12 ms·

Wizards of the Coast, Equity Distributions: Part 1

92 points by rb2e 13y ago

patio11 13y ago
This is one of the reasons why I like HN, because nothing in my lower-to-middle-class upbringing prepared me for the notion of stock as anything other than shares of IBM which you held at the brokerage until you needed to retire. Pretty much everything I learned about the mechanics of tech investing I learned as a direct consequence of this site, in many cases to material effect. One would hope that investors, on dealing with unsophisticated entrepreneurs, would tell them "Hey, it seems like you don't know the ropes of this yet, let me explain it to you" but the overwhelming number of anecdotes where I hear that have that sentence followed by advice so bad it shocks the conscience.
- wooster 13y ago
  FWIW, TechStars was great about this. David Cohen and Andy Sack gave fantastic advice to our round (Seattle '12). I've been doing this for awhile, have read the relevant books and heard a lot second-hand from people who've raised a lot of money, but having mentors give great guidance around this from personal and networked experience was leaps and bounds better.
- michaelochurch 13y ago
  One would hope that investors, on dealing with unsophisticated entrepreneurs, would tell them "Hey, it seems like you don't know the ropes of this yet, let me explain it to you" but the overwhelming number of anecdotes where I hear that have that sentence followed by advice so bad it shocks the conscience. Most people know that when they deal with savvier and more experienced people in the upper class, they're at serious risk (okay, high probability) of getting an unfair deal, but their model of "unfair" is 60/40 or 70/30, which most people can accept in the course of getting their vision off the ground. See also: http://en.wikipedia.org/wiki/Ultimatum_game http://en.wikipedia.org/wiki/Ultimatum_game In practice, it's often more like 95/5 or even 99/1. The people who know the game and have the power take almost all of it, and leave just enough to keep people motivated to produce.
cperciva 13y ago
Can someone explain to me how this is even possible? I mean, when a corporation is created, before it takes any investment, someone has to own it, right? How is it possible for the founders to not start out owning 100%?
- patio11 13y ago
  It's more clear if you read his follow-up to the post. (http://www.peteradkison.com/blog-entry-3-wizards-of-the-coast-equity-distributions-part-2/ http://www.peteradkison.com/blog-entry-3-wizards-of-the-coas... <-- highly recommended) What probably happened is that they (on the basis of really, really, REALLY bad advice) started with something like 1,000 shares of the company, valued at $0.50 apiece. They did genuinely own 100% at that time. Then as they raised the 300k they issued additional shares, at valuations between $0.50 and $4, diluting the founders horribly, because the founders did not award themselves new shares. The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. For example, if you had hypothetically bought them a drafting table for $100 (an example used later), you ended up with a 0.5% stake in the company (implicitly valuing the company at $2k at that point). A tech company which only exists as a napkin held between two hungry young men with no asset other than a gleam in their eye gets a notional value of $250k+ on day one. If you attempt to invest in them later, after they have e.g. a product with customers for it, the value gets re-pegged SHARPLY north of that, perhaps in the single digit millions or higher if they're doing really well. He mentions that a lot of the money men involved were annoyed by hordes of small investors making seemingly outsized returns on their initial investments. I don't think he quiiiiite understands that they're not wrong: their outsized returns were essentially large gifts of surplus value from the founders to them. (The money men, of course, seem a little put out that the founders didn't instead make a large gift of surplus value to them.)
  - cperciva 13y ago
    The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices. Tarsnap Backup Inc. officially has 100 Common shares outstanding, but there's no way I'll issue new shares for $0.50 each. ;-)
jacalata 13y ago
The story of all the small investors surprised me, because i thought there were more rules about who could invest in a company. Are these rules new, or do i misunderstand something?
- bretpiatt 13y ago
  I'm a "suit", without a "Esq.", so if you want real detail here perhaps an attorney with a focus on equity issuance can reply. Rules do exist about non-accredited investors buying shares of private companies or shares in public company private placement. Those rules give the "little guy" extra rights. This is why you won't see them investing capital in venture led financing rounds or able to trade on places such as Second Market. Non-accredited investors end up with equity in private companies all the time through "Founder's stock" or grants from the option pool. They may even put in "seed money" to get it started so often in a venture backed company you'll have some early capital from what gets called "friend and family money".
michaelochurch 13y ago
This is painful to read, especially the part about rich establishment late-comers whining about early, small investors getting "too much" payoff. Apparently people from middle-class backgrounds who "got lucky" don't deserve it. This reminds me of when Mark PinkAss whined in public about the Google chef making $20 million. The people at the top of society really don't want anyone else to win because, as they see the world (and the OP clearly does not subscribe to this) it's completely zero-sum. These people do not believe in fairness at all. They're constantly looking for ways to take advantage of people, which I suppose is how they ended up at the top, but it makes the world ugly and I wish it would stop.
- simonh 13y ago
  It wasn't a case of establishment late-comers whining. It was a case of establishment late comers not actually coming at all, late or not, because the system was rigged so they couldn't make any money. Since WoTC needed the investment, it was WoTC's problem and so they amended their terms. If you're in a situation where you need to borrow people's money, it's up to you to offer terms that are acceptable to them. If you don't, then there's no law that says they have to lend to you.
- JabavuAdams 13y ago
  In general, I think these behaviours are better explained by the Hedonic Treadmill theory, rather than by malice. If your $1M house isn't perfect, you start looking at $2M houses. If your monthly costs are what other people hope to make in a year, any decrease in your means seems horrible and unfair. This doesn't address Pincus' comments, but there are jealous rich as well as jealous not-rich.
contingencies 13y ago
I've started one business and had options in two. In the end, one of those businesses (not the one I started) wound up paying me some lump sum. Presently I distrust futures of any kind; to put it simply, I am more interested in present-day pragmatism than greed. I think the author comes from a similar line of thinking, as his tone seems to suggest. I'm not rich but I do fine. I'd recommend: do what you love; money comes and goes, someone with more flexible morals or risk affinity will certainly make more of it, but in the end you won't regret it.

92 points by rb2e 13y ago

This is one of the reasons why I like HN, because nothing in my lower-to-middle-class upbringing prepared me for the notion of stock as anything other than shares of IBM which you held at the brokerage until you needed to retire. Pretty much everything I learned about the mechanics of tech investing I learned as a direct consequence of this site, in many cases to material effect. One would hope that investors, on dealing with unsophisticated entrepreneurs, would tell them "Hey, it seems like you don't know the ropes of this yet, let me explain it to you" but the overwhelming number of anecdotes where I hear that have that sentence followed by advice so bad it shocks the conscience.

wooster 13y ago
FWIW, TechStars was great about this. David Cohen and Andy Sack gave fantastic advice to our round (Seattle '12). I've been doing this for awhile, have read the relevant books and heard a lot second-hand from people who've raised a lot of money, but having mentors give great guidance around this from personal and networked experience was leaps and bounds better.
michaelochurch 13y ago
One would hope that investors, on dealing with unsophisticated entrepreneurs, would tell them "Hey, it seems like you don't know the ropes of this yet, let me explain it to you" but the overwhelming number of anecdotes where I hear that have that sentence followed by advice so bad it shocks the conscience. Most people know that when they deal with savvier and more experienced people in the upper class, they're at serious risk (okay, high probability) of getting an unfair deal, but their model of "unfair" is 60/40 or 70/30, which most people can accept in the course of getting their vision off the ground. See also: http://en.wikipedia.org/wiki/Ultimatum_game http://en.wikipedia.org/wiki/Ultimatum_game In practice, it's often more like 95/5 or even 99/1. The people who know the game and have the power take almost all of it, and leave just enough to keep people motivated to produce.

cperciva 13y ago

Can someone explain to me how this is even possible? I mean, when a corporation is created, before it takes any investment, someone has to own it, right? How is it possible for the founders to not start out owning 100%?

patio11 13y ago
It's more clear if you read his follow-up to the post. (http://www.peteradkison.com/blog-entry-3-wizards-of-the-coast-equity-distributions-part-2/ http://www.peteradkison.com/blog-entry-3-wizards-of-the-coas... <-- highly recommended) What probably happened is that they (on the basis of really, really, REALLY bad advice) started with something like 1,000 shares of the company, valued at $0.50 apiece. They did genuinely own 100% at that time. Then as they raised the 300k they issued additional shares, at valuations between $0.50 and $4, diluting the founders horribly, because the founders did not award themselves new shares. The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. For example, if you had hypothetically bought them a drafting table for $100 (an example used later), you ended up with a 0.5% stake in the company (implicitly valuing the company at $2k at that point). A tech company which only exists as a napkin held between two hungry young men with no asset other than a gleam in their eye gets a notional value of $250k+ on day one. If you attempt to invest in them later, after they have e.g. a product with customers for it, the value gets re-pegged SHARPLY north of that, perhaps in the single digit millions or higher if they're doing really well. He mentions that a lot of the money men involved were annoyed by hordes of small investors making seemingly outsized returns on their initial investments. I don't think he quiiiiite understands that they're not wrong: their outsized returns were essentially large gifts of surplus value from the founders to them. (The money men, of course, seem a little put out that the founders didn't instead make a large gift of surplus value to them.)
- cperciva 13y ago
  The fundamental problem here is grossly misvaluing the company (i.e. the total value of 100% of the shares) at the time new shares were issued. Aha, that makes much more sense. So the problem wasn't that they didn't have founders' shares, or that they didn't have enough shares; but rather that they were selling off shares at ridiculously low prices. Tarsnap Backup Inc. officially has 100 Common shares outstanding, but there's no way I'll issue new shares for $0.50 each. ;-)

jacalata 13y ago

The story of all the small investors surprised me, because i thought there were more rules about who could invest in a company. Are these rules new, or do i misunderstand something?

bretpiatt 13y ago
I'm a "suit", without a "Esq.", so if you want real detail here perhaps an attorney with a focus on equity issuance can reply. Rules do exist about non-accredited investors buying shares of private companies or shares in public company private placement. Those rules give the "little guy" extra rights. This is why you won't see them investing capital in venture led financing rounds or able to trade on places such as Second Market. Non-accredited investors end up with equity in private companies all the time through "Founder's stock" or grants from the option pool. They may even put in "seed money" to get it started so often in a venture backed company you'll have some early capital from what gets called "friend and family money".

michaelochurch 13y ago

This is painful to read, especially the part about rich establishment late-comers whining about early, small investors getting "too much" payoff. Apparently people from middle-class backgrounds who "got lucky" don't deserve it. This reminds me of when Mark PinkAss whined in public about the Google chef making $20 million. The people at the top of society really don't want anyone else to win because, as they see the world (and the OP clearly does not subscribe to this) it's completely zero-sum. These people do not believe in fairness at all. They're constantly looking for ways to take advantage of people, which I suppose is how they ended up at the top, but it makes the world ugly and I wish it would stop.

simonh 13y ago
It wasn't a case of establishment late-comers whining. It was a case of establishment late comers not actually coming at all, late or not, because the system was rigged so they couldn't make any money. Since WoTC needed the investment, it was WoTC's problem and so they amended their terms. If you're in a situation where you need to borrow people's money, it's up to you to offer terms that are acceptable to them. If you don't, then there's no law that says they have to lend to you.
JabavuAdams 13y ago
In general, I think these behaviours are better explained by the Hedonic Treadmill theory, rather than by malice. If your $1M house isn't perfect, you start looking at $2M houses. If your monthly costs are what other people hope to make in a year, any decrease in your means seems horrible and unfair. This doesn't address Pincus' comments, but there are jealous rich as well as jealous not-rich.

contingencies 13y ago

I've started one business and had options in two. In the end, one of those businesses (not the one I started) wound up paying me some lump sum. Presently I distrust futures of any kind; to put it simply, I am more interested in present-day pragmatism than greed. I think the author comes from a similar line of thinking, as his tone seems to suggest. I'm not rich but I do fine. I'd recommend: do what you love; money comes and goes, someone with more flexible morals or risk affinity will certainly make more of it, but in the end you won't regret it.