6 ms·

Rich vs. King in the Real World: Why I sold my company

118 points by tyn 14y ago

DividesByZero 14y ago
It might be a small niggle, but the author is pretty dismissive of microeconomic theories of risk. Despite what the author writes - "Of course statistically there’s no difference, so this isn’t a question of math or economics or intelligence; it’s a measure of your attitude towards risk.", risk aversion is a well studied concept in economics. http://en.wikipedia.org/wiki/Risk_aversion http://en.wikipedia.org/wiki/Risk_aversion Most people have a preference curve that is risk averse, and for these actors it makes perfect economic sense to take the 10 and not the 20. 'Statistically identical' they most definitely aren't, just the expected value.
auggierose 14y ago
A good friend of mine (actually back then, my boss) decided to roll the dice in that situation instead of just cashing in 15mill. He lost that game, and he only told me a long time later that he was offered that choice. I think this is one reason why VCs want young entrepeneurs, because VCs need people who think that they get many more opportunities to cross that line in case the current startup tanks. Because VCs will ALWAYS pick box B if the expected value of B is larger than that of A, even if A is a 100% thing.
- Alan01252 14y ago
  My Dad did exactly the same thing. He ran a steel company with profits of around £600,000 was offered ~£2 mill for the company and turned it down. The recession of the 1990's came and completely wiped out the steel/construction industry and his company went under. In the highly unlikely event I'm ever given that opportunity I'll definitely pick Box A, I've seen first hand just how hard it can be when Box B doesn't work out.
  - agsamek 14y ago
    2M for 600k profit was just a very poor offer and your father chose right regardless of what happened next. (Judged by the limited information provided)
    - kansface 14y ago
      Considering the company went bankrupt shortly thereafter, the offer actually reflected the actual value of the company. Its hard to know that at the time.
      - StavrosK 14y ago
        Then it didn't reflect the actual value of the company. It was a low offer, and the unpredictable events are just that: unpredictable. The winning lottery ticket still costs $1, because you don't know if it's going to win.
    - mesozoic 14y ago
      Exit multiples for steel mills aren't quite the same as for tech companies.
- yarou 14y ago
  It's actually an interesting toy problem. Brings me back to microeconomics. Most people tend to be risk-averse, so they will never accept a 50/50 gamble (ref: http://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenstern_utility_theorem http://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenstern...). However, those in the startup space tend to be risk seeking, thus they are more inclined for the second option. Behaviorialists will point out this is a classic example of framing effect (http://en.wikipedia.org/wiki/Framing_effect_(psychology) http://en.wikipedia.org/wiki/Framing_effect_(psychology)). While the distinction between 10 or 20 dollars is trivial, the distinction between 5,000,000 and a gamble of 20,000,000 is more substantial.
- 1337biz 14y ago
  This is an excellent point and could also highlight why Europe is relatively slagging behind when it comes to high value startups. Europeans are often much older than in the US when founding a company (mid 30s). This could explain an increased risk-aversity. A while back I was attending a talk by Thiel, and his point was that Europeans should stop exiting $10m companies when they could have build those up to a $1b valuation. He framed this quite interestingly, somewhat as a duty to society, as only with this kind of capital it is possible to built a futile start-up environment for following entrepreneurs.
- walshemj 14y ago
  I recall a mate about 15 years ago who worked at Texas Instruments - once shared a plane ride with a director (they had a policy of upgrading people if they where on the same flight) Apparently after the 3rd stiff G&T the older guy mused "gee I wish i had gone in with those guys" and he was referring to the traitorous 8 who left Shockley labs :-)
FollowSteph3 14y ago
The key is that your selling point has to pass that line. If you're 75% there, how many people would take it?
- gyardley 14y ago
  75% of the way to never having to work again? A whole lot of people would take that deal, and they'd be smart to do it. Here's the thing about accumulating money - the more you have, the easier it is. Going from zero to 25% of 'never having to work again' has got to be an order of magnitude harder than going from 75% to 100%. By the time you get to 75% of your personal 'never have to work again' figure, you'll have access to a better class of financial advisors and more investment opportunities. Your bank will start to kiss your ass. At even a modest rate of return, you'll be making large sums each year with zero effort on your part. You can be much more choosy about the opportunities for paid employment you decide to accept - it's a lot easier to optimize for your own pleasure instead of raw salary. In short, it's a very nice place to be.
pressurefree 14y ago
we watch game of thrones and we want to give everyone a sword
michaelochurch 14y ago
I'd take Rich. I hate that I would, but I would. I'd make that call not so I can quit working full-time. I'm only 29. I'd take it so I can start working full-time. So I can guarantee that I focus on real work for the rest of my active life. Liberate the cognitive 1% from subordination, and creation (real work) happens. (Humility is not a virtue in people like me. If we don't raise up our confidence to overwhelm Authority's much more toxic arrogance, with the intent of the latter's decisive and irreversible demolition, the world loses.) It'd be selfish for me not to take Rich, with that option. Then I could go off and be as King as I want. That said, I think this selfish mentality (Rich > King) is, on the whole, really bad for startups. Rational people will close out lifestyle businesses (and walk away, wealthy) because they aren't likely to get another one if a competitor takes theirs down. That's a shame. The build-to-flip mentality has created a VC-istan ecosystem no longer worth caring about. In VC-istan, we have an array of dumb ideas and shitty cultures, and no one cares for shit about the future. We have a lot of well-connected VC-funded Founders who are just glorified PMs with the mentalities of dinosaur executives that "startups" were supposed to kill off. We need to bring back the lifestyle business and make it a viable lifestyle and career (even if individual business shall fail, which is inevitable). A Fleet of 50,000+ small companies doing interesting things and working toward Real Technology. We won't get there as things are now. There needs to be a reliable path for technical minds to find safety and capital. Given that there's no real source of capital for small, lifestyle businesses-- at least, not yet-- it doesn't exist yet. But the world fucking needs it.
- writer 14y ago
  The current VC model, throw money at the wall and see what sticks, has worked pretty well. Yes, funding dumb ideas is a side effect. So what? If the returns are sweeter than funding more conservative, organic growth oriented businesses, then that's where the money is going to go. Access to capital is not a natural right. If you need investment for your 'lifestyle business', it's your burden to demonstrate that you can outperform the status quo. 'Finding safety' isn't really complementary to striking out on your own. I propose that your rage might be better directed at the current state of academia instead of the VC ecosystem. That seems more in line with your goal of promoting long term innovative thought. Yes, in academia you won't necessarily own the rights to your inventions, nor see most of the economic benefit. But it's never been easy to have it all...
rabble 14y ago
I faced a choice like this as I went through M&A of my most recent company. We were doing well, growing like a weed, but also because it was a consulting services company it was very cyclical and dependent on a few large clients. There was a real risk that we could lose both key clients and staff at the same time and eat up our capital reserve. Growth was also dependent on us reinvesting the profits of the business while maintaining working capital. Each time i took money out of the company, it was taking out of it's capital reserves. The earnout comes in a stages as is norm when you're expected to stay involved. So it hasn't changed my life much except for paying off all of my debts. While i think the rich vs king thing might have some truth, I ran my company this time to be king. To enjoy doing good work with smart people and build interesting products. Have an awesome office, run a good conference, and the like. It was a lifestyle business and i wasn't looking to sell it. But i'm happy to have gotten the offer, happy with the arrangement, and happy with my new role as CTO of the acquiring company. It's not perfect, but neither was everything perfect running a company all on my own. The really ironic part is that i've been involved in many startups, which were very intentionally about making money and value. Odeo became Twitter, and really was worth a lot of value, but left after 2 years & sold my options, long before it was clear Twitter would become, well, twitter. With my most recent company, it was about creating a place i wanted to work myself, with a team i liked, doing great work. Sometimes you make money where you intended to change the world, and change the world where you intended to make money.
nugget 14y ago
I'm curious what the author and others think is a reasonable "freedom line". Silicon Valley is pretty expensive and it's hard to know exactly what's implied when someone says "never have to work again". Of course everybody is different and has different expenses, but it's a worthwhile data point.
- w3pm 14y ago
  I believe it's about the money your money will earn that buys you the freedom. Consider having $5 million in the bank. You buy some conservative Pimco bonds earning 5% per year and bam, you've got $250k in yearly income (pre-tax) doing literally nothing and never spending a dime of that 5 million. If that's not freedom in any city in the world then I don't know what is.
  - mhb 14y ago
    What are these conservative bonds that return 5%?
  - CurtMonash 14y ago
    Inflation says hello.
- rdouble 14y ago
  Even in Silicon Valley, one could do it for $5M after taxes.
- adestefan 14y ago
  If I ever got the freedom line, the first thing I would do is sell my house in the Baltimore/DC metro area and move to the middle of nowhere. Different strokes for different folks though.
- StavrosK 14y ago
  Living in Greece, I just calculated it at $35k per year. Now to find something that will allow me to make that kind of money without working (too much)...
- 14y ago
nicholassmith 14y ago
If you think you've got a business that will absolutely, no bullshit, leave a dent in the world be a king and enjoy it, after all when is a King ever poor? However, the majority of businesses won't leave a dent in the world and that's okay, and taking the money is fine because you start a business to make money. It's great being a king, but someone is always waiting with a guillotine, or a sharp dagger, or a poisoned glass. Take the cash, move on, hope next time you leave that dent.
rdouble 14y ago
What does "never have to look at the right side of a menu" mean?
- w3pm 14y ago
  Prices are on the right side of a menu in America. It means you never have to care how much you're spending on a meal.
  - rdouble 14y ago
    Oh... thanks. "Derp" on my part.
auctiontheory 14y ago
I think the most telling line in the article is "100% of the negative reactions were from people who had never started their own company." If working for myself has taught me one thing, it is to be much less judgmental of other people's choices. Those who've never done it just cannot understand.
majani 14y ago
I think alot of the angst that comes towards people who sold their companies, is simply using the term "sell." That gives the impression that you went out and shamelessly hawked your product to the highest bidder. I personally find that if you instead say that so and so was "bought out" by a bigger company, then that's much easier to come to terms with for most people. That phrase gives the impression that a bigger company saw much value in your company and just had to have it for themselves, leaving you little choice in the matter.
jedberg 14y ago
There is a viable middle ground. Sometimes these days, when you build a solid business, an investor is willing to let you cash out with some of their investment. Essentially, they are moving you from the left of the line to the right, so you can be rich and then focus on "king".

118 points by tyn 14y ago

It might be a small niggle, but the author is pretty dismissive of microeconomic theories of risk. Despite what the author writes - "Of course statistically there’s no difference, so this isn’t a question of math or economics or intelligence; it’s a measure of your attitude towards risk.", risk aversion is a well studied concept in economics. http://en.wikipedia.org/wiki/Risk_aversion http://en.wikipedia.org/wiki/Risk_aversion Most people have a preference curve that is risk averse, and for these actors it makes perfect economic sense to take the 10 and not the 20. 'Statistically identical' they most definitely aren't, just the expected value.

auggierose 14y ago

A good friend of mine (actually back then, my boss) decided to roll the dice in that situation instead of just cashing in 15mill. He lost that game, and he only told me a long time later that he was offered that choice. I think this is one reason why VCs want young entrepeneurs, because VCs need people who think that they get many more opportunities to cross that line in case the current startup tanks. Because VCs will ALWAYS pick box B if the expected value of B is larger than that of A, even if A is a 100% thing.

Alan01252 14y ago
My Dad did exactly the same thing. He ran a steel company with profits of around £600,000 was offered ~£2 mill for the company and turned it down. The recession of the 1990's came and completely wiped out the steel/construction industry and his company went under. In the highly unlikely event I'm ever given that opportunity I'll definitely pick Box A, I've seen first hand just how hard it can be when Box B doesn't work out.
- agsamek 14y ago
  2M for 600k profit was just a very poor offer and your father chose right regardless of what happened next. (Judged by the limited information provided)
  - kansface 14y ago
    Considering the company went bankrupt shortly thereafter, the offer actually reflected the actual value of the company. Its hard to know that at the time.
    - StavrosK 14y ago
      Then it didn't reflect the actual value of the company. It was a low offer, and the unpredictable events are just that: unpredictable. The winning lottery ticket still costs $1, because you don't know if it's going to win.
  - mesozoic 14y ago
    Exit multiples for steel mills aren't quite the same as for tech companies.
yarou 14y ago
It's actually an interesting toy problem. Brings me back to microeconomics. Most people tend to be risk-averse, so they will never accept a 50/50 gamble (ref: http://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenstern_utility_theorem http://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenstern...). However, those in the startup space tend to be risk seeking, thus they are more inclined for the second option. Behaviorialists will point out this is a classic example of framing effect (http://en.wikipedia.org/wiki/Framing_effect_(psychology) http://en.wikipedia.org/wiki/Framing_effect_(psychology)). While the distinction between 10 or 20 dollars is trivial, the distinction between 5,000,000 and a gamble of 20,000,000 is more substantial.
1337biz 14y ago
This is an excellent point and could also highlight why Europe is relatively slagging behind when it comes to high value startups. Europeans are often much older than in the US when founding a company (mid 30s). This could explain an increased risk-aversity. A while back I was attending a talk by Thiel, and his point was that Europeans should stop exiting $10m companies when they could have build those up to a $1b valuation. He framed this quite interestingly, somewhat as a duty to society, as only with this kind of capital it is possible to built a futile start-up environment for following entrepreneurs.
walshemj 14y ago
I recall a mate about 15 years ago who worked at Texas Instruments - once shared a plane ride with a director (they had a policy of upgrading people if they where on the same flight) Apparently after the 3rd stiff G&T the older guy mused "gee I wish i had gone in with those guys" and he was referring to the traitorous 8 who left Shockley labs :-)

FollowSteph3 14y ago

The key is that your selling point has to pass that line. If you're 75% there, how many people would take it?

gyardley 14y ago
75% of the way to never having to work again? A whole lot of people would take that deal, and they'd be smart to do it. Here's the thing about accumulating money - the more you have, the easier it is. Going from zero to 25% of 'never having to work again' has got to be an order of magnitude harder than going from 75% to 100%. By the time you get to 75% of your personal 'never have to work again' figure, you'll have access to a better class of financial advisors and more investment opportunities. Your bank will start to kiss your ass. At even a modest rate of return, you'll be making large sums each year with zero effort on your part. You can be much more choosy about the opportunities for paid employment you decide to accept - it's a lot easier to optimize for your own pleasure instead of raw salary. In short, it's a very nice place to be.

pressurefree 14y ago

we watch game of thrones and we want to give everyone a sword

michaelochurch 14y ago

I'd take Rich. I hate that I would, but I would. I'd make that call not so I can quit working full-time. I'm only 29. I'd take it so I can start working full-time. So I can guarantee that I focus on real work for the rest of my active life. Liberate the cognitive 1% from subordination, and creation (real work) happens. (Humility is not a virtue in people like me. If we don't raise up our confidence to overwhelm Authority's much more toxic arrogance, with the intent of the latter's decisive and irreversible demolition, the world loses.) It'd be selfish for me not to take Rich, with that option. Then I could go off and be as King as I want. That said, I think this selfish mentality (Rich > King) is, on the whole, really bad for startups. Rational people will close out lifestyle businesses (and walk away, wealthy) because they aren't likely to get another one if a competitor takes theirs down. That's a shame. The build-to-flip mentality has created a VC-istan ecosystem no longer worth caring about. In VC-istan, we have an array of dumb ideas and shitty cultures, and no one cares for shit about the future. We have a lot of well-connected VC-funded Founders who are just glorified PMs with the mentalities of dinosaur executives that "startups" were supposed to kill off. We need to bring back the lifestyle business and make it a viable lifestyle and career (even if individual business shall fail, which is inevitable). A Fleet of 50,000+ small companies doing interesting things and working toward Real Technology. We won't get there as things are now. There needs to be a reliable path for technical minds to find safety and capital. Given that there's no real source of capital for small, lifestyle businesses-- at least, not yet-- it doesn't exist yet. But the world fucking needs it.

writer 14y ago
The current VC model, throw money at the wall and see what sticks, has worked pretty well. Yes, funding dumb ideas is a side effect. So what? If the returns are sweeter than funding more conservative, organic growth oriented businesses, then that's where the money is going to go. Access to capital is not a natural right. If you need investment for your 'lifestyle business', it's your burden to demonstrate that you can outperform the status quo. 'Finding safety' isn't really complementary to striking out on your own. I propose that your rage might be better directed at the current state of academia instead of the VC ecosystem. That seems more in line with your goal of promoting long term innovative thought. Yes, in academia you won't necessarily own the rights to your inventions, nor see most of the economic benefit. But it's never been easy to have it all...

rabble 14y ago

I faced a choice like this as I went through M&A of my most recent company. We were doing well, growing like a weed, but also because it was a consulting services company it was very cyclical and dependent on a few large clients. There was a real risk that we could lose both key clients and staff at the same time and eat up our capital reserve. Growth was also dependent on us reinvesting the profits of the business while maintaining working capital. Each time i took money out of the company, it was taking out of it's capital reserves. The earnout comes in a stages as is norm when you're expected to stay involved. So it hasn't changed my life much except for paying off all of my debts. While i think the rich vs king thing might have some truth, I ran my company this time to be king. To enjoy doing good work with smart people and build interesting products. Have an awesome office, run a good conference, and the like. It was a lifestyle business and i wasn't looking to sell it. But i'm happy to have gotten the offer, happy with the arrangement, and happy with my new role as CTO of the acquiring company. It's not perfect, but neither was everything perfect running a company all on my own. The really ironic part is that i've been involved in many startups, which were very intentionally about making money and value. Odeo became Twitter, and really was worth a lot of value, but left after 2 years & sold my options, long before it was clear Twitter would become, well, twitter. With my most recent company, it was about creating a place i wanted to work myself, with a team i liked, doing great work. Sometimes you make money where you intended to change the world, and change the world where you intended to make money.

nugget 14y ago

I'm curious what the author and others think is a reasonable "freedom line". Silicon Valley is pretty expensive and it's hard to know exactly what's implied when someone says "never have to work again". Of course everybody is different and has different expenses, but it's a worthwhile data point.

w3pm 14y ago
I believe it's about the money your money will earn that buys you the freedom. Consider having $5 million in the bank. You buy some conservative Pimco bonds earning 5% per year and bam, you've got $250k in yearly income (pre-tax) doing literally nothing and never spending a dime of that 5 million. If that's not freedom in any city in the world then I don't know what is.
- mhb 14y ago
  What are these conservative bonds that return 5%?
- CurtMonash 14y ago
  Inflation says hello.
rdouble 14y ago
Even in Silicon Valley, one could do it for $5M after taxes.
adestefan 14y ago
If I ever got the freedom line, the first thing I would do is sell my house in the Baltimore/DC metro area and move to the middle of nowhere. Different strokes for different folks though.
StavrosK 14y ago
Living in Greece, I just calculated it at $35k per year. Now to find something that will allow me to make that kind of money without working (too much)...
14y ago

nicholassmith 14y ago

If you think you've got a business that will absolutely, no bullshit, leave a dent in the world be a king and enjoy it, after all when is a King ever poor? However, the majority of businesses won't leave a dent in the world and that's okay, and taking the money is fine because you start a business to make money. It's great being a king, but someone is always waiting with a guillotine, or a sharp dagger, or a poisoned glass. Take the cash, move on, hope next time you leave that dent.

rdouble 14y ago

What does "never have to look at the right side of a menu" mean?

w3pm 14y ago
Prices are on the right side of a menu in America. It means you never have to care how much you're spending on a meal.
- rdouble 14y ago
  Oh... thanks. "Derp" on my part.

auctiontheory 14y ago

I think the most telling line in the article is "100% of the negative reactions were from people who had never started their own company." If working for myself has taught me one thing, it is to be much less judgmental of other people's choices. Those who've never done it just cannot understand.

majani 14y ago

I think alot of the angst that comes towards people who sold their companies, is simply using the term "sell." That gives the impression that you went out and shamelessly hawked your product to the highest bidder. I personally find that if you instead say that so and so was "bought out" by a bigger company, then that's much easier to come to terms with for most people. That phrase gives the impression that a bigger company saw much value in your company and just had to have it for themselves, leaving you little choice in the matter.

jedberg 14y ago

There is a viable middle ground. Sometimes these days, when you build a solid business, an investor is willing to let you cash out with some of their investment. Essentially, they are moving you from the left of the line to the right, so you can be rich and then focus on "king".