7 ms·

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'

by 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?"

by pc86 3y ago

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?"