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There are not just startups that become unicorns and startups that fold. Investors' worst nightmare is if you just make enough money to keep going, but you don

by jll29 2y ago

There are not just startups that become unicorns and startups that fold. Investors' worst nightmare is if you just make enough money to keep going, but you don't grow ("lifestyle business" as they use it is a derogatory term). That's because they prefer a sudden death where they can write down the investment and deduct their loss from taxes than an investment where they never see any money again. And then there are "acquisitions" that are really "acui-hires" dressed up as acquisitions to get the people (more common) or to buy an asset in a limited shell package (less common) after things did/may have (but people were to tempted to take the offer) or did not pan/panned out. Some people consider anything <$50m as a "failure", because that's roughly the sum that many corporations can spend without calling the bigshots for a board meeting to decide.

jbverschoor 2y ago
That’s not what a lifestyle business is. Unless your lifestyle is eating ramen
- that_guy_iain 2y ago
  Enough money to keep going doesn't mean just enough money to cover the costs. It means being able to continue paying yourself and all your employees their salaries, meet costs and make a small minimum profit.
  - normie3000 2y ago
    Aren't salaries considered to be part of the costs?
    - oefrha 2y ago
      Employee salary is definitely cost. Founder/owner salary is more complicated.
    - that_guy_iain 2y ago
      Yea, I meant more pay all the other bills like AWS, etc. But yea, salaries are defo costs.
  - CPLX 2y ago
    You have to add “and return initial capital” to that list. That’s usually what’s at issue here.
    - that_guy_iain 2y ago
      The reason that is the issue is because that is not something they actually need to do. It's something the investors want but not generally required as they expect an exit of some sort.
- smallerfish 2y ago
  Sure it is. If your business nets 3 million a year, it takes 5 people to run it, and your customer base is steady, that's lifestyle. Sucks for investors, pretty nice for you if you can keep it running.
  - jbverschoor 2y ago
    Just enough to keep going is different from a lifestyle business. Ramen/support low margins != a good lifestyle
  - YetAnotherNick 2y ago
    3 million a year for 5 person is something like 400k/person after corporate tax. Which is pretty high and low at the same time(unless it is just freelancing). High in the sense that there would be competition and the other company will have more budget to reduce the price and make the entire segment unprofitable till you die. Low in the sense that you would likely make the same or higher in corporate if you are that skilled to net 3 million/year.
    - smallerfish 2y ago
      Once the competition has initially shaken out in a new category, minority players can hang on for years. Their product could be perfect for their customers in ways that the big guns don't accommodate.
  - idlewords 2y ago
    In other sectors that's just called a "small business" and celebrated as the fullest expression of the American dream. I've always found it funny that tech treats the idea of a going concern with such distaste.
    - aprilthird2021 2y ago
      Specifically investors, not "all of tech". And to be fair to them, if a company doesn't grow, your investment is wasted in that company, right? No shade to good small businesses, but they may not be worth investing in?
- julianeon 2y ago
  The thing I don't like about the term "lifestyle business" is that it imprecisely mixes 2 very different things. It's like grouping students who were accepted at Harvard and chose not to go, with students who flunked out of school, as "not Harvard." Imagine if you were presented with a group that was 50/50 for example and had to draw conclusions about it. Really those are just two dissimilar groups that were lumped together, that shouldn't be bucketed together. In the case of "lifestyle business," it includes businesses that tried their best to expand but hit a ceiling. They failed, basically, to return their investment in any meaningful way. Or to put it even more simply, they failed. At the same time, "lifestyle business" includes businesses that are tremendously strong and could be 10 or even 100x bigger, but aren't due to owner's choice. It mixes together businesses that are capable of being Fortune 500 with those that are almost the inverse. In that sense it's confusing and unhelpful.
vasco 2y ago
Nothing stops them from selling you back their share at close to zero if they really want to right it off.
- deleted 2y ago
  [deleted]
- immibis 2y ago
  They might have to prove to the IRS the share was actually worth that. Whereas if the business is bankrupt, it's obvious.
  - orionsbelt 2y ago
    No - that’s true if you are trying to determine if you can write it off, but if you actually sell it back for $1, you can take the loss.
    - booi 2y ago
      Not if the fair market value can be proven otherwise. It’s just fraud
      - jjmarr 2y ago
        It's not inherently fraudulent to sell something for below market value. If I sell something I bought for $1 million for $1 in an arm's length transaction, I'm realizing a loss of $999,999 even if the asset was worth $500,000. And it'd be a rational decision if it cost me $5 million in opportunity costs to do that $500k sale.
        nradov 2y ago
        That's not how US capital gains tax law works. It's legal to sell something at below market value, but you have to use the fair market value when calculating a loss for tax purposes. Of course some people cheat.
deleted 2y ago
[deleted]
persnicker 2y ago
"Investors' worst nightmare" seems very off. Most SAFE notes give you dividends that are on par with how corporations issue dividends. Assuming there is cash flow, you should be getting dividends. If the dividends are so low that you will never be reasonably paid back you can often negotiate to get out in some form. Very low cash flow only with no growth seems to be the only exception...which I'd guess would only exist if something such as high revenue or some unique IP existed to make the equity very valuable and therefore the company worth running. With a convertible note as opposed to a SAFE, you either need to extend the maturity date or get paid back your note with interest. Both SAFEs and convertible notes seems to have a path to exit in some reasonable form. The only time I've seen "nightmare" situations occur is when the investor themselves makes it a nightmare i.e. https://www.cnbc.com/2025/01/07/tech-investor-denis-grosz-orchestrated-takedown-plot-of-startup-toptal.html https://www.cnbc.com/2025/01/07/tech-investor-denis-grosz-or... ...and that's a nightmare for the company, not the investor.
- slashdev 2y ago
  If there’s enough money to pay the founders salaries, but not so much for dividends, this doesn’t help. There are two direct ways to return money to the founders - salaries and dividends. In the U.S. there is a tax advantage to dividends, over an amount anyway. This is not true of all countries.
  - persnicker 2y ago
    Neat edge case! Perhaps SAFE notes or other dividend-paying instruments should account for this by capping executive salaries or trigger dividend payouts at a certain salary dollar amount. Though, admittedly, I've never heard of a founder or executive using their salary instead of taking dividends as an end run around paying everyone their fair share of dividends. It seems possible though.
    - alooPotato 2y ago
      There already is a cap. Founders have a fiduciary duty to their shareholders and can't pay themselves unreasonably. Lots of gray area, but there is a limit.
AbstractH24 2y ago
Worse than becoming lifestyle company is becoming a zombie startup. Zombie is when founders get rid of almost everyone except what they need to give the impression of effort, do little work, but draw an income and slowly spend down the money they raised until it’s gone. I was one of the very few survivors at a startup that turned into a zombie in 2020 (went from 100+ employees to 10 in a matter of weeks). In some ways it was a cushy job and a privilege, just wish I realized the founders didn’t truly care about success. Cause then I could have shared the mindset and better prepared myself and my skills for life after.
- pavlov 2y ago
  IMO that’s not a zombie because it has an expiration date (when the money raised runs out). A proper zombie is a lifestyle company without the lifestyle — enough revenue to maintain an eternal startup crunch and trying to make a product work, but without the resources to actually grow. Doesn’t die, doesn’t quite live.
  - AbstractH24 2y ago
    I’m honestly not sure what it is. Hindsight is 20\20, the company probably would have been better off thawing itself until lockdown ended then going right back to what it was doing (that’s what their main competitor did, and while rumors of their demise always abound, externally they’ve grown and raised more rounds). One of the founders is a niche big-shot in the VC world and well connected. I assume eventually they’ll be acquired for an undisclosed amount of $0. It’s been a year since I left and until this post I’ve been shocked it’s yet to happen. Now I wonder if they are waiting until they payed out all the money they raised as salary to play that card because otherwise they need to give the money up for no real benefit other than continued employment.
- jordanb 2y ago
  I question your read on what happens here. At most startups the investors control the board (there are a few where a charismatic founder manages to retain control, but that's rare). If the board thought the founder was just transferring the remaining investment to himself slowly they'd fire him and replace him with someone to wind operations down.

by jll29 2y ago

jbverschoor 2y ago

That’s not what a lifestyle business is. Unless your lifestyle is eating ramen

that_guy_iain 2y ago
Enough money to keep going doesn't mean just enough money to cover the costs. It means being able to continue paying yourself and all your employees their salaries, meet costs and make a small minimum profit.
- normie3000 2y ago
  Aren't salaries considered to be part of the costs?
  - oefrha 2y ago
    Employee salary is definitely cost. Founder/owner salary is more complicated.
  - that_guy_iain 2y ago
    Yea, I meant more pay all the other bills like AWS, etc. But yea, salaries are defo costs.
- CPLX 2y ago
  You have to add “and return initial capital” to that list. That’s usually what’s at issue here.
  - that_guy_iain 2y ago
    The reason that is the issue is because that is not something they actually need to do. It's something the investors want but not generally required as they expect an exit of some sort.
smallerfish 2y ago
Sure it is. If your business nets 3 million a year, it takes 5 people to run it, and your customer base is steady, that's lifestyle. Sucks for investors, pretty nice for you if you can keep it running.
- jbverschoor 2y ago
  Just enough to keep going is different from a lifestyle business. Ramen/support low margins != a good lifestyle
- YetAnotherNick 2y ago
  3 million a year for 5 person is something like 400k/person after corporate tax. Which is pretty high and low at the same time(unless it is just freelancing). High in the sense that there would be competition and the other company will have more budget to reduce the price and make the entire segment unprofitable till you die. Low in the sense that you would likely make the same or higher in corporate if you are that skilled to net 3 million/year.
  - smallerfish 2y ago
    Once the competition has initially shaken out in a new category, minority players can hang on for years. Their product could be perfect for their customers in ways that the big guns don't accommodate.
- idlewords 2y ago
  In other sectors that's just called a "small business" and celebrated as the fullest expression of the American dream. I've always found it funny that tech treats the idea of a going concern with such distaste.
  - aprilthird2021 2y ago
    Specifically investors, not "all of tech". And to be fair to them, if a company doesn't grow, your investment is wasted in that company, right? No shade to good small businesses, but they may not be worth investing in?
julianeon 2y ago
The thing I don't like about the term "lifestyle business" is that it imprecisely mixes 2 very different things. It's like grouping students who were accepted at Harvard and chose not to go, with students who flunked out of school, as "not Harvard." Imagine if you were presented with a group that was 50/50 for example and had to draw conclusions about it. Really those are just two dissimilar groups that were lumped together, that shouldn't be bucketed together. In the case of "lifestyle business," it includes businesses that tried their best to expand but hit a ceiling. They failed, basically, to return their investment in any meaningful way. Or to put it even more simply, they failed. At the same time, "lifestyle business" includes businesses that are tremendously strong and could be 10 or even 100x bigger, but aren't due to owner's choice. It mixes together businesses that are capable of being Fortune 500 with those that are almost the inverse. In that sense it's confusing and unhelpful.

vasco 2y ago

Nothing stops them from selling you back their share at close to zero if they really want to right it off.

deleted 2y ago
[deleted]
immibis 2y ago
They might have to prove to the IRS the share was actually worth that. Whereas if the business is bankrupt, it's obvious.
- orionsbelt 2y ago
  No - that’s true if you are trying to determine if you can write it off, but if you actually sell it back for $1, you can take the loss.
  - booi 2y ago
    Not if the fair market value can be proven otherwise. It’s just fraud
    - jjmarr 2y ago
      It's not inherently fraudulent to sell something for below market value. If I sell something I bought for $1 million for $1 in an arm's length transaction, I'm realizing a loss of $999,999 even if the asset was worth $500,000. And it'd be a rational decision if it cost me $5 million in opportunity costs to do that $500k sale.
      - nradov 2y ago
        That's not how US capital gains tax law works. It's legal to sell something at below market value, but you have to use the fair market value when calculating a loss for tax purposes. Of course some people cheat.

deleted 2y ago

[deleted]

persnicker 2y ago

"Investors' worst nightmare" seems very off. Most SAFE notes give you dividends that are on par with how corporations issue dividends. Assuming there is cash flow, you should be getting dividends. If the dividends are so low that you will never be reasonably paid back you can often negotiate to get out in some form. Very low cash flow only with no growth seems to be the only exception...which I'd guess would only exist if something such as high revenue or some unique IP existed to make the equity very valuable and therefore the company worth running. With a convertible note as opposed to a SAFE, you either need to extend the maturity date or get paid back your note with interest. Both SAFEs and convertible notes seems to have a path to exit in some reasonable form. The only time I've seen "nightmare" situations occur is when the investor themselves makes it a nightmare i.e. https://www.cnbc.com/2025/01/07/tech-investor-denis-grosz-orchestrated-takedown-plot-of-startup-toptal.html https://www.cnbc.com/2025/01/07/tech-investor-denis-grosz-or... ...and that's a nightmare for the company, not the investor.

slashdev 2y ago
If there’s enough money to pay the founders salaries, but not so much for dividends, this doesn’t help. There are two direct ways to return money to the founders - salaries and dividends. In the U.S. there is a tax advantage to dividends, over an amount anyway. This is not true of all countries.
- persnicker 2y ago
  Neat edge case! Perhaps SAFE notes or other dividend-paying instruments should account for this by capping executive salaries or trigger dividend payouts at a certain salary dollar amount. Though, admittedly, I've never heard of a founder or executive using their salary instead of taking dividends as an end run around paying everyone their fair share of dividends. It seems possible though.
  - alooPotato 2y ago
    There already is a cap. Founders have a fiduciary duty to their shareholders and can't pay themselves unreasonably. Lots of gray area, but there is a limit.

AbstractH24 2y ago

Worse than becoming lifestyle company is becoming a zombie startup. Zombie is when founders get rid of almost everyone except what they need to give the impression of effort, do little work, but draw an income and slowly spend down the money they raised until it’s gone. I was one of the very few survivors at a startup that turned into a zombie in 2020 (went from 100+ employees to 10 in a matter of weeks). In some ways it was a cushy job and a privilege, just wish I realized the founders didn’t truly care about success. Cause then I could have shared the mindset and better prepared myself and my skills for life after.

pavlov 2y ago
IMO that’s not a zombie because it has an expiration date (when the money raised runs out). A proper zombie is a lifestyle company without the lifestyle — enough revenue to maintain an eternal startup crunch and trying to make a product work, but without the resources to actually grow. Doesn’t die, doesn’t quite live.
- AbstractH24 2y ago
  I’m honestly not sure what it is. Hindsight is 20\20, the company probably would have been better off thawing itself until lockdown ended then going right back to what it was doing (that’s what their main competitor did, and while rumors of their demise always abound, externally they’ve grown and raised more rounds). One of the founders is a niche big-shot in the VC world and well connected. I assume eventually they’ll be acquired for an undisclosed amount of $0. It’s been a year since I left and until this post I’ve been shocked it’s yet to happen. Now I wonder if they are waiting until they payed out all the money they raised as salary to play that card because otherwise they need to give the money up for no real benefit other than continued employment.
jordanb 2y ago
I question your read on what happens here. At most startups the investors control the board (there are a few where a charismatic founder manages to retain control, but that's rare). If the board thought the founder was just transferring the remaining investment to himself slowly they'd fire him and replace him with someone to wind operations down.