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The summary is "When the FanDuel founders raised funds, two key investors received a liquidation preference that entitled them to the first $559M in an acquisit

The summary is "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. Because the Paddy Power Betfair was for just $465M, the founders received nothing" Also they raised over 400M in funding. If you exit with 465M with 400 million raised in funding AND liquidation preference entitles investors to first $559M in an aquisition, of course you are going to get nothing. The question is why they raised 400M in funding and could only exit for 465M. This tells me it was a failed business.

pc86 3y ago
Honestly $400M in funding with only a preference of $559M seems pretty reasonable as far as the VC world goes. That's a 39% return, which yeah is a lot, but we're also talking about half a billion dollars and when your entire business model is built on looking for 10X or 100X returns, a .39X guarantee isn't out of this world crazy. Especially when the actual exit was about half that return.
- thelastparadise 3y ago
  Yeah basically the investors let them larp as businessmen and they churned the investment capital and produced a bunch of hot air and imposed opportunity cost on the investors. The bottom line is these guys were not profitable. But the investors got very lucky to not see -100% return.
- vidarh 3y ago
  The last round was also 3 years prior, so the amortised yearly return was definitely not something their investors had any reason to cheer about. From their point of view this was a failed opportunity. People forget that VC funds also aren't great business for the partners without carry (you get a management fee that keeps the light on, but you make your profit largely from a proportion of returns of the fund above some threshold; on top of that, in many funds you're required to lock up a significant chunk of your own cash as well, so poor returns both means you earn less and means your own investments return less), and a return like that likely would have had a seriously negative impact on their carry.
  - lukeschlather 3y ago
    The employees were sold a lie that their stock options were worth taking a lower salary. Every single developer effectively invested something resembling 10-30k and was totally wiped out, and if they worked there 3 years that's probably a quarter of their life savings. But the investor only demands a meager $200 million return on their $400 million investment before they recognize the workers' investments.
    - robertlagrant 3y ago
      The employees chose to take that risk, knowing that options might not materialise. It's not guaranteed, and isn't advertised as such. If it is advertised as such, that's not the VC. That's the hiring manager.
    - vidarh 3y ago
      Were they? Do you have inside info? I have done many startups, and in none apart from one did I accept a lower salary whether as regular staff or as a founder [EDIT: to be clear: after a funding round, as a full time employee; as a founder/co-founder I've of course done work for free on the side, but with according amount of stock]. In the one where I did, I forced in a clause in the investment agreement guaranteeing us a raise after the next round. I know it can happen, and maybe it happened here. If so that's shitty, and people will have learnt a hard-earned lesson they shouldn't have to have had. [Also in case anyone do face this argument: as a general rule don't unless you feel like a founder and your share holding gives you good reason to; e.g. even in one of the startups I got 7.5% of on joining I was paid above my previous salary - the one case mentioned above where I was "underpaid" for 6 months, I had 25% of the shares when the company was founded] > But the investor only demands a meager $200 million return on their $400 million investment before they recognize the workers' investments. "The investor" here are mostly VC funds that almost certainly lost money on the return they did get, as they in turn take investments on terms that leave them with a minority of the profit after clearing certain hurdles. Given the duration from the last round and the amount of the exit, it's highly unlikely that exit cleared the hurdle, and so this likely at best did nothing towards the VC fund managers profitability either. At best it will have offset even worse investments a little bit. The investors putting money into those VC funds again, got some returns, but lower than they would have if they hadn't taken the risk in the first place and just put the money in an index fund. If you're going to account for lower salary as a loss, then the limited partners and the general partners in the VC fund also suffered a loss by not getting the return they would have if they didn't invest in this company. That is the risk you take when you choose to make an investment - be it in cash, or labour. Don't take those risks if you're not prepared for them. I'm all for lots more workers rights than most people on this site would have the stomach for. But this was not a successful company. This exit was a failure. There's no realistic scenario where staff would get much - if any - return from an exit on terms as bad as this one.
- fennecbutt 3y ago
  Could you explain to me the point of it, though? What's the point of accepting 400M to build a business if you essentially don't own any of that business (because of the 559M buyout ceiling). Were they gambling on a buyout more than 559? I don't understand why someone building a business would accept these terms.
  - jfray2k22 3y ago
    It's quite possible that the founders cashed equity out of the funding round, and that could possibly be why it was such a large round. During the FinTech/Web3 boom back around 2019-2020, a ton of founders did this and it caused huge misalignments between them and their employees. Their thinking could be, "who cares if you didn't make anything from the acquisition when you've already taken $40MM off the table?"
vidarh 3y ago
Yeah. I've not had an exit that high, but I've had an exit where my 25% initially was whittled down to 10k, and frankly I was surprised I got anything at all - in the end I was diluted to hell and back, but none of the later rounds had any liquidation preference that got triggered. It's easy to see a large exit number and assume it means it's a success, but in the case in question the (significantly more modest than $559M but still significant-sounding) exit was even below the total amount raised, and I'd written it off as a failure and left when we needed to staff down and I didn't feel I was needed any more about 5 years before the company was finally sold. It sucks to see "your" (at this point it did not at any point feel like it was "mine") company selling for huge amounts and get nothing or near nothing, but it's worth people understanding that a large-sounding exit does not automatically mean it represents a success. E.g. in this case the last round in 2015 apparently valued them at over a billion. Going from a $1bn valuation to a $465m exit is not great... It's easy for people to think these terms were onerous, but if they could get $275m (the size of the last round) at those terms they likely could've still have found significant investment at less onerous terms if they wanted less risk. They chose to take those investments. Taking VC cash is very often a game of deciding whether you want to gamble it all on faster growth or take less risk for less cash, but with the additional caveat that the investors you take on often will cheer for the "gamble it all" option as they have many parallel bets while you as the founder has one. I've taken VC money several times and been part of early stage VC funded startups several times (including a VC), and I wouldn't rule out doing so again at some point, but it's important to go in understanding that the VC's incentives and yours are different, but if they are too different, then taking VC money might not be right for you, and that's fine.
- takinola 3y ago
  Stories like this often have a lot of missing details that would provide more context and explain why things played out the way it did. I have no doubt the founders knew the risks they were taking and signed up for it. However, the big question is whether the employees knew the risk they had been signed up for. The lack of transparency for employees is where the big problem lies. If you are a non-exec level employee at a startup where most of your compensation is in private securities, you should apply a significant discount to your valuation to account for this opacity.

pc86 3y ago

Honestly $400M in funding with only a preference of $559M seems pretty reasonable as far as the VC world goes. That's a 39% return, which yeah is a lot, but we're also talking about half a billion dollars and when your entire business model is built on looking for 10X or 100X returns, a .39X guarantee isn't out of this world crazy. Especially when the actual exit was about half that return.

thelastparadise 3y ago
Yeah basically the investors let them larp as businessmen and they churned the investment capital and produced a bunch of hot air and imposed opportunity cost on the investors. The bottom line is these guys were not profitable. But the investors got very lucky to not see -100% return.
vidarh 3y ago
The last round was also 3 years prior, so the amortised yearly return was definitely not something their investors had any reason to cheer about. From their point of view this was a failed opportunity. People forget that VC funds also aren't great business for the partners without carry (you get a management fee that keeps the light on, but you make your profit largely from a proportion of returns of the fund above some threshold; on top of that, in many funds you're required to lock up a significant chunk of your own cash as well, so poor returns both means you earn less and means your own investments return less), and a return like that likely would have had a seriously negative impact on their carry.
- lukeschlather 3y ago
  The employees were sold a lie that their stock options were worth taking a lower salary. Every single developer effectively invested something resembling 10-30k and was totally wiped out, and if they worked there 3 years that's probably a quarter of their life savings. But the investor only demands a meager $200 million return on their $400 million investment before they recognize the workers' investments.
  - robertlagrant 3y ago
    The employees chose to take that risk, knowing that options might not materialise. It's not guaranteed, and isn't advertised as such. If it is advertised as such, that's not the VC. That's the hiring manager.
  - vidarh 3y ago
    Were they? Do you have inside info? I have done many startups, and in none apart from one did I accept a lower salary whether as regular staff or as a founder [EDIT: to be clear: after a funding round, as a full time employee; as a founder/co-founder I've of course done work for free on the side, but with according amount of stock]. In the one where I did, I forced in a clause in the investment agreement guaranteeing us a raise after the next round. I know it can happen, and maybe it happened here. If so that's shitty, and people will have learnt a hard-earned lesson they shouldn't have to have had. [Also in case anyone do face this argument: as a general rule don't unless you feel like a founder and your share holding gives you good reason to; e.g. even in one of the startups I got 7.5% of on joining I was paid above my previous salary - the one case mentioned above where I was "underpaid" for 6 months, I had 25% of the shares when the company was founded] > But the investor only demands a meager $200 million return on their $400 million investment before they recognize the workers' investments. "The investor" here are mostly VC funds that almost certainly lost money on the return they did get, as they in turn take investments on terms that leave them with a minority of the profit after clearing certain hurdles. Given the duration from the last round and the amount of the exit, it's highly unlikely that exit cleared the hurdle, and so this likely at best did nothing towards the VC fund managers profitability either. At best it will have offset even worse investments a little bit. The investors putting money into those VC funds again, got some returns, but lower than they would have if they hadn't taken the risk in the first place and just put the money in an index fund. If you're going to account for lower salary as a loss, then the limited partners and the general partners in the VC fund also suffered a loss by not getting the return they would have if they didn't invest in this company. That is the risk you take when you choose to make an investment - be it in cash, or labour. Don't take those risks if you're not prepared for them. I'm all for lots more workers rights than most people on this site would have the stomach for. But this was not a successful company. This exit was a failure. There's no realistic scenario where staff would get much - if any - return from an exit on terms as bad as this one.
fennecbutt 3y ago
Could you explain to me the point of it, though? What's the point of accepting 400M to build a business if you essentially don't own any of that business (because of the 559M buyout ceiling). Were they gambling on a buyout more than 559? I don't understand why someone building a business would accept these terms.
- jfray2k22 3y ago
  It's quite possible that the founders cashed equity out of the funding round, and that could possibly be why it was such a large round. During the FinTech/Web3 boom back around 2019-2020, a ton of founders did this and it caused huge misalignments between them and their employees. Their thinking could be, "who cares if you didn't make anything from the acquisition when you've already taken $40MM off the table?"

vidarh 3y ago

Yeah. I've not had an exit that high, but I've had an exit where my 25% initially was whittled down to 10k, and frankly I was surprised I got anything at all - in the end I was diluted to hell and back, but none of the later rounds had any liquidation preference that got triggered. It's easy to see a large exit number and assume it means it's a success, but in the case in question the (significantly more modest than $559M but still significant-sounding) exit was even below the total amount raised, and I'd written it off as a failure and left when we needed to staff down and I didn't feel I was needed any more about 5 years before the company was finally sold. It sucks to see "your" (at this point it did not at any point feel like it was "mine") company selling for huge amounts and get nothing or near nothing, but it's worth people understanding that a large-sounding exit does not automatically mean it represents a success. E.g. in this case the last round in 2015 apparently valued them at over a billion. Going from a $1bn valuation to a $465m exit is not great... It's easy for people to think these terms were onerous, but if they could get $275m (the size of the last round) at those terms they likely could've still have found significant investment at less onerous terms if they wanted less risk. They chose to take those investments. Taking VC cash is very often a game of deciding whether you want to gamble it all on faster growth or take less risk for less cash, but with the additional caveat that the investors you take on often will cheer for the "gamble it all" option as they have many parallel bets while you as the founder has one. I've taken VC money several times and been part of early stage VC funded startups several times (including a VC), and I wouldn't rule out doing so again at some point, but it's important to go in understanding that the VC's incentives and yours are different, but if they are too different, then taking VC money might not be right for you, and that's fine.

takinola 3y ago
Stories like this often have a lot of missing details that would provide more context and explain why things played out the way it did. I have no doubt the founders knew the risks they were taking and signed up for it. However, the big question is whether the employees knew the risk they had been signed up for. The lack of transparency for employees is where the big problem lies. If you are a non-exec level employee at a startup where most of your compensation is in private securities, you should apply a significant discount to your valuation to account for this opacity.