tried to grow the product, and I imagine they had a pretty great time with $350m over the years. It's not as though they intentionally undercut them by a dollar, their sale was $94m short. If the story was what the headline leads you to believe and you 10x'd someone's investment and they did you over, why wouldn't you see red and scuttle your product?
• gregorvand 3y ago
  The book 'Billion Dollar Fantasy' covers the whole story of FanDuel vs DraftKings. It's clear why they 'needed' funding for this to work, how they came to these terms however is not detailed in the book or clear other than they had no other option.
• JackSlateur 3y ago
  tldr: the founders gave their compagny to a couple of people. Some time later, those two people sold the compagny and got the cash. The founders got nothing, because it was no longer their compagny.
• phkahler 3y ago
  >> Because they take on significant risks, investors expect to get “VIP” head-of-line privileges to be paid upon a liquidation event such as an acquisition. What a crock of shit. I understand that employees might be considered "lower risk" because they get a paycheck. But if you're going offer them shares as an incentive then those should be full shares, Same as the others. They are probably led to believe that is the case unless they dig a little deeper themselves. So read that stuff!
• steveBK123 3y ago
  This kind of stuff should be a reminder why startup employees skew so young. It's not just youthful energy. It's that they haven't learned the expected value lesson of what their lottery ticket equity really is worth. You have all the dilution & liquidity issues before you even get into this liquidation preference and drag along rights stuff. 99% of kids out of college going to work on The Next Big Thing do not understand any of this.
• zer00eyz 3y ago
  The valuable lesson you should all take away. If the company is not public ask for a "cap table", if the answer isn't "it's in your inbox"... Then your response is: If you don not have a cap table then the shares are more or less toilet paper. You are going to take them but they are worth nothing in this deal, say "more cash please", and as salary.
• tejohnso 3y ago
  > When the FanDuel founders raised funds, two key investors received a liquidation preference that entitled them to the first $559M in an acquisition. Founders and employees would be paid only if the acquisition exceeded $559M. > The reality was the founders couldn’t stop the deal because they also granted the same two lead investors drag along rights. This drag along right forced the other shareholders to accept the decisions made by these two investors. So they signed a funding contract that gave two investors the right to take all the money in a certain situation and force the company to go along with it. That seems pretty insane. I think the lesson is the same as any other contract. Know what you're signing, and beware. I thought this story was going to be about some people getting screwed over somehow. This is a story about people agreeing to something that they should not have agreed to, and had to suffer the consequences.
  • marcosdumay 3y ago
    It is a story of people getting screwed. Having layers working for them and using the knowledge asymmetry between them and working people is how institutional money screws people.
    • datavirtue 3y ago
      Extra bonus points if the employees took an 83b election (paid tax on stock grant up front instead of when vested). Hopefully they all had options instead of stock.
  • giarc 3y ago
    I suspect the founders were told that no one was going to invest in gambling companies and they should take their deal.
• mattgreenrocks 3y ago
  Suppose I were evaluating a startup as a potential employee. What would I ask to get more insight into how funding is structured? I realize the terms can change in future rounds, but I'd like to at least get a sense of where things are now.
  • nwsm 3y ago
    If you are interviewing for an early employee position maybe you can ask them directly, but otherwise I doubt you'll have much luck. Sites like crunchbase [0] offer some information, much of it paywalled, but I'm not sure how detailed they can possibly get on liquidation preference / drag along rights. [0] https://www.crunchbase.com/organization/fanduel/company_financials https://www.crunchbase.com/organization/fanduel/company_fina...
• lpolovets 3y ago
  I'll throw out a VC's perspective on liquidation prefs: 1) I think 1x is very fair and meant to protect investors from bad company behavior. If you didn't have 1x preference, this would be an easy way for an unscrupulous founder to cash out: raise $X for 20% of the company, no liquidation preference. The next day, sell the company and its assets ($X in cash) for, say, 0.9x. If there's no liquidation preference, the VC gets back 0.18x and the founder gets 0.72x, even though all that the founder did was sell the VC's cash at a discount the day after getting it. 2) >1x liquidation preferences are sometimes the founder's fault and sometimes the VC's fault. Sometimes it's an investor exploiting a position of leverage just to be more extractive. That sucks. But other times it's a founder intentionally exchanging worse terms for a higher/vanity valuation. For example, let's say a founder raised a round at $500m, then the company didn't do as well as hoped, and now realistically the company is worth $250m. The founder wants to raise more to try to regain momentum. A VC comes and says "ok, company is worth $250m, how about I put in $50m at a $250m valuation?" Founder says "you know, I really don't want a down round. I think it would hurt morale, upset previous investors, be bad press, etc. What would it take for you to invest at a $500m+ valuation like last time?" VC thinks and says "ok, how about $500m valuation, 3x liquidation preference?" The founder can now pick between a $250m and a 1x pref, or $500m and a 3x pref. Many will pick #1, but many others will pick #2. It's a rational VC offer -- if the company is worth $250m but wants to raise at $500m, then a liquidation preference can bridge that gap. The solution is kind of elegant, IMHO. But it can also lead to situations like the one described in the article above where a company has a good exit that gets swallowed up by the liquidation preference. 3) generally both sides have good lawyers (esp. at later stages of funding), so the liquidation preference decision is likely made knowingly. Related to #3, if you're fundraising, please work with a good lawyer. There are a few firms that handle most tech startup financings, and they will have a much better understanding of terms and term benchmarks than everyone else. Gunderson, Goodwin, Cooley, Wilson Sonsini, and Latham Watkins are the firms I tend to see over and over.
  • tofuahdude 3y ago
    Great write up, thanks for sharing this. As a founder, I'd always though that >1x was predatory with no excuses, but your #2 really clarified that an appropriate situation.
• Alcatros552 3y ago
  this could have been easily solved by letting the investor know that this is happening and that they stop working for the startup immediately, this would have resulted in them pulling out the funding because nobody will put money in a company without the founders. You need to on the same level as the investors and lower your ethical and moral level to understand that for them this is a money game...
• hackernoteng 3y ago
  I think all this is OK. The problem is when it's not transparent. Then you have early employees (even some naive founders) with a lot of stock/options who assume they are going to be compensated with the exit. Then it's quite a shock when they aren't. As a veteran of such things (both successful and unsuccessful exits), I make sure to educate my fellow engineers on how these things work and what their realistic expectations should be.
  • dukeyukey 3y ago
    When founders get hit by this, well, it is their job to understand what they're getting into. They're the ones who can hire lawyers to tell them what it means, who cana ccept or turn down investment, and pivot the company where it should go. For the employees who get stock options though, it's a despicable move that should get you blacklisted. If you fuck over early employees like that, I will avoid you for life, and tell everyone else to do so too.
  • ytx 3y ago
    Right, I suspect many people (including me) wouldn't even know what terms look up to research such things. I get a lot of my knowledge by osmosis from the hn comment section, for better or worse :P
• mattmaroon 3y ago
  Was curious why no mention was made of their funding rounds' sizes and valuations so I hit the Google. Couldn't find the exact rounds, but they raised over $416m and sold for $465m. That's a fail, and you wouldn't expect the founders to get much in any case. If you raised $415k to start a restaurant, ran it for a few years at a loss, then sold it for $465k, you wouldn't expect to pocket anything. Adding a few zeroes and calling it a tech company wouldn't change that. I don't think the story really necessitates liquidation preferences.
• wooyi 3y ago
  The founders likely took some money off the table in those huge rounds. They didn't end up with "nothing".
• exreddit 3y ago
  It's not great from the employee side, either. I got 150,000 options for Reddit very early after it was spun out. With the current target price, that's $4.6M, but I didn't get all 4 years of vesting, the pay was below-average, and my money is tied up. During the same decade, the faangs were up 12x on average, but the pay, even at Amazon, was better, and my money would be liquid. Reddit might not hold up for 6 months, either. The IPO feels like a cash-out because the company's profitability metrics have never been great, and the LLM hype is the best shot at getting something.
• ein0p 3y ago
  That’s why I have my lawyer cross out bullshit in contracts I sign, and if it’s not removable, at least explain, in layman terms, the ramifications to me. My first early startup job offer (from the people I “trusted”) had so many land mines in it that it took 2 weeks of back and forth and a board decision to get it to the point where fucking me over closer to the acquisition (which did eventually occur) wasn’t lucrative. And there were multiple such clauses in the initial version. Eg work for us for a few years and then we’ll get you into a situation where you will inevitably fuck up and strip you of vested equity by firing you “for cause”, just to give one example As to these folks - I pass no judgement here, could be they just didn’t read the fine print or this was the best possible outcome. Hire a good lawyer next time.
• technick 3y ago
  I hate advocating for new laws but we need something to fix this imbalance that really screws over the worker more than anyone else. I recently left a company due to investors wanting to sell the company and a statement in the original RSU documents stating that I forfeit my shares upon leaving at the price the CEO sets really screwed me. The CEO decided my 4 years of shares were worth 2 cents a piece.
• nobodywillobsrv 3y ago
  Why would they sign on to this gamble though? It seems like idiocy or mis-selling. The article is frustrating as it merely explains the outcome and not how an obvious mistake was made. Basically nobody in their right mind would sign on to this and work for free.
• eimrine 3y ago
  Am I understand right that your definition of nothing is $94M?